How Dual Pricing Strategy Can Help Retail Businesses During Inflation 🌗

Have you heard of a dual pricing strategy? As inflation continues and interest rates continue to rise; we are seeing many more retailers applying some form of variable pricing across their product portfolio to combat inflation without losing customers. This is a promising sign that more businesses are prepared to experiment with and optimise their pricing models in search of better business approaches that are more resilient in the face of challenges. 

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The problem is, though, the struggle is not the same in every industry. The cosmetics industry, for instance, faces heavier difficulties as people buy less of their products as prices rise.

In this article, we are going to discuss one of the many pricing techniques cosmetic companies and other retailers use to combat inflation. This refers to a dual pricing strategy. Then, we focus on how it is being implemented through the example of the omnichannel cosmetics company called e.l.f. Beauty. We argue that while a dual pricing strategy is not yet a well-developed method, retailers can explore it to deliver value for both the business and their customers even in the face of inflation.

At Taylor Wells, we believe that every business in the cosmetics industry needs an effective pricing strategy to help mitigate the negative effects of rising prices. By the end, you will know if you should also try implementing a dual pricing strategy for your business.

Dual Pricing And Marketing Strategy For Cosmetics Retail Businesses

In recent months, inflation has been high, causing a ripple effect of crises throughout all industry segments, including the beauty and cosmetics sector.

How did inflation affect cosmetic companies?

Just as cosmetic companies were beginning to recover from the effects of the pandemic, a new crisis hit the industry: inflation. Costs are rising across the entire supply chain, from acquiring raw materials to transporting final products. As consumers begin to feel the pinch, exacerbated by rising energy and gas expenses, skincare, makeup, and fragrance purchases are expected to become less important. Consequently, companies are grappling with setting the right prices to account for high costs while also not losing sales.

How are companies using pricing to cope with inflation?

During periods of high inflation, cosmetic companies may face increased production costs. They use pricing strategies to manage their expenses or to pass on costs strategically without losing customers.

The use of a competitive pricing strategy is one of the most common. Cosmetic companies use this to base their prices on the competition. For example, they strive to be the market’s most average available price. Some are better at pricing key-value items. Sales and marketing use this pricing model to entice customers to their stores by offering discounted prices on popular products. They then intend to profit from products that customers purchase in addition to this popular product.

Many online stores, particularly those with a wide range of products, are experimenting with dynamic pricing. Aside from these, we’ve seen some physical and online businesses use a dual pricing strategy. What does this mean exactly?

Discussion On Dual Pricing Strategy For Cosmetics Omnichannel eCommerce Business

A dual pricing strategy is the practice of setting different price points for products in different market segments. This pricing strategy identifies customers based on their willingness to pay. As a result, depending on the target consumers, the seller offers different product lines at varying prices. This allows businesses to sell products at all price points in order to appeal to as many customers as possible.

Products are typically priced higher when they are marketed to customers who are less price sensitive and willing to pay more. Low-cost products are aimed at people on a tighter budget or who are more price sensitive. A company can use this dual pricing strategy for a variety of reasons, but it is most commonly used to take market share away from competitors. Many retailers use this strategy to remain appealing to customers during economic downturns such as inflation.

How is e.l.f. Beauty using a dual pricing strategy?

In the midst of high inflation, the omnichannel cosmetics company, e.l.f. Beauty announced that it would not raise prices on approximately one-third of its lowest-priced entry-level products while they increase the prices on higher-cost items. The strategy was applied by e.l.f Beauty to two main categories of products only, which were bestsellers and high-end items. So, really it is not that sophisticated a pricing strategy, but a good starting point.

This pricing strategy coincides with a period of increasing financial pressures on consumers. Recent research indicates that 70% of households are cutting back on discretionary purchases to cover the high costs of basic commodities. Unlike most categories, cosmetics, skincare, and hair care products are frequently viewed as existing in both essential and discretionary goods. Consequently, studies also found that consumers are trading to lower-quality brands.

The rationale behind dual pricing is that customers are less likely to switch and more likely to buy when retailers don’t mess around with prices for bestsellers. Research shows, for example, that customers tend to price-shop when prices for bestsellers are changed or increased. There is greater market awareness of these prices – unlike lesser-known products in the portfolio. This is because different products have different price sensitivities.

Implications Of Dual Pricing Strategy During Inflation

Dual pricing can also deliver positive results for retailers. Namely, it enables them to:

1) Maintain sales volume on popular items as other prices were increased.

2) Increase web traffic while potentially upselling through the customer journey and new product price tiers. 

3) Safely capture instant and more revenue and margin by increasing prices on non-traffic driving products. 

4) Encourage customers with a higher willingness to pay to spend more on higher-margin products. 

Should you use a dual pricing strategy?

Overall, dual pricing is a good pricing option for retailers, but only if the price increase is optimal; the business has a firm understanding of its product categories and best sellers; the pricing is aligned with the value of the product portfolio; and the business has taken account of and delivers on the value of its business model and operations.  Otherwise, a strategy like this may be loss-making for retailers.

If you don’t have yet, we recommend having a specialised pricing team. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.

Building commercial capability is key. Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.

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Bottomline

Cosmetic companies, in particular, are correct to optimise their pricing models in the face of inflation. Experimenting and testing are essential for determining what works best for you. Remember that dual pricing is a good option for retailers, but only if the price increase is adequate to compensate for the items you will not be increasing the prices.

For a comprehensive view on maximising growth in your company, Download a complimentary whitepaper on How To Drive Pricing Strategy To Maximise EBIT Growth.

Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

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