How retailers can use advanced pricing strategies to send a positive message to shoppers
Your shoppers see red when they encounter evidence of inflation in rising prices and shrinking package sizes of goods on your store shelves. Is your price image in jeopardy?
Retailers are put in the position of delivering tough pricing messages every day, while their suppliers may make their own decisions at arm’s length. Oftentimes the price equation is driven by commodity costs further up the supply chain, well outside the retailer’s control. How should you counter negative perceptions?
It is intuitive that inflation is not uniform. We observe how recent fuel prices have behaved differently from housing costs, for example. Across grocery categories there are also differences, as reported by the USDA Economic Research Service in its April 2024 Food Price Outlook report.
The agency predicts that all food-at-home prices will increase 1.2 percent in 2024, on top of a 5.0 percent increase in 2023. But consumer prices for several categories are forecasted to rise more sharply: Poultry and seafood up 1.6 percent; beef and veal up 3.3 percent; eggs up 4.8 percent; sugar and sweets up 4.3 percent. Notably, there are no forecasted price declines.
Consumers have somewhat exaggerated expectations about this, says a survey from Purdue University’s Center for Food Demand Analysis and Sustainability. With recent inflation that peaked at 11.3% in 2022 still on their minds, 64% of survey respondents said in February they expected food prices to increase further in 2024. Their average predicted increase was 3.7 percent – three times the USDA forecast.
Consumer pricing confidence is shaken
Consumer worries about prices come from several directions, including stories in the popular press, and even statements from top government officials about holding the line on recent inflation. But much of their belief is in response to the item prices they see – and remember – on store shelves.
In a provocative New York Times essay earlier this year, UBS economist Paul Donovan highlighted the rising cost of the humble Snickers® candy bar as a trigger for negative shopper feelings. “A chocolate bar that moves up 20 percent in price from $1 to $1.20 will provoke a sense of outrage, even though their total spending on chocolate is, hopefully, fairly limited,” he observed.
While somewhat lighthearted in tone, his idea was not news to most grocery retailers, who have long understood the importance of maintaining a positive price image – that is, to set and display prices that shoppers perceive as fair and trustworthy. Since the era of price optimization began two decades ago, leading retailers have used strategic pricing decisions to send a message to shoppers that they can be trusted to deliver the best overall value.
This is especially relevant today
In fact, managing price image is one of the foundational objectives of the retail pricing discipline, alongside your margin and profit goals. It can also be essential to your loyalty and share-of-pantry/trips/wallet goals. Taken together these are crucial reasons to adopt modern price management and price optimization methods to enable informed decision making.
You likely already recognize why an informed pricing discipline is essential. Executing with granularity across the total store assortment requires time and expertise. The sheer number and frequency of pricing decisions can overwhelm – especially in an era where producer prices are changing more often, and shoppers routinely compare retail prices on digital apps.
Today’s shoppers may be highly sensitive to price changes on items that are important to them individually. These known-value items (KVIs) are the principal carriers of your pricing message. But KVIs are not universal. It is not sufficient to rely on intuition or cursory analyses of your transaction logs to understand which item prices will influence each shopper’s attitudes and behaviors most.
Those who seldom buy Snickers bars may form their perception of your prices based on a completely distinct set of items they regularly buy.
Strategies to put to work now
How can you formulate a comprehensive pricing discipline that systematically identifies the right KVIs, preserves a fair total margin where it is needed, and also conveys the right value perception to your shoppers? The answer requires more than good intentions.
It takes powerful software tools to deconstruct your total pricing structure by departments, categories, and items, measure how price affects demand for each, and re-assemble a total pricing picture that delivers on your business goals.
Among approaches we see as very effective:
“Gate” some price changes when they are due to cost increases or competitive pricing, in alignment with category roles. Shoppers experience greater consistency and less volatility, which enhances trust. For example, you may set your pricing system to take cost decreases immediately but apply rules to raise to raise prices only if COG rises above a defined trigger level.
Leverage relative pricing rules within categories that are congruent with shoppers’ sensibilities, such as the appropriate gaps between national brands and private labels. Automate these so that when supplier costs increase, the category impact is considered holistically.
Analyze demand data to understand how price sensitivities vary at the category, brand and item levels. Use price optimization to decide which can be priced to increase margins and reliably predict the impact upon unit sales.
DemandTec Total Lifecycle Pricing incorporates the full spectrum of solutions to apply these pricing strategies and more, using intelligent automation that empowers faster, more accurate decision-making.
Prices that send a message that you are on their side
When retailers employ comprehensive solutions to track shoppers’ responses to your prices based on empirical analysis, certain core truths tend to emerge:
- What shoppers hate: Frequent price changes. Big jumps in item prices and their total basket costs. Too few value alternatives within the categories. “Shrinkflation” due to manufacturer package changes. Fewer or shallower deals.
- What shoppers love: Less frequent price changes. Ability to predict their basket costs. Fairly priced alternatives for items that have gone up in price. Attractive deals on KVIs that help stretch their budgets.
Consistent and disciplined strategic management of your prices is a primary channel retailers can use to convey trust and value to your shoppers. Total Lifecycle Pricing from DemandTec is built for this.
Contact Us for an in-depth conversation about the value you can create using DemandTec Total Lifecycle Pricing.
