Pricing for profit

It seems appropriate to re-visit pricing strategies in a time where most retailers seem to be taking the machete to their margins. A common mistake that I see is that retailers confuse discounts with value.
A discount is only perceived as value by the consumer ONLY in the case of:

  • commodities
  • KVIs (known-value-items)
Chances are that 80% or more of your range falls outside of these categories. It therefore does not make sense to slash and burn, destroying your margin and your brand in the process.
There are a whole bunch of factors that influence consumers’ price perceptions, and the retailer only controls some of them. You must also achieve alignment between controllable and uncontrollable factors. With that I mean you are destroying your business if you are slashing the price, but there are simultaneously several uncontrollable factors which are supporting the OPPOSITE perception.
Uncontrollable Influences
  • Past experience with that product line
  • Knowledge of what others paid
  • Recalled advertising
  • Brand name perception
  • ‘Common’ sense

Example: If common sense dictates that a 2 course meal at a casual dining restaurant is around $25, then you will not be doing much for your business if you slash the price to $5 - because people will likely think the food quality must be atrocious. Offering a free bottle of wine will get their interest without damaging price perceptions.
You must think about these factors and make sure you are not fighting a losing battle by trying to go against the tide.
As a retailer you control perceptions by how you communicate your price offer.

Controllable Influences
Price comparisons you offer: A study found that a majority of shoppers couldn't guess the price of over 90% of common purchases like toilet paper and milk within 10% of their actual selling price. Most buyers will take your word that the quality of both items is equivalent. [See section explaining the notion of KVIs – Known Value Items.]
On Sale signs: Buyers are generally trusting people. If you tell them an item is on sale, they'll believe the price they see.
Discounts: There are three common types of discounts used in advertising and these three methods can create different perceptions about the same discount:

  1. The Discount Range promises you'll save something ("10% to 40% off!") depending on the item you select. Always go low to high because the 'recency' principle applies in customers remembering the offer.
  2. Stating the exact discount offered ("Christmas cards 50% off!") gives the buyer greater certainty of what to expect. Research shows that stating an exact discount is as effective as stating a range, when that range is small ("10% to 20% off!") – and this applies to KVIs.
  3. Using the upper end discount is often an effective method of gaining buyer attention, interest, and action. "Up to 70%" is usually more effective than quoting a range (30% - 70% off), because the lower number in the range takes some of the focus off of the higher number, and it is usually the one read first.