Pricing Snakes and Ladders

Topics: Channel / Retail, FMCG, Point of Purchase

What do you price up or price down in a category? What’s the role of brands and price promotion? ShopAbility navigate the pricing gameboard for Retail Pharmacy Magazine.

Last time, we looked at pricing strategy at a store level – your price positioning, attitude to competition and strategies to select. Here we’re going to dig a bit deeper into pricing considerations at the category, brand and sku levels and discuss the role of price promotion so you can climb more ladders and avoid some of the snakes.

Note that the focus and scope of this discussion is OTC, S2/S3 and merchandise products, not S4 prescription items.

Category Pricing

Once you’ve decided your overall store pricing strategy (EDP, EDLP, Hi/Lo) the question is then do you apply it equally to every category?

Probably not. There’s no point doing yourself out of dosh if you don’t need to.

The good news is that unlike a lot of FMCG products with use by dates or that function on newness (think milk or DVDs respectively) the idea of having to price along a product lifecycle is less applicable to pharmacy products, so that’s one complicating element removed from the mix.

The role each category plays to the store is different (see Figure 1).  Here you need to consider your overall store positioning and ranging strategy. For the categories you want to be known for, do you want to be known for them based on price – ie are there loss leader categories? More importantly, do you actually need to be known for them based on price?

Category Types vs Pricing diagram

Shopper trip types differ (distress purchase vs top up or stock up) and based on the shopper’s purchase decision hierarchy (the order in which they make decisions about a category – see Figure 2) the role of price will therefore differ.

Purchase decision hierarchy diagram

You also need to consider the breakdown of the category into its segments and whether specific segments can command a premium due to either their specialized nature or the brands in them.  This links to your range. Pharmacy specific or ‘professional’ ranges not available in other channels can command a price premium because shoppers don’t have an easy point of comparison (however, the product efficacy and benefits over and above the brands they know would need to be clearly spelt out to justify paying a higher price).

Each category segment plays a role within the category also, you can apply the table from Figure 1 at the category segment level. This will help you determine which parts of the category you need to promote more heavily than the others.

Brand & Sku Level Pricing

Here again you need to consider the role of each brand to the category. There may be specific brands, or more likely specific products, that can be used as loss leaders. However before pursuing this you need to consider a) whether everyone else is doing it on that product – fish oil comes to mind, and b) whether by loss leading on that product you will actually drive incremental traffic or sales, or simply be giving shoppers already planning to buy that product a better deal (and doing yourself out of dough in the process).

Grocery tends to use a ‘good/better/best’ levels model, where value brands are on the bottom shelves, mainstream brands are in the middle, ‘beacon’ brands are eye level and premium brands are top shelf. Each pricing level is a predetermined percentage range higher than the last. Brands within each ‘level’ are priced roughly the same, with variances per sku based on product format and size (the discount curve – the bigger the pack the better the deal for the shopper) but very little variance based on flavour or type. With products or brands that have a one-size-fits-all format or size, there is virtually no price differentiation between skus (unless a particular sku is being delisted and therefore on a run-out special).

You also need to consider private label (store brands). If private label applies to a category you stock, you need to consider what the price differential will be between the private label brand and the value/mainstream brands. Ie what % cheaper the private label will be.
Other considerations Depends on the terms (margins) negotiated between retailer and supplier, matched against the market (for price ranges) and against shopper expectation.

Promotions – the slippery slope
Price promotions are probably your biggest short term sales driver (depending on the product), and depending on how you’ve structured your trading terms either one of your larger sources of revenue or your largest costs.

Price promotions contribute to shopper’s value perceptions of a store … how many things are on special at any given time, rather than the price points or depth of discounts. Happily, there is less of an expectation of this in pharmacy than in grocery (grocery have created a rod for their own backs in some respects).

BUT price promotions are a delicate balance. Do it too deep, too often and shoppers will only visit you when you have a big sale on (think Target). Don’t do it often enough or on enough things and shoppers may not have a reason to visit you outside of scripts (however if your store pricing strategy is EDP – Every Day Pricing, then that’s OK).

And from a brand point of view a balance is required of equity vs sales. Underpromote a product or brand (depending on type) and it won’t sell. Overpromote it and you damage the brand’s equity and reset (lower) the brand’s expected price in shoppers’ heads.

A way to look at this at a category, category segment and brand level, and avoid or course correct, is to look at baseline vs incremental sales (see Figure 3).  This indicates where you may be eroding your ‘everyday’ sales and selling more on promotion.
Baseline vs Incremental Sales Diagram

The key aspects to consider for price promotions are Frequency and Depth.  Do you want shallow promotions more frequently, or deeper discounts less frequently? (Going the route of deep promotions, frequently could spell disaster unless you have deep pockets).

Depth of discount can be used for different things. Shallow discounts can be used for profit or trial. Deeper discounts are used to get brand switch, drive your share of a category’s sales or drive traffic.

However, approach deep discounts with caution. You need to be clear that the product you’re discounting will actually drive new traffic and sales if you put it on promo. Are you just creating a short term sales jag or would there be residual effects – new shoppers of the store, the category or the brand? Typically residual effects are very hard to quantify.

Another risk of deep discounting is onselling or leakage, where another retailer buys off you (cheaper than they can get it from the manufacturer) and sells it in their own store. Which you may consider to be fine if you’re not fussy about where your sales come from, but the practice is questionable.

You also need to consider cannibalization. The deeply discounted product may simply be switching a sale from another brand or product, and not actually getting you an incremental sale. So you need to consider where the increased sales of discounted Product X are actually coming from … which products/brands have gone down while Product X was on promotion?

Frequency of promotions needs to be based around how often shoppers shop the store and the category. In general, keep something on promotion much longer than 2-3 weeks and it becomes wallpaper and is not seen by the shopper.

Of course, the success of a promotion will also be dependent on how you support it and how loudly you shout about it. For example, if you just do shelf ticketing you might get brand switch, but will it make you any money? We’re going to talk about promotional support and devising promotions that work next time.

Till then!

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