What Supermarkets Can Do When Their Price Is Too High For Consumers 🧨
In any successful business, the alignment of price, value, and consumer’s ability to pay is paramount. For businesses, especially those selling essential goods like supermarkets, pricing plays a crucial role in ensuring affordability for their target market. It’s essential to strike a balance between offering competitive prices that resonate with consumers’ budgets while still delivering value through quality and convenience. When these elements are harmoniously aligned, businesses can foster customer loyalty, drive sales, and maintain a sustainable operation in the long term, ultimately benefiting both the company and its customers. But what if businesses set a price that is too high for consumers?
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Achieving equilibrium among the three facets is far from effortless. Economic hurdles and inflation can complicate matters, often leading to elevated prices that render essential goods unaffordable for individuals. Unfortunately, this predicament can be detrimental to businesses, as it frequently results in declining sales, reduced consumer spending, and, in extreme cases, instances of theft as individuals grapple with unmanageable expenses for basic necessities.
In this article, we’ll delve into the impact of unaffordable pricing and offer strategies for retailers to address this issue. We’ll first discuss the negative consequences and underlying causes of high prices. Then, we’ll provide guidance on aligning pricing with value and customers’ financial capacity. We argue that the strong response to supermarket price that is too high highlights the urgency for businesses to adjust their pricing strategies for the benefit of financially strained shoppers.
At Taylor Wells, we believe that achieving a harmonious balance between pricing, value propositions, and consumers’ financial constraints is a vital necessity. By the conclusion of this article, you will gain insights into how retailers can establish optimal pricing strategies for their products, particularly during times of economic hardship.
What Happens When A Supermarket Sets Price That Is Too High?
Supermarkets, like Coles and Woolworths, found themselves compelled to increase prices in response to escalating costs driven by inflation. Both retail giants justified these price hikes as necessary to bridge the growing gap between supply and demand, citing a substantial 6 to 7 per cent inflationary surge in the costs of grocery products.
Regrettably, these elevated prices have reached a point where a portion of consumers is now struggling to afford various essential items, highlighting the challenge of maintaining affordability amid economic fluctuations.
High prices are impacting consumer behaviour, causing them to reduce their purchases, particularly in the case of big-ticket items like electronics at stores like Big W. People are also cutting back on indulgent treats for their children, with average spending on such items decreasing from $30 to $10. This shift in buying habits reflects the strain that inflated prices can place on household budgets, forcing consumers to make more frugal choices.
Moreover, the surge in theft, including shoplifting and more organised criminal operations, is becoming a growing concern for supermarkets like Coles, not only in Australia but also in New Zealand. Rising costs have pushed some financially struggling individuals to resort to theft as a means to cope, while coordinated criminal efforts further exacerbate the challenges faced by retailers, leading to financial losses and increased security concerns. These trends underscore the complex interplay between pricing, consumer behaviour, and criminal activity in the retail sector during times of economic strain.
These emerging consumer and socio-economic trends serve as significant indicators that the balance in the value equation has been disrupted.
In response, substantial investments will likely be made in surveillance and shopper tracking technologies, but these measures may not necessarily enhance the overall customer experience. Instead, businesses are expected to make strategic pricing adjustments. Here’s how retailers are likely to adapt:
1. Leveraging their loyalty programs and customer data to personalise offers for individual shoppers, ensuring that discounts and promotions resonate with their preferences and buying habits.
2. Employing SKU (Stock Keeping Unit) level analysis to identify popular items that can be discounted on a weekly basis, aligning pricing strategies with consumer demand.
3. Encouraging customers to explore different product categories at different times, potentially diversifying their shopping behaviour to optimise discounts.
4. Intensifying marketing efforts and promotions for their more affordable in-house brands, emphasising value and quality.
5. Attracting price-sensitive shoppers by offering Everyday Low Price (EDLP) brands and value-oriented bulk deals on essential items like rice, pasta, and cooking oil.
The sharp response from customers to supermarket price hikes signals a clear need for businesses to adapt their pricing practices to accommodate a growing segment of financially strained shoppers. Meeting the needs of these consumers will require a delicate balancing act to ensure affordability while preserving the bottom line for retailers.
Discussion On Improving Supermarket Business Strategy When Price Is Too High
In the realm of retail, particularly for businesses like supermarkets, achieving equilibrium among prices, value proposition, and consumers’ financial capacity is not just a desirable goal but a critical imperative. Firstly, price competitiveness is pivotal to attracting and retaining customers. However, it should always align with the perceived value of the products or services offered. When these two elements fall out of sync, it can lead to erosion in customer trust and market share, undermining long-term profitability.
Secondly, acknowledging the nuances of consumers’ willingness and ability to pay is essential. Failing to do so can result in missed revenue opportunities or, conversely, alienating customers due to pricing that is too high or too low for their comfort zones. Striking this delicate balance, underpinned by thorough market research and adaptable pricing strategies, can foster sustainability and growth in the competitive landscape of the retail sector.
What are the negative effects when supermarket grocery price is set too high?
1. Decline in Sales Volume
The effects of high prices on consumers and a supermarket’s sales performance should not be overlooked. When prices exceed what customers perceive as reasonable or competitive, they are often deterred from making purchases. This leads to a noticeable decline in sales volume, affecting the top-line revenue.
In the highly competitive retail industry, a reduction in sales can be especially detrimental, as it not only translates into lower revenue but also compromises the supermarket’s overall profitability. Moreover, decreased sales can also affect inventory turnover, potentially resulting in unsold goods that may go to waste, further exacerbating financial losses.
2. Rising Incidents of Theft
High prices can create an environment where theft, particularly shoplifting, becomes more prevalent. When essential goods are priced beyond the means of some individuals, desperation can lead to illegal activities. The supermarket is then faced with the dual challenge of direct financial losses due to stolen merchandise and increased security and operational expenses to combat theft.
Additionally, organised criminal efforts may target the store’s inventory, leading to significant inventory shrinkage and further impacting the supermarket’s bottom line. This not only represents a financial strain but also undermines the store’s overall security and customer experience.
3. Erosion of Customer Loyalty
High prices can erode the loyalty of long-standing customers. When prices consistently exceed what consumers consider fair, they may seek alternative shopping destinations that offer better value for their money. This churn in the customer base disrupts the supermarket’s long-term business sustainability, as it becomes increasingly challenging to maintain a loyal and dedicated customer following.
As a result, the supermarket’s competitive position weakens, making it difficult to retain or grow its market share in the face of fierce competition. To mitigate this effect, supermarkets must carefully balance their pricing strategies to ensure affordability and value for their customer base while maintaining healthy profit margins.
How can businesses balance their pricing with both the value they offer and consumers’ ability to pay during commodity price inflation?
1. Segmented Value Propositions
A strategic approach involves segmenting your customer base into distinct groups based on their preferences, needs, and purchasing power. Each segment can then be targeted with tailored value propositions that align with their unique requirements. For instance, for customers seeking premium experiences, high-value offerings can be designed to justify a higher price point.
Meanwhile, for price-sensitive customers, budget-friendly options can emphasise affordability without compromising core benefits. By catering to diverse customer segments, businesses can maximise value perception and attract a wider audience while ensuring that their pricing remains accessible to all.
2. Value Bundling
An effective strategy is to create bundled packages that combine multiple products or services into a single, attractively priced offering. Bundles not only enhance the overall perceived value of the purchase but also provide cost savings to customers compared to purchasing each item separately.
This approach can be particularly appealing to consumers looking for comprehensive solutions at a reasonable price. By strategically crafting bundles that resonate with customer needs and preferences, businesses can offer compelling value propositions that incentivise larger purchases and boost revenue.
3. Transparent Pricing with Customisation
Building trust with customers is crucial in balancing pricing with value. Adopting transparent pricing practices allows customers to see the breakdown of costs, ensuring they understand what they are paying for. Additionally, offering customisation options empowers consumers to personalise their purchases.
By allowing customers to choose additional features, services, or product variants based on their individual preferences and budgets, businesses not only enhance value perception but also demonstrate a commitment to meeting diverse customer needs. This approach fosters a sense of control and satisfaction among customers, leading to higher trust levels and increased loyalty.
Implications Of Value-Based Supermarket Retail Strategy When Price Is Too High
To mitigate the adverse impacts of excessively high prices on sales volume, theft, and customer loyalty, companies must undertake a series of internal improvements. Firstly, they should invest in comprehensive market research to gain a deep understanding of consumer preferences, purchasing power, and price sensitivity. Armed with this knowledge, businesses can fine-tune their pricing strategies, ensuring that prices align with the value perceived by customers.
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.
Secondly, companies should explore cost optimisation measures within their operations. Streamlining processes, negotiating better supplier deals, and enhancing supply chain efficiency can help manage costs, allowing for more competitive pricing without compromising quality.
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.
Lastly, it’s imperative to focus on enhancing the overall customer experience. This includes improving product offerings, customer service, and loyalty programs. By consistently delivering exceptional value, companies can foster customer loyalty, even in the face of challenging pricing scenarios, thereby safeguarding their sales volume and reputation while deterring theft. These internal improvements collectively create a strong foundation for businesses to navigate pricing challenges successfully and maintain a resilient market position.
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Bottom Line
In conclusion, the delicate balance between pricing, perceived value, and consumer affordability is a critical factor that significantly influences a company’s success. Businesses must adapt and optimise their pricing strategies to remain competitive and responsive to market dynamics. By implementing value-based approaches, conducting thorough market research, and enhancing the customer experience, companies can mitigate the negative consequences of excessively high prices, including declining sales, theft, and eroding customer loyalty.
In today’s dynamic business landscape, flexibility and responsiveness to consumer needs are paramount. Striking the right balance in pricing not only sustains profitability but also strengthens a company’s resilience in the face of economic challenges and shifting consumer behaviours. It’s a testament to the adaptability and innovation of businesses that recognise the pivotal role pricing plays in their continued growth and success.
For a comprehensive view of building capability to prevent loss in revenue, Download a complimentary whitepaper on How to Avoid Pricing Chaos.
Are you a business in need of help aligning 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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