Research Consortium: Price Rollbacks Better Than Discounts
After a huge run-up over the past year, commodity prices are back down again. But vendors unwisely have been more inclined to deal off higher list prices or offer more trade funding rather than to actually lower prices to retailers. That's the view of a new consortium of researchers led by Dechert-Hampe and Strategic Marketing Sciences.
The resulting high shelf prices in turn have driven a 10 percent to 15 percent jump in price elasticity, as consumers shut their wallets if they think prices are too high.
Retailers, meanwhile, are battling with vendors for lower prices and more promotion, while they ratchet up private label in nearly every category. Dan Graham, vice president of consulting services for Dechert-Hampe, believes manufacturers and retailers must partner to pass along everyday price decreases as the emerging pricing and promotional strategies are weakening the major national brands.
"Over-reliance on deep discounting is an inefficient mechanism for winning and retaining customers," said Mr. Graham.
"Virtually every manufacturer and retailer is playing a game of chicken - even as it becomes obvious that everyday price rollbacks represent the last best hope of winning back consumers," added Ben Ball, senior vice president, Dechert-Hampe. "However, manufacturers understand that a list price decrease is unlikely to get passed through to the consumer, so their preferred strategy is to maintain the current high base prices and offer value by dealing back through deep discounts. The issue with this particular hi-lo strategy is that consumers quickly learn that full list prices are artificially high and that they have the opportunity to buy comparable brands or private label items with at a discount."
Mr. Graham listed a few of key questions for manufacturers and retailers to address the new consumer realities:
1. What is my brand's new price elasticity and promotional response? How will this change as economic conditions change?
2. What is the new consumption equilibrium as a result of the loss of access to credit?
3. Is my brand/store impacted by the loss of credit or is this dynamic actually helping me by inducing my consumer to buy our products because of their relative value?
4. Will retailers partner with manufacturers to address consumer need for value?
"Price and promotional responses are increasing as a result of consumers' need for value," said Hoss Tabrizi, managing director of Strategic Marketing Sciences. "However, the marketing community should understand that these spikes may well be driven by their own pricing and promotional tactics that induce value purchasing."
Discussion Questions: What are the pros and cons of instituting everyday price rollbacks across retail over discounting? What are the challenges in implementing price rollbacks?
[Author's commentary] Dechert-Hampe and Strategic Marketing Sciences, in conjunction with three other analytic and consulting firms, are launching a major research initiative aimed at measuring future consumer behavior and developing specific strategies that can be used efficiently and effectively by manufacturers and retailers. The group's website is www.emergingconsumerconsortium.com.