Retail Pricing – setting your compass

Topics: Business Strategy, Channel / Retail, FMCG, Point of Purchase

What do your prices say about you, and are they helping or hindering you? ShopAbility discuss elements to consider when setting your pricing strategy. For Retail Pharmacy Magazine.

Aside from range, pricing (and price promotion) is the area that retailers and manufacturers tend to spend the most time on and is the most hotly contested, because it has such an impact on the bottom line.

The contention also comes because there sometimes isn’t an overarching pricing strategy on one or both sides … prices may have been historically set by slapping on specific margins across the board, or slavishly matching the competition.

In this and future articles we’re going to discuss considerations that go into building a pricing strategy.

Levels of pricing

Like with ranging, pricing strategy needs to be looked at from a ‘top down’ (or left to right) perspective, starting with store level and finishing at sku level. This is illustrated in Figure 1. This article discusses store level. We will discuss the other levels in subsequent articles dealing with price and promotion.
RP Price levels

Pricing roles and objectives – store level

Similar to our first article on ranging and what it says about your store, you need to think about what your pricing says about you in the context of who you are and what you’re trying to do, and which of the retail objectives you’re talking to.

Given the high percentage of pharmacy traffic that is script driven, and that most front of store categories are destination or stress purchase rather than impulse, it could be argued that a pharmacy doesn’t need low prices to drive traffic.

From a number of shopper and pricing studies we have conducted across channels and categories, most shoppers choose their store based on location, convenience and service. They don’t drive miles out of their way to save 3 cents on something (unless it’s petrol). Most are aware of price ranges for a category or product type, but not specific price points (low income families on tight budgets are the exception, and that’s driven by catalogues allowing price comparisons). They compute a store’s value by the average prices the store charges across the board, and how many specials they see each time they go in, weighed against the service they get … but these computations are largely subconscious.

It’s a bit like coffee … they can tell you what’s a good one or a bad one (ie who is a store providing value and who isn’t), but not the components contributing to this perception. This means you have room to move in your pricing strategy and still be considered value without price gouging.

In setting your pricing strategy, have a think about what your pricing is trying to do:

  • Drive traffic? From whom – walk past impulse traffic?  Which categories? What type of traffic – one off vs repeat traffic? (What’s the role of your store type and location in this?)
  • Steal traffic and purchase from other stores? Other pharmacies or other retail channels? Is this realistic, based on what you know of why people come into your pharmacy in the first place?
  • Increase the basket size (AWOP, basket penetration) of the shoppers already in your store?
  • Drive profit by taking the highest margin possible?
  • Drive existing shopper frequency by offering best value? Is this possible if frequency is script driven and/or ailment driven?

Competitive pricing

Once you’ve figured out what you’re trying to achieve with your pricing it then obviously needs to be put in competitive context based on who your direct and indirect competitors are.

This requires understanding, defining and mapping who your competition is, at a whole store and department/category level. Who do your shoppers perceive your competition as being?

Why do shoppers come to you vs other similar stores? When do they choose other stores over yours? Answers to this give some indication as to how you should price vs your competition (and how that may need to differ per category). You don’t need to loss lead when you don’t have to.

There are basically three ways to price vs competitors: Lead, Follow or Independent (maverick).

If you’re going to price lead, this assumes that shoppers see you as a leader, that you can and do lead the market and set the expectations, and that you’re proactive in your stance. If you price lead, unless it’s a major event, you don’t generally react to competitors’ moves.

Price leadership generally means being first to increase or drop price. Price leaders need to be prepared to take the consequences – good or bad – of changing the market price perceptions.

Price following (or market pricing, or price matching) is a reactive strategy and the path of least resistance for many. However it can lead to unnecessarily doing yourself out of dough if you’re following the price leaders and discounters into a price war. If you’re going to price follow, you need to figure out what the price ranges in the market are, and where you want to sit in them based on the value perceptions you want your shoppers to have.

Independent pricing is where you run your own race irrespective of what the competition does, based on your unique offer or proposition. You may decide you want to be known for exceptional service, or stay open late for example, and that this justifies a price premium.

A simple way to figure out what your current stance is vs competitors is to ask the question: “If our competitors do this, what will we do? Do we care?’”

Pricing levers to pull

Once you’ve decided your competitive price position and to what extent you are sensitive to competition, your next decision is which pricing lever (strategy, operating ethos) you will pull.

In general there are three overarching pricing strategies:

  1. EDLP: everyday low price (this is where the Big Ws of the world position themselves, and often involves price matching/price beating competitors)
  2. EDP: everyday price (not necessarily low)
  3. High/Low: everyday prices are higher but you have reasonably frequent price promotions to achieve lower prices. The thing here is that if you’re a market leader and  you do Low often enough it winds up resetting (lowering) the shopper’s perception of the average price … we’ll discuss this more in subsequent articles.

Note that you can change the strategy per category depending on its dynamics, but it helps to have an overarching view first.

Summary

In setting your store level pricing strategy, key questions to ask yourself are:

  • What is our current pricing strategy? Do we have one and is it working? Why is this the pricing paradigm? Does it need to change, and if so, what to?
  • How do our shoppers compute value? Why do they choose us or others and what’s the role of price in this?
  • Who is our competition and do we care how they price? Will we price lead, follow or act independently?
  • What is the best pricing strategy for us? EDLP, EDP or Hi/Lo?

Next time, pricing by category, brand and product, and discussion of price promotions.

We welcome feedback on these articles – what you agree with, what you don’t – and what you’d like to hear about. Email us with feedback on enquiries@shop-ability.com.au