Retailers and manufacturers need to stop seeing price as a tactical lever and move from constant discounting to improve long-term profitability.
During the economic downturn, companies competed for market share and volume, which meant frequent price promotions and markdowns. While many markets have since recovered from the recession, corporations still find themselves stuck in a cycle of recession-driven discounting.
Companies need to now rethink their pricing strategy. The high-low model – marking products up, only to discount them later – not only lowers margins, but damages and devalues brands over time.
KPMG recently conducted a wide-ranging study of pricing with companies in the UK and the unanimous response is that they all have significant room for improvement. Over 70 percent of companies said they could increase profits by at least 5 percent if they were able to price products and services more effectively, while 40 percent believed they could generate at least a 10 percent improvement in profits.
But to do so, brands need to treat pricing as a strategic rather than tactical capability. This is especially important now as companies are having to contend with growing competition, increasing price transparency, new consumer-led buying models and technological advances in traditional pricing models.
E-commerce across borders is also contributing to the challenges of competitive pricing. Competition previously resided within geographic borders; now domestic and foreign brands are going head-to-head online. In Australia, where goods are typically more expensive than in most other parts of the world, residents can make overseas online purchases of up to AUD$1,000 without paying duty, goods and services tax and import processing fees.
To ensure that its prices remain competitive with global e-commerce sites, Australian department store chain David Jones, purchased by South Africa-based Woolworths last year, embarked on “price harmonisation” as part of its turnaround plan.
Other consumer-led models have emerged including collective buying, where shoppers use their combined purchasing power to get deals. Groupon is a well-known enterprise-led example.
Retailers have more information about their customers than ever before. More and more brands are using data to set prices on an increasingly dynamic basis, where prices can change by month, week or day, depending on supply, demand and a multitude of other variables. It is a model that has driven the success of online giant Amazon and is now being replicated by similar retailers across the globe.
By breaking down the offer into individual components that drive value for customers – such as the ability to check baggage, change flights or reserve seat locations – airlines can charge for them on a per-use basis, since they are separated from the ‘seat price’ on a flight.
Dynamic pricing is nothing new at retail – restaurants’ ‘early bird’ specials and shoe store end-of-season clearance sales, for example, demonstrate dynamic pricing in its simplest form. But can these bricks-and-mortar retailers learn to better leverage technological advances?
One market segment that rarely discounts is luxury goods and services. They are the best example of the proactive, value-based model, in which pricing is determined based on how much a consumer values the product or service. To maintain its value, luxury brands and high-end fashion labels always keep prices at a high level.
Non-luxury brands have embraced the value-based model partly by shifting from mass production to a made-to-order or made-to-build model. An example is Apple’s just-in-time model, achieved through lean manufacturing and smart supply chain management, which helps maintain prices as demand is always greater than supply.
However, marketers still have to find the right price point that will attract buyers, and ensure stock doesn’t pile up. This demands that companies also better understand how production and pricing can work together strategically; too often pricing is a reactionary response to inventory levels.
We believe that retailers and suppliers need to become more sophisticated about pricing strategies – because if they don’t they will continue to execute reactionary, low-margin responses to competition and consumer behaviour even during times of growth.