7 Pricing Paradoxes Hindering Your Retail Profits

If you look between the lines of the just-released 2014 RSR Benchmark Report, The Pricing Paradox, you might notice some discrepancies between the answers that respondents gave vs. their actual reported pricing behaviors. It appears that, in many cases, what the respondents said they wanted to do with their pricing strategies was at odds with what they were actually doing. (Survey respondents included 110 senior, middle, and "other" levels, with 22% in in store operations; the majority in basics/replenished Items and durable goods; and 27% representing over $5 Billion in sales).

PARADOX #1:   

"What's more important: Increasing market share and driving demand, or maximizing gross margins?" Retailers said the primary objective of pricing strategies is to maximize gross margin, BUT (in the hopes of increasing market share and driving demand, i.e. pricing too low), their actions  seemed destined to drive gross margin down, rather than up.

PARADOX #2: 

Conflict between retailers' stated pricing objectives vs. what they were actually doing with their prices.   

PARADOX #3:   

Retailers fretted more about how their actions would impact their relationship with their consumers, than on what their competitors were doing.   

PARADOX #4:

Retail winners ran more promotions and generated more price changes than their peers, yet 29% of them said they were not confident that their promotions were effective.    

PARADOX #5:  

55% of the Retail Winners report they have been more successful in continuing to improve gross margin… while jiggering prices, (even though they didn't always seem to see the correlation). 

PARADOX #6:

Winners report that both forecasting the impact of potential pricing decisions and measuring the impact of executed pricing decisions are less of a challenge this year than last -- although they don't seem up to speed on either the forecasting or measuring. 

PARADOX #7:

Winners say the new #1 operational challenge is "keeping up with competitors’ prices"; even though most say that they are getting access to robust competitive price data.      

Other interesting responses to come out of the Pricing Study:    

* The Top 3 Strategic Pricing Business Challenges that retailers identified for 2014 were:

  1. Increased Price Sensitivity of Customers - 56%
  2. Need to protect our brand's price image. 43%
  3. Need to provide consistency across channels. 42%

* The Top 3 Objectives of Pricing Strategy cited by the respondents were:

  1. To maximize gross margin - 46% 
  2. To build market share - 43%  
  3. To drive demand - 40%

Respondents said pricing would contribute these top opportunities to their Business Strategy in the Next Two Years:  

  • Improve margins
  • Improve top line sales
  • Create a more price competitive image for our customers
  • Better matching of demand and product supply
  • Provide a more seamless cross-channel experience to customers
  • Increase market share for key categories or products
  • Create more profitable promotions
  • Provide more localized offerings to customers
  • Gain margin advantage through more dynamic pricing

Other objectives of pricing strategy ranked by the respondents were:  

  • To convey value proposition
  • To stave off competitive pressures
  • To create excitement for our brand 
  • To improve merchandise sell-through
  • Price is not our primary driver
  • To liquidate merchandise at end of life

(When asked if these pricing strategies were effective for them, 27% said "very effective"; 62% said "somewhat effective"; and 11% said "not effective at all"). 

* 52% of respondents indicated that competitive price data is valuable. 

* 52% of respondents indicated that competitive price data currently plays a major role in price setting.

* 65% of Retail Winners agree that they have the ability to respond quickly to competitors’ price changes. (RSR noted wryly that that means that 35% don't).   

* 52% of the respondents cited Competitors' Prices in Managing and Optimizing Prices "very valuable"; 40%, somewhat valuable; and 7%, little or no value.  

Bottom Line For Your Bottom Line:  

What the retail respondents said were their pricing priorities appear to be more a case of watch what I do, not what I say; so how should retailers give proper balance to competitive issues, pricing strategy, brand image, and consistency? 

Laggards overwhelmingly cited competitive issues, while retail winners (who were more successful in business) worried about their brand image and consistency across channels.

What may be the most important statement of the study: "The future will not be won by having solutions so much as in how retailers use them." 

Watch for Part 2 of this post: How To Increase Your Pricing Power By Using The Right Pricing Solutions.   

 

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Amos Peleg

About Author

Amos Peleg co-founded Upstream Commerce following 15 years of leadership roles in operations and global team management in the software industry. At Mercado Software – later acquired by Omniture, Inc. (now Adobe) – Amos served as General Manager of Mercado Labs and was responsible for the company’s operations. Mercado Software, a provider of advanced merchandising solutions, counted among its customers Macy’s, John Lewis, Williams-Sonoma, Argos, Overstock, Guess and Sears. Prior to Mercado, as Director of Small-Business Technology Platforms at SAP, Amos managed the group responsible for international engineering programs. Previously, at Check Point Software Technologies, he drove the technical development of two core products and was responsible for the conception, architecture, development, and market delivery of all new products. Amos holds a M.Sc. degree in Computer Science from the Weizmann Institute of Science and a B.Sc. in Physics and Computer Science from the Hebrew University of Jerusalem.
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