The price of everything...

Driving value through pricing

You aren’t always buying what you think you are.

(The next couple of paragraphs are an extract from my first book, Reinventing Retail, which explores the changing world that retailers operate in)

Let's work an example. When you buy a chocolate bar you are actually exchanging money for a complex set of goods and services:

• The chocolate itself

• The design work, branding and marketing which has gone into creating a 'product' out of simple chocolate

• The packaging

• The cost of getting the bar from a factory somewhere into your hands

• The cost of the retail space where the bar was displayed, hoping you would notice it just when you were feeling snacky

• The profit that various businesses are hoping to make from the deal, including the manufacturer, the retailer and the transport company

And the same is true for any other product or service - what seems to be a simple purchase is really a complex bundle of transactions. You are not just buying a product, you are buying the experience of having that product right now, at this time and in this place.

As markets have evolved, many aspects of these bundles of transactions have changed. If you don't value the design, packaging and branding in a product then there are probably low-cost versions available with generic brands and plain packaging. If you don't value the immediacy of buying the product right now you can probably get it delivered from a warehouse tomorrow cheaper or next week for even less. If you don't value the 'discovery' and 'experience' elements of retail distribution then you can type the product's name into a search engine directly instead.

The rest of that chapter of Reinventing Retail goes on to explore how we might respond to those changes in consumer needs and survive against the low-cost, online-only pure-players who have sprung up in almost every industry.

The same analysis, though, is a great way to get into understanding how our pricing strategies might evolve. In the first post in this series I explored Dynamic Pricing and gave the example of it’s introduction in the cinema sector.

The price is right

Film pricing is an interesting example of this ‘bundle of goods and experiences’ way of understanding shopping. If all you were purchasing when you saw a film was the consumption of viewing the film itself then all of the channels through which you could make that purchase would end up charging much the same. But movie prices vary wildly from the high price of a cinema ticket through the lower cost of a purchase through a PPV service at home and down to the essentially zero marginal cost of watching it on a terrestrial TV channel.

The reason those prices can vary that much is that you aren’t just buying ‘seeing the film’. You are also buying when you saw the film - so earlier windows where you get to be the first of your friends to see a new movie cost more. You are also buying the broader experience you consume - so a luxury cinema can charge more than a regular multiplex, for example.

What does that have to do with retail pricing? Well, if you are looking to find those instances when you might be under-pricing (and therefore giving away value) or over-pricing (and losing sales) this type of analysis of what is really going on when a customer buys from you can be a big help.

Let’s consider four of those sometimes ‘hidden variables’ of the sales process:

Immediacy

The chocolate bar example has a terrific real-world illustration. It is arguable that WH Smith, stalwart of the UK High Street, has survived and thrived when many others have failed by putting itself in the position of being the nearest and best option available when you want something right now.

Whether that is the chocolate bar that you want at the motorway service station (no option for next day delivery there!) or the printer paper that the High Street store is the last place in your neighbourhood to stock, the genius of the WHS strategy has been to engineer ‘last man standing’ positions wherever it could, and adapt its pricing strategy accordingly.

Convenience

There is an interesting twist to the immediacy story for many retailers, and that is what to do with delivery charges.

In some circumstances these are a great opportunity to price extra for the intangible extra of convenience - I’m going to bring the product right to you, and that saves you the time and effort of coming to get it.

But that of course is the opposite of the immediacy benefit - there I was charging you a premium because you wanted it now. Now I’m charging you a premium to bring it to you later.

Both can’t be true at the same time, and so for each retailer there is an interesting analysis to be done of whether a delivery premium or an immediacy premium is a better charging policy. Many end up in the odd position, for example, where they charge a small amount for delivery, a larger amount for speedy next day delivery but then a lower amount again if the customer is willing to come and collect it from their store today. That structure might make sense for some customers and some products, but won’t be universally the right answer.

Popularity and scarcity

It is a retail staple, of course, that if a product is only shifting slowly it will end on sale, heavily discounted to move it on.

But that cuts both ways. My suspicion is that many commercial teams are quicker to cut prices on slow moving items than they are to increase them when a product is shifting fast and proving popular.

An interesting test of that hypothesis will come as we enter a phase where the inflation which has beset many retail sectors for the last couple of years starts to fall again. Retailers have had to juggle with increasing input cost prices over this last period and have had to toe a very difficult line in their consumer pricing between passing those cost increases on to protect margin and being sensitive to customer needs and the competitive environment.

That juggling act will get even more complex, I suspect, as input prices start to fall again. The temptation to ‘take margin’ for businesses which have had a very tough few years will be great, but those competitive and customer forces will still be there to temper that. A delicate hand will be needed on the pricing lever. Developing a really good granular understanding of elasticity (how sales volumes respond to price changes) will be key to getting it right, and is one of the areas where AI technologies are being usefully deployed by some retailers.

Relativity

That reference to the competitor brings us to another interesting way to think about pricing - the relative pricing of a particular product to others. Sometimes that dynamic is an external one. If your particular products and customers are such that you experience a lot of comparison shopping and switching then it is quite likely that your first port of call when making pricing decisions is to consider your competitor set and what they are doing.

But some of the relative pricing observations that customers make are more internal. There are some retail sectors, for instance, which do very well by always having a rotating set of products on deep sale to attract bargain hunters who are often up-sold to more expensive items.

Relative pricing over time is also an interesting tactic to explore. Looking backwards, “this was expensive but is now cheaper” is obviously the fundamental message of any sale. Only this morning, though, I got an interesting piece of direct mail from a bathroom supplier pointing out that their prices are about to up and that I should hurry to get their current offers.

Conclusion

There is clearly a lot to think about when setting your pricing strategy. All the obvious things, of course, like costs, return rates, margin targets and stock turn. But there is also value to be unlocked in considering some of these more subtle dynamics too - remembering, in the end, that what your customer buys from you is a complex mix of things, and that there are opportunities to be found by understanding how that changes over time.

In further posts in this series I’ll consider other aspects of pricing strategy, but do let me know your favourite examples of clever pricing in the comments, I’d love to hear your views.