What matters most in pricing?

Ikea. They've done it since day one. Great value and I don't mind building it. Do you know anyone who doesn’t love Ikea? I don’t.

What you pose is a tough balance for retailers and companies like Best Buy need to figure it out quickly or they'll be the next Circuit City. In addition to the actual store and products, there are the intangibles that can add real value. I can buy an iPad anywhere. But, the experience at the Apple store is so beyond anywhere else, it's where I go. No consider buying an LED TV. Same product everywhere. No discernable differentiation in service. Just comes down to who has it the cheapest.

Lastly, I'd say that mobile has the ability to change the experience. Especially in high-frequency retail. Think about the club buying experience at stores like BJ's or Costco. What value does the checkout provide? None. In fact, it detracts from an otherwise good, value-based experience. Eliminate the traditional checkout process and you eliminate the bottleneck, reduce costs, increase loyalty and have a clear differentiating experience.

This is the era where multiple price comparisons are as simple as a scan. It also follows on the heels of times we, particularly in FMCG, have not well understood what consumers what when they say "service" or "convenience".

So the new customer centric rules that drive value? How well do you stack up against my list of consumer needs drivers?
Give me what I want, when and where I need it. At a price that I am willing to pay, and that does not make me look foolish. Anticipate my needs, don't make me work too hard. Don't do anything that will make me look elsewhere. Occasionally surprise and delight me.

How hard is that? Who does that now?

Looking at what John and Mike have said in the light of Bob Sherlock’s belief that “…it’s about the total value proposition, including the experience and how it makes you feel,” made me think of a conversation I had recently with a very tech enabled shopper. She was sharing her positive experience using Amazon’s Subscribe and Save Program. It was evident that the really important thing that she gets from using the program is the confidence that she’ll always have the products she needs, when she needs them. You could almost hear a sigh of relief that she no longer had to worry about it, because Amazon was handling that worry for her. Price was mentioned only later and, listening to her, it appears that Amazon may have left “something on the table.”

An article in last Friday's Wall Street Journal reports that the growing use of price apps is encouraging retailers to try to defend themselves by developing more exclusive brands and items. Beyond Trader Joes, which retailers do you see doing this and who appears to be having success?

Last week I visited a Loblaws store in Ottawa, Canada and ran across one of the best examples of leveraging the power of exclusive brands that I’ve ever seen. The store dedicated about 25% of space to their Joe Fresh apparel offering for women, men and children. The Joe Fresh department was filled with shoppers—most of whom had baskets filled with groceries—who were actively hunting for fashionable apparel and accessories right before Christmas. Not only is Joe Fresh a great sales-builder (it’s a CDN $1 billion business by itself), it clearly attracts stock up grocery trips as well…all without competing head-to-head with competitors on price.

From my experience, Bob’s thinking on pricing is spot on and it leads me to think broadly about the disconnect that exists in pricing today. It occurs to me that in many cases, supermarkets no longer control their pricing relative to their brand's value. In essence they have given their pricing strategy over to either Wal*Mart or the share leader and are allowing their internal “machines” to calculate pricing based on a price index. The net of the index approach is pricing begins off someone else's brand value, not their own.

In this scenario, WMSC, or the share leader, sets a retail price on items, and then other chains within the same market set pricing to get to an index number. It may be 3, 5, 8% higher – but in almost all cases the retail price is set off someone else's pricing. Internally, the pricing team is then measured on their ability to deliver that targeted index day in and day out – not the ability to understand the demand curve (which we know is unique to each retail brand) that will maximize profitability. As an example; high penetration/high frequency Key Value Items (KVI) are selected based on demographics and indexed to some competitor.

Turning to how this can disconnect pricing from a retailer’s brand, there are two distinct examples. On one end of the spectrum a chain perhaps should get paid more for their products because they deliver value in other areas such as quality and overall experience. With a simple index approach price value is not fully leveraged. In the second example, the chain should set prices to index LOWER than the super stores if they look honestly at their own brand's value! As Wal*Mart in particular has gotten better at quality assortment, cleanliness and even improved checkout, many chains still price index higher even when the net value of their brand is not as strong. When this happens, the impact on sales of course can be devastating.

Making matters worse, the preoccupation with comparing everything to everyone also impacts private label. Since most chains set their private label price based on a percent discount to the national brand price, by proxy the private brand price is set by someone else’s national brand price.

The same thing has occurred in specialty items too. With almost all “specialty” items coming from a broker and carried by everyone, that too gets indexed. Bonne Maman jams and jellies are a poster child for this. There was a time when supermarkets set the price on this in the five dollar range, but some time ago Wal*Mart started selling it too. The result – supermarkets begin to price it based on an index. Why? One argument would be to protect price image, but how much comparison is done on the edges of assortment, and would promotional pricing be better served here?

Today, items a retailer can and does set a price on are truly differentiated products. These products -- unique to them -- take time and effort to source. They don’t get indexed since they have a perceived brand value that escapes easy comparison. The more of these products a retailer has the more they are actually able to price based on value to the consumer. Here someone actually has to think about what a consumer is willing to pay. It follows that the more differentiated a store's products are, the more differentiated the chain is, and they then can connect pricing to the value of their retail brand. Excellent examples are Whole Foods, Trader Joe's, The Fresh Market, etc. Another example is chains that balance the two such as Wegmans. They push the envelope on selling differentiated products to generate cash to price commodities low that they index. We’ve all heard people refer to Whole Foods as whole paycheck – but they do tremendous volume because pricing connects to what the brand of the chain delivers and they are free to set their prices.

So what does all this mean? It means that today it would be worth the time for retailers to think broadly about pricing on their own terms: To understand their brand's value, their customer’s willingness to pay more or less for other things such as assortment, service and differentiation based on what they actually deliver outside of price.

Everyone is making great points. There are two things, and others have touched on them, that have always struck me about the nature of retail pricing. The first is that the shopper has absolutely no concern for, or knowledge of, the underlying cost of a product. Their only concern, and rightfully so, is the price they pay. And yet so much of pricing is based a target margin approach - cost plus a predefined markup. To the shopper both the cost and the markup are irrelevant and, from their point of reference, arbitrary. The only price that matters to the shopper is what they are willing to pay. The result is that the mechanisms retailers use to establish prices are often totally disconnected from the shopper’s actual propensity to pay that price (whether higher or lower). Of course the retailer can’t ignore the cost side of the equation, but to me effective pricing should place a far greater bias on the shopper and the reality of how they vote with their pocketbook.

The second thing, and Paul really nailed this, is the prevalence of competitive pricing as a strategy. That it is a purely reactive strategy is actually the lesser of the evils. The more insidious implication is that focusing on a reactive strategy reduces focus on a strategy based on differentiation. It’s about value not price. Many retailers provide wonderful shopping experiences, great assortment and great service – and yet they fight it out on price. The shopper’s propensity to pay a price is directly proportional to their perception of value. And value has many more moving parts than price alone. Pricing and marketing must be inexorably intertwined and its marketing’s job to tell the story of differentiation so as to create a vivid picture of value beyond price alone. Great retailers do exactly that.