Over the last few years, a myriad of reasons have popped up increasing the rate of change of what we used to call ‘normal’ in the retail industry. Whether it is due to CoVID-19, rampant inflation, increasing fuel and distribution costs or an increasing drift to online shopping, shifting consumer buying patterns means it is now more important than ever to consider your retail industry pricing strategies.
At Pricefx, we have been analyzing retail sales data and setting automated pricing processes for our retail clients for more than 10 years now and assisting them to facilitate real-time price changes and remain ‘pricing nimble’ and proactive in protecting profit.
In this article, we will examine the top pricing strategies that retailers may find useful, a famous retail industry pricing strategy example and some handy tips for building flexibility into your retail pricing strategy in times of uncertainty.
Types of Retail Pricing Strategies & Mixing-and-Matching Strategies to Price Effectively
The correct answer to the question ‘Which Retail Pricing Strategy for My Business?’ has an answer you might not like. Why? Because the answer really depends on your company and the unique set of business objectives you’re trying to achieve.
For example, your chosen pricing strategy as a sporting goods retailer may be entirely different to your competitor, despite the fact you are both selling Nike and Adidas sports shoes and sportswear.
It is critical to acknowledge that no single perfect pricing strategy exists for any company. Changes in the market conditions and competition require flexibility and adaptability.
What’s more, being flexible and able to pivot and switch between pricing strategies is becoming just as important as the pricing strategy itself. As shifting market forces are moving faster than ever before, you may need to use different strategies on different lines of your products. Going back to our sporting goods retailer example, you might use a competitive pricing strategy on your Adidas shoes (as competitors in your market all have the same models for sale) but you may choose a value-based pricing strategy on the exclusive Nike shoe models that you have imported from Europe. After all, as Warren Buffet once famously said; “Price is what you pay. Value is what you get.”
A prosperous retailer is usually prepared to adjust their pricing strategy over time in pursuit of competitive advantage and profitability.
The most common pricing strategies employed in the retail industry include;
Competitive Pricing Strategy – Acompetitive pricing strategy is a pricing method that involves setting the prices of your businesses’ products in relation to the prices of your competitors.
Discount Pricing Strategy – Discount pricing is a strategy where you mark down the prices of your products with the goal of increasing customer traffic, clearing old and outdated inventory from your shelves, or simply increasing sales volume.
Everyday Low Pricing Strategy – Or ELDP (as it is commonly referred to) is a pricing strategy in which companies promise their customers consistently low prices on their products each and every day without having to wait for sales events.
High Low Pricing Strategy – Retailers charge more for initially introduced products and then later, sell them at a much lower price during promotional campaigns (seasonal deals, clearance sales, and markdowns etc.) before raising prices again. Yes, prices are decreased in sales promotions, but the strategy also includes increasing the prices again after the promotional period has finished. Great to boost your sales revenue.
Economy Pricing Strategy – An economy pricing strategy sets prices at the bare minimum to make a small profit, but the idea is to make the bare minimum as many times possible by selling as much volume of your products as possible.
Price Skimming Pricing Strategy – is a strategy whereby retail businesses mark up the initial (usually introductory) price of the product to a much higher rate and slowly decrease it as time goes on.
Penetration Pricing Strategy – Penetration pricing is a pricing strategy that is used by new companies to quickly gain market share by setting an initially low price to entice customers to purchase their products.
Captive Pricing Strategy – Captive pricing is a pricing strategy developed to attract a large volume of customers to a one-time purchase of a lower-priced core (or main) product that requires accessory (or captive) products for the main product to function. Regular purchasers of either razor blades, or toner and ink cartridges for their printer are fully aware of captive pricing.
Loss Leader Pricing Strategy – Outlawed in many parts of the world (Australia, Europe, Oklahoma, California and Colorado), but still a viable option in certain U.S. states, a loss leader pricing strategy involves selling a product or service at a price that is not profitable to attract new customers or to sell additional products and services to those customers. Loss leading is a common strategy used when a business first enters a market.
No matter which kind of pricing strategy you will be looking to apply there needs to be the potential to apply flexible price guardrails and flexible price boundaries. By that, we mean you need to go beyond looking at a floor price of $12.99 for your 1lb bags of coffee beans. On the other hand, you need to possibly consider a minimum profitability of 2% or 5%, meaning if your margin is flexible and operates in a corridor between your lower and upper price limits.
You may also need to apply absolute and percentage psychological price boundaries on top of that as grounding rules.
These are the factors you want to have applied automatically based on volatile input data, which needs to be as clean as possible. And price software should help in making the inherent flexibility that is required for accurate and profitable pricing an achievable reality.
Tips for Setting Retail Pricing Strategies & Overcoming Problems
An important element when implementing a successful pricing strategy is knowing the potential pitfalls and complications. Avoid these complications and you should be well on your way to a profitable retail pricing strategy
Price Strategy Stagnation: Companies failing to evolve with their pricing policies risk missing out on sales. Change in the retail business industry has become the new normal if your pricing strategy snoozes, your business risks losing.
Revenue is not the same as profit: Companies make a living off profits, not revenue. Top notch revenue numbers are great, but profits and profit-based incentives are the pathway to a sustainable business. Your retail business may want to consider value or profit-based incentives for staff rather than revenue-based incentives.
Shift away from oversimplified margins: While it is not now as common as it once was, having a high overarching margin target such as 40% or higher may seem like an encouraging idea. However, there is a risk for retailers underpricing some products and leaving money on the table. On the flip side, overpricing other products is also a possibility and missing out on the sale altogether is conceivable. A good pricing software solution provides retailers with the opportunity to recognize the value of their products compared to others, and then price according to their value.
It’s okay to say “No Sale”: Don’t feel compelled to sell to every customer that comes along. Not every client that could use your valuable products may be willing to pay you what they are worth. Focus on serving customers that are willing to pay you what you know your products to be worth.
Aldi Pricing Strategy vs Lidl Pricing Strategy – A Famous (& Interesting) Head-to-Head
Aldi and Lidl are both successful grocery retailer stores that began business in their home country Germany and expanded their markets to almost all parts in Europe. In case of Aldi, they even have their stores in Australia and Unites States, while Lidl continues to push forward with expansion into the United States.
Anyone familiar with Traders Joe’s in the United States will be aware of the type of business model that both Aldi and Lidl use to dominate the retail grocery market across Europe. It is a no-frills approach with a small number of product lines in store compared to American grocery retailers. Like Trader Joe’s, Aldi and Lidl employ an everyday low pricing (EDLP) strategy in combination with what is perceived to be quality merchandise. The minimalist in-store design provides customers with lower prices. Aldi and Lidl, like Trader Joe’s, implement an EDLP pricing strategy whereby their customers perceive both brands’ products to be high quality but inexpensive. The prices are relatively similar between the two chains, with Lidl having slightly cheaper prices on a few kitchen staples, but close to equal on most other items across their ranges.
The secret to the Aldi and Lidl pricing strategy is to sell many private-label products at the best profit margins possible (products unavailable elsewhere) that enrich shopping baskets and augment well-known brands such as Nutella and Coca-Cola etc.
Many of Aldi and Lidl’s products are their in-house brands. What that means is that consumers cannot get those products anywhere else. Shoppers can purchase originally creative and exclusive in-house products (like Lidl’s Garlic or Olive-flavored Hummus line, or Aldi’s exclusive Croatian-spiced barbeque sauce) while picking up their regular staples like bread and milk at heavily discounted rates.
Many of Lidl’s and Aldi’s products are original and novel, but also inexpensive to put on the shelves. The two European mega grocery giants buy those goods directly from suppliers, enabling them to price their privately-branded products at the best valued prices that those products have to offer.
Most importantly for Aldi and Lidl in these tough times is that they have been prepared to be flexible in their pricing strategy and successfully adapt to sudden and dramatic shifts in market forces.
Price Pivoting as Markets Shift – Lessons Learnt in E-Commerce Since 2020
Since the onset of the global pandemic in March 2020, more-and-more sales have been made online due to shifting market forces created by Covid-19, planning and supply chain issues.
As an online retailer, you may have potentially seen your percentage of sales for products for free shipping rise from 10% of your total sales volume to as much as 50% or even higher when the pandemic was at its absolute peak.
In 2020-21, shoppers’ buying patterns shifted away from your bricks-and-mortar stores to your online stores and they may have taken advantage of an attractive free shipping offer you possibly may have had in place.
Now your bricks-and-mortar stores are open again, but many of you may have noticed that the online shopping trend has remained. The extra shipping costs could be eating into your margins and raising your prices to cover the free shipping costs is now a reality to protect your profits.
By failing to react quickly to the rapid retail industry changes that can occur now more regularly than ever, the risk of leaving profit at the checkout grows.
What’s more, staying on top of volatile demand for products has become far more prevalent. The image below is deliberately provocative – by comparing March 2019 with the first month of the pandemic in March 2020 – but it does go to show how unpredictable market forces can affect demand, and staying proactively on top of your pricing strategy is now more important than ever.
Original image sourced from https://www.visualcapitalist.com/shoppers-buying-online-ecommerce-covid-19/
The underlying point to consider is that being able to pivot and flexibly switch between pricing strategies as circumstances change (they do not need to be as dramatic as a global pandemic or regional conflict) is critical for any retail business.
That’s Great – I have a Retail Pricing Strategy in Mind, But What Should I Do Next?
After reading this article, you are now aware of the many unforeseen factors and potential pitfalls that can occur when setting up a successful retail pricing strategy.
You may have possibly already determined the pricing strategy that best suits your retail company and your organization’s unique collection of business objectives AND, to make it so, next generation pricing software like that of Pricefx maybe needed to build the required flexibility into your pricing.
But wondering how to get started in implementing a retail pricing strategy that will also be ‘future-proofed’ when your needs change?
Discover more about how to implement a unique pricing strategy for your retail business, check out this practical article below:
Jochen Schmidt has over a decade of experience in strategy consultancy and advisory in addition to pricing and software. Over 7 years with Pricefx, he held several positions including Solution Strategist Manager for the EMEA region and spearheading the global retail industry team as a subject matter expert. Throughout his career he has held various positions at specialized consulting companies, providing value to clients by advising on pricing strategies and implementing pricing software. In his free time, he is a passionate cook, beach volleyball and volleyball player, spending most of his vacations travelling and hiking.