Through a special arrangement, presented here for discussion is a summary of an article from Retail Paradox, Retail Systems Research's weekly analysis on emerging issues facing retailers.
As RSR prepares to launch the fourth edition of its pricing report, it's easy to forget that as far as price optimization has come, there is still a long way to go. At Retalix's recently held user conference, Lyle Walker, VP of marketing for KSS Retail, reminded me that sometimes the basics need a refresh.
He presented three pricing "myths" and explained why retailers should be working to blow up these myths internally.
Close enough pricing: When you have a private label brand, sometimes the mandate is to keep the private label price "close enough" to national brands -- for example, if the national brand can of peas is .99, then the private label should never be more than 20 cents away. But customers don't know your costs or margins, so you have an opportunity to be flexible here -- in fact, some stores may be next to serious price competitors. You don't have to kill the margin for the entire product line just to stay competitive. You might find benefit by varying that price by region or location -- either or both the national and the private label brand.
Margin pricing: Sometimes retailers set margin objectives for their private label -- the private label brand should always achieve 35 percent margin, for example. But if the private label product is not priced close enough to the national brand, it sometimes creates a negative connotation for the customer.
Line Pricing: This example applies primarily to products that have lots of flavors or colors. The temptation is to set the prices so that the entire line is priced at the same price -- all prices of a salad dressing line are set at $1.29, for example. But a common differentiator for a smaller grocer against a big chain is that they often carry a wider selection of flavors that you can't get elsewhere. So why give away margins on products your competitors don't even carry by pricing the entire line the same way?
The main point is that traditional pricing technologies are designed to automate pricing decisions across a lot of stores. Price optimization enables you to treat every single store (if you want to go to that level) as its own demand pool, and gives you insight into what makes for successful price strategies at that particular store. There is a lot of value -- our surveys on pricing show consistently that I'm not understating this -- in breaking from the one-size-fits-all pricing strategies of the past.
Discussion Questions: What do you think are the biggest fallacies around traditional pricing strategies? How well do retailers really understand the margin benefits from more sophisticated pricing techniques?