Bold Move #1: Start a price war

By: Marc Hoogenberg  |  Published: August 5, 2016

How retailers can influence shoppers' price perception

Many retailers — mainly incumbents — come to us with market research results showing two things:

1. Price is ranked as one of the top three purchase drivers by their target audience.

2. Their retail chain is not ranked in the top three on affordability in their competitive peer group.

Since it is difficult to influence the importance of the purchase drivers of your target audience, it is clear to the retailers that the shoppers’ price perception needs to be tweaked. But how? Retailers in general immediately focus a lot of attention on pricing and promotion, which we find, paradoxically, are not the most effective instruments to influence price perception when used in isolation: JCPenney’s move from a “high-low” promotion-focused pricing strategy to “everyday low pricing” value-focused pricing, in essence reducing base pricing by as much as 40 percent, resulted in a revenue drop of 30 percent. In addition, retailers are reluctant to implement these pricing measures because they are afraid to find themselves in a negative spiral of price cuts with competitors — a tried-and-true way of wiping out the bottom line, which can lead to bankruptcy for non–cost leaders. Starting a price war is almost never mentioned, but perhaps that is the bold move required to nudge your target audience’s price perception in the right direction.

Market research results
 

Pricing is not just about pricing

The customers price perception of the retailer needs to be tweaked

All indicators on price wars seem to be bright red. Race to the bottom, profit destruction, and bankruptcy are frequently mentioned outcomes, and Wikipedia states that avoidance of a price war is by far the best policy. An often cited case in point is the 1992 price war involving American Airlines, Northwest Airlines, and other U.S. airlines, in which the losses suffered that year due to the price war exceeded the combined cumulative profits for the U.S. airline industry since the beginning of time.

But when done well, a price war can be beneficial for both the consumer and the “aggressor.” Just as computers are only a tool for conducting a cyberwar, requiring a defined target, knowledge about the target, and skilled hackers to be successful, price is only a tool for conducting a price war.

The first important point to acknowledge is that for many product categories, shoppers have a poor knowledge of individual product prices, with research suggesting that when asked to guess product prices, consumers are off by more than 20 percent about 40 percent of the time. But when asked to rank well-known retail chains on price, shoppers have a clear, and for them true, opinion. This leads to the conclusion that the price perception of a retail chain is often based not on actual price, but on price plus something else — and that something else turns out to be value.

Price plus value

Value encompasses all the benefits customers gain when shopping in a certain store, including product quality, store environment, customer service, and choice. By offering a sober store environment and limited choice, a discounter intrinsically has a lower price perception than a midmarket grocery store, regardless of actual price points. To influence the shopper’s price perception, a retailer can put to work six price-plus-value elements:

 

Promotions

Promotions

Shoppers might not remember exact prices, but they often do remember the amount that a product was marked down — for example, 50 percent. If today’s markdown is not 50 but 25 percent, the deal is perceived as less good, and price perception falls. A scientific approach to promotion analysis is required to provide insights into the true net effect of promotions, and the identification of clear improvement opportunities.

Assortment

Assortment

Shoppers’ price perception is often driven more by differences in a retailer’s assortment than by differences between retailers in like-for-like pricing and promotions. A retailer will enjoy a much better price perception if it has a wider assortment of products at the low end, increasing the chance that shoppers will walk out of the store with heavily laden bags for a low price.

Services

Services

Price-matching guarantees ensure that shoppers are less likely to engage in comparative shopping, and they boost the retailer’s price image. A close look at other services, understanding their effect on price perception, and acting accordingly also are required. In general, a high service level not only improves the shopping experience but also can raise the price perception of a store.

Store environment

Store environment

Handwritten product information, clean and tidy stores, and wide aisles improve the store environment, but can also raise the price perception of a store. Hard discounters, on the other hand, often present products still boxed, using the “stack ’em high, sell ’em cheap” marketing method to underline their low prices.

Brand communications

Brand communications

Focusing marketing efforts to present a certain price message can strongly influence price perception. Campaigns featuring “lowest prices for everyday products” have been shown to have a strong impact on a retailer’s price perception, even when focused only on a subset of the assortment.

Price

Price

This not only includes price levels, but also price points and price cues. Retailers need to identify the items whose price elasticity is highest and understand which reference points shoppers use to judge prices.

Battling a successful price-plus-value war

A price-plus-value war can be very successful in repositioning the price perception against a direct competitor: When Albert Heijn (AH) started the price war in the early 2000s, it was trying to win back former shoppers who had moved to hard discounters for some of their daily groceries, as well as to win market share from other midmarket grocery retailers. AH did not aspire to be seen as price competitive with hard discounters, but rather as a chain with (more) affordable daily groceries, and thus did not target hard discounters in its price-plus-value war; it targeted a repositioning in the midmarket grocery arena.

Upscale fashion retailer Nordstrom fully utilized the assortment and store environment levers and made a bold move by introducing a separate discount format, Nordstrom Rack, to appeal to the price (perception) conscious shopper. The retailer did this very successfully, growing the number of Nordstrom Rack outlets from 87 stores in 2010 to 167 stores in 2015, with plans for continued growth to more than 300 stores by 2020. More important, Nordstrom has been able to enter the discount business without damaging its full-price format: The retailer grew its revenue by about twice the average industry growth (9.2 percent) in the second quarter of 2015. In addition, profit margins have not (yet) fallen, as there is only a 10 to 20 percent overlap in customers between Nordstrom and its discount alternative.

Even a “slight” repositioning, such as the one Albert Heijn conducted, requires an extremely well thought through plan, including details on which of the price-plus-value elements to leverage when, the development of the capabilities required to execute the plan successfully, and other organizational adjustments required to see the war through (i.e., maintain profitability), even in an adverse scenario. Because a retailer will not be able to complete these preparations in a timely fashion when forced to respond to a competitor initiating a price-plus-value war, it is key for the retailer to understand the competitive landscape it is operating in, determine whether a slight price perception repositioning can be expected, and, if so, immediately start building up the required capabilities — and go to war.

How a retailer can influence the shoppers price perception

 
 

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