Why It’s More Important Than Ever Not to Be Overpriced

Aug 20, 2003

Commentary by Bill
Bishop – BrainTrust

Price continues to be an important element in the shopper’s value equation,
but it’s not always clear what this means in today’s retail environment.

One competitor in every market can grab the low-price image, and those remaining
must find other ways to differentiate themselves that will yield a sustainable
market share.

It’s becoming increasingly clear that to win a meaningful share of the business,
you can’t be overpriced, regardless of your basis of differentiation within
the total value equation. This is a real challenge for most companies. One step
in meeting that challenge is to better understand the importance of not being
seen as overpriced, specifically as it relates to current household income.

Looking at the most recent U.S. Census information, the median household income
in real terms dropped 2.2 percent from 2000 to 2001 to a level of $42,228. This
is no great surprise given the current recession, but it’s somewhat startling
to realize that this translates into the $102 billion that’s no longer available
for spending in the economy.

While these facts help explain the current big picture, another interesting
image appears when we look at change in income among household segments over
the longer term. (Visit www.bishopconsulting.com/WBC16.cfm
for more details.)

Focusing on the change from 1971 to 2000 for the lowest and highest 20 percent
income households in the U.S. population, we find that:

  • The lowest 20 percent experienced a growth in total income of 107 percent.
  • The highest 20 percent experienced an increase in total income of 170 percent.

So, it’s clear that income growth has been strongest among the highest-earning
households. As a result, the highest 20 percent earning households now capture
45 percent of total household income.

What’s important to consider for pricing strategies is that 80 percent of the
households in the U.S. experienced a drop in their share of income. This big
group is likely to be more focused on price than they used to be as they maintain
their standard of living.

What does this mean to companies that are not the low-price leaders in a given

  • You can’t afford to be seen as being overpriced because at least four out
    of five households are probably focusing now more than ever on price. While
    these shoppers may not be motivated exclusively by price, they will likely
    be less attracted to products they see as overpriced, regardless of other
    product features.

  • Only one in five U.S. households have experienced above-average income growth,
    but many of them will be more price-sensitive than they used to be because
    of the drop in the stock market. Who wants to pay “full price” when your personal
    wealth is declining?

The growing popularity of dollar stores, limited-assortment grocery stores,
and supercenters speaks to the advantage and appeal of not being overpriced.
Traditional supermarket retailers and manufacturers will need to develop similarly
meaningful responses to sustain business growth in the years to come.

Moderator’s Comment: How do food/drug combo store operators
remain price competitive in a market that includes dollar stores, limited-assortment
grocery, supercenters and warehouse clubs?

Generally speaking, they don’t and probably won’t.

Personal wealth is declining and food/drug combo stores
continue with a purchasing system that adds costs through a variety of upfront
money schemes. At the same time, competitors are focused on keeping the buying
process simple and getting the lowest bottom line cost so they can sell for
Anderson – Moderator

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