Retail Pricing Strategies: Strange Things Happening With Australian Retail Prices 📠
Leading retailers Woolworths & Coles and pure-play online businesses – Sephora, Mecca, ShowPO, ASOS, Prettylittlething, the Iconic; and even pet food business PetCircle – use online retail pricing strategies, tailored promotions and customer loyalty to drive margin increases on some products of up to 60%. Developing better retail pricing strategies and tactics in a new digital retail environment is now a burning priority for CEOs in Australia.
The problem is though many businesses have been too slow to update their pricing strategies, category management methodologies and eCommerce platforms.
At Taylor Wells we think this is a big mistake for the following reasons:
- Customers now make cross-channel buying decisions. They are starting online on their mobiles and computer even if they end up buying from the store.
- Customers are using the internet to remember prices. They no longer rely on their memories or a notebook to compare prices across retailers, they go online and use price-comparison sites. Even new concepts such as crypto-currencies are appearing.
- Pure play online retailers are now re-pricing top-selling items up to 12 times a day. Amazon, Alibaba and even Uber are dynamically managing their prices concerning their competitor’s prices and can respond to their competitors in less than 1 hour.
- Customers now demand personalised offers, promotions and deals. Retailers are now creating personalised promotions based on someone’s shopping history.
- Retailers are now hiring technical pricing and data talent to maximise revenue. Large, medium and small businesses are searching for people who can make money out of data. Data analytics and modelling are not enough – they want people who can turn data into margin growth.
We strongly believe that in order to sidestep mass players like Amazon.
Businesses must build eCommerce platforms that are more than just a direct sales channel. But rather a marketplace providing a mix of specialised products, services, and content by involving consumers, customers and third-party businesses in the value-creation process, as both receivers and providers of value.
In this article, we have put together a collection of articles on retail price management discussing trends in pricing, sales, discounting, consumer spending, marketing and category management. We evaluate pricing strategies, key methodology and the application of eCommerce retail over the past 5 years and its impact on category management, sales and pricing. By the end of the article, you will be much more informed on the steps you need to take to develop an effective retail pricing strategy for your business; and how to prepare your staff and customers for change.
Table of Contents:
Retail Pricing Strategies: Strange Things Happening With Australian Retail Prices
What are the latest retail pricing strategies?
Many retailers are responding to the new online digital retail era by reducing their prices for most items to keep up with Amazon’s retail pricing strategies.
A large number of retailers are taking the predictable path of high-low pricing usually a bit lower than their competitors. To drive volume and hold onto customers – very tactical retail pricing strategies.
Some retailers are attempting to improve their online retail pricing strategies by optimising their prices. However, most retail pricing strategies and optimisations still appear to be automating cost-plus thinking at the category price level.
A handful of talented pricing and data teams are bucking the typical retail pricing trend and are well on their way to optimising at a very granular, line-item price level while managing price and data complexity.
We see some exceptional examples of teams transforming their retail pricing strategies and sales techniques to re-connect with the market and customer by:
- Building and referencing competitor price indexes
- Developing individual line item elasticities
- Creating dynamic pricing groups based on individual line item value drivers (rather than static category-level segments)
- Recalibrating statistical modelling with new data and information sources (i.e., user reviews, search, click-through, bounce, purchase rates)
- Creating a set of line item value price groups to understand demand (rather than just category-level segments).
- Refreshing their prices more frequently and more precisely (i.e., moving different items in and out of different price groups based on shifts in the market.
- Stimulating and tracking the relative values of goods and services across multiple segments.
Price elasticity is currently one of the best methods of understanding customer responses to line item changes. However, price elasticity will only give you one view of how online shoppers respond to different price points. Many major retailers are now combining price elasticity with several other measures and indicators of customer response (not necessarily data-driven) to act as lead indicators of traffic change over time.
If you are thinking a basic price optimisation is your silver bullet solution to drive better online retail pricing strategies, you’ll probably end up losing hard-earned margin and price perception. Especially if your competitors are optimising their retail prices at a more granular, line-item level across multiple segments.
It’ll only take a matter of days before your teams begin to react to competitive price pressure, especially if they are relying on inflexible pricing structures and optimisations. Don’t be surprised to find that your teams have been using deep discounts and random promotions and deals to win new business from frustrated customers actually looking for more personalised offers. Don’t be surprised when your online competitors start winning high-value customers willing to make impulse purchases and big-ticket purchases because they invested more time, care and resources into their online pricing retail strategies and internal IT and pricing capabilities.
Bringing advanced price practices together requires investment in a sophisticated pricing capability, dedicated team resources and an aligned pricing culture. It takes to 2-3 years to fix up a reactive cost-plus pricing culture as teams work at cross purposes to figure out how customers really value their products.
Price optimisation is an ongoing process, not a silver bullet solution. As you go through the process, make sure you have the right teams, skills and thinking in place to implement more sophisticated retail pricing management and tactics.
To execute more sophisticated pricing retail strategies, you’ll need dedicated price and data analytics teams with the capability to govern line-item price decisions.
Below listed are some of the technical skills that key pricing, commercial and category management teams will need to be across to implement retail pricing strategies in the new online retail era:
- Statistically testing
- Price elasticity
- Price trials, tests and experimentation
- Store or zone rules & trending by the competitor
- Contribution margin analysis & cost pass-through rate
- Category analysis – markdown effectiveness, stock-inventory levels
However, technical skills alone are not enough to drive retail pricing strategies, pricing and category teams also need strong communication, strategic influencing, leadership and passion to make the journey to a high-performance pricing culture.
Successful retail leaders, for example, actively pursue financial results without making other stakeholders and teams pay the costs. They understand that price optimisation and the retail pricing strategies that underpin it are only the first steps in the journey. They are 100% committed to making the journey to a high-performance culture. However, truly successful leaders believe that how the business makes the journey to high performance is at least as important as getting there.
There are new trends in the online pricing retail marketplace that are impacting online and brick-and-mortar retail pricing strategies. We see leading Australian retailers transforming their retail pricing strategies, including their organisational structure and team structures.
We see some exceptional examples of advanced pricing and analytics being successfully executed in the online retail space. Also, we see a larger number of Australian retail businesses still figuring out how to set up and integrate a new pricing capability within the business and falling behind their competitors.
Evidence shows that high-performance retail teams and organisations are not just technically skilled, they are passionate about achieving clear financial goals and contributing to retail pricing strategies.
Successful retail pricing strategies start with exceptional leaders from all levels of the business: Leaders who care enough to guide the organisation to a new definition of pricing success. Leaders who are passionate about results, but not defined by them. Furthermore, leaders who see the journey from A to B as at least as important as the dollar upside that they’ll get at the end. Leaders who fundamentally believe that you can’t expect people to buy in to a new vision for pricing when the journey to profitability was slow, miserable and unnecessarily painful.
Retail price management: The end of Treasure Island in Australian Retail
“We’re in a low inflation, almost deflationary environment – we’re benefiting from lower commodity prices as well but rate [price] realisation is definitely the challenge in Australia at the moment.”
Australia has been called Treasure Island by the overseas firm in the past – this appears to be changing. Over the past two years, grocery suppliers in Australia have been adapting retail price management and grocery channel strategy to regain control and selling power with retailers. Many are looking for new ways to work with retailers to survive. Others, however, are less prepared and under-resourced; struggling to reach margin targets with low leverage category strategies, excessive discounting, blanket annual price rises and erratic relations with retailers (e.g. Arnott’s refuses to supply Coles with Tim Tams).
Leading companies, like Mars, Nestle, Coca-Cola Amatil, Woolie X, and Goodman Fielder have all recruited high-calibre retail price management teams over the past years to both innovate and defend against enduring pricing battles (i.e., demands for lower prices, excessive discounting, private label proliferation, and changing consumer preferences).
Investment in people to optimise revenue and margins should not be considered a cost in the traditional sense of headcount. The challenge for businesses is to deploy resources where there will be a return on capital. Retail price management is your most powerful profit lever and if left unattended or inadequately resourced can become your biggest source of margin risk. Many companies have reviewed their people assets, making serious and ongoing investments in building well-designed pricing and commercial teams. Other FMCG suppliers, however, haven’t made the same level of investment and have become complacent, accepting a fate of lower prices and margins.
What you will learn from this article:
In this article, we will discuss the FMCG pricing battle and key implications on Australian FMCG businesses.
We will explain how an investment in retail price management teams can help boost revenue and increase profit (as well as support the business to navigate challenging times ahead).
The enduring retail price management challenge for FMCG
The Australian FCMG industry is quite unique from anywhere else in the world because of a largely duopolistic retail market. Coles and Woolworths account for nearly two-thirds of Australian grocery retail sales with gross margins including trading terms in excess of 40%+ across nearly all categories with overall EBIT margins running at 6.0%+. These EBIT margins are some of the highest in the supermarket retailing in the world.
With Woolworth’s backward integration through the supply chain and Coles successful “down, down prices are down” pricing strategy, both highly profitable and powerful grocers have strengthened their buying terms, doubling penetration of their own brands and removing even more “substitutable” products from their supermarket shelves.
Price inflation is also a significant growth factor in Australian FMCG: A basket of goods being nearly 50% more expensive in Australia than in the UK. The financial benefits of price inflation however are not evenly distributed across the value chain.
How does this affect retail price management?
In some categories suppliers aggressively use price growth to maintain market share. The long-term effects of over-promotion mean that in many categories up to 70-80% of all volume is sold on deal. This destroys baseline sales and full price profitability. Consumers come to learn that the product is always on promotion in either Woolworths or Coles and simply buy when on special. These economics are unsustainable when trading terms have been developed with the assumption that only 30-50% of all product will be sold on a deal.
Setting unrealistic targets.
FMCGs often set unrealistic top and bottom-line growth targets to grow margins. A decision that often leads them to manage their businesses for the short term. Many retail price management teams are forced to cut back on brand marketing in order to hit a profit target. Others increase prices and very often price increases lead to unexpected volume losses. Suppliers are then forced to “deal back” prices by running increasingly deep and frequent promotions. Each of these actions makes it even more difficult for suppliers in the future.
Specialist pricing teams can help you boost revenue & increase profitability
In order to reshape pricing strategy in a market with numerous pricing challenges, leading FMCG businesses like Coca-Cola Amatil, Mars and Arnotts’ have heavily invested in designing and building their pricing and commercial teams. They have sought to define new roles, teams and business priorities against pressing commercial challenges and business model constraints. They have taken time to understand how their retail price management and commercial teams should engage with each other, the sales force, major accounts and consumers to boost revenue and grow profitability.
As a way of ensuring that they have correctly aligned the right people to key business strategy, these businesses have chosen to recruit and build their teams in the best way possible. They regularly evaluated their people assets; looking for high potential executives, and leaders of the future. They also remove unsuitable people from the business to weed out toxic subcultures in the business.
What leading FMCG businesses are doing
Since taking over from former CEO Terry Davis in March 2014, Alison Watkins has re-structured CCA’s entire senior management team and hired numerous specialist pricing, revenue and commercial management positions. She announced plans to invest $100 million from cost savings into innovation, marketing and recruitment, and sold a 30% stake in the Indonesia business to major shareholder like the Coca-Cola company for $US500 million to fund further market development.
Coca-Cola is facing unprecedented times. For the first time in CCA’s history, large numbers of consumers are switching to alternative beverages, which is seriously challenging Coca-Cola’s business, pricing and revenue models.
FMCG pricing challenges are not going away. It is vital to prepare and build teams that can identify margin opportunities and risks amidst an industry characterised by lower prices, growth in private label and changing consumer preferences.
Taylor Wells believes that grocery suppliers will continue to feel pressure in the following into 2016-2017:
- There will be a continued and heavy reliance on annual price rises; creating even more opportunity for low-cost competitors like Aldi, Costco and the latest entrant, Lidl to attract bargain-seeking consumers.
- There will be even more private labels occupying an even greater percentage of consumers’ shopping basket.
- There will be more customer consolidation (i.e., supermarkets, warehouse clubs, and food distributors) taking place in major markets, resulting in a reduction in customer numbers and spend.
As Bernardo Hees, CEO of Heinz says in a video message released to Kraft employees in April of last year after merging with Heinz: “In many places, our similarities will create synergies and our differences will open up opportunities…but we all understand that change is never easy and brings with it a lot of uncertainty and questions.”
In Australian FMCG, price inflation is a significant growth factor. It’s almost 50% more expensive in Australia than in the UK just for a basket of goods.
A lot of retail price management teams are forced to cut back on brand marketing just to hit a profit target. Others increase prices. However, oftentimes price increases lead to unexpected volume losses.
Leading FMCG companies have discovered how to boost revenue and grow profitability. They have taken time to understand how their retail price management and commercial teams should engage with each other, the sales force, major accounts and consumers.
Online Retail Pricing Strategies: How Not to Get Scammed 🦹🏿♂️
Not everybody knows about online retail pricing strategies. It doesn’t take a genius to figure out how retailers study consumer behaviour and pricing strategy to price their products. But one particular pricing strategy for online business seems to be at the centre of a controversy. These are the comparison websites.
Trying to get the best buys from the comparison sites can be tricky. It takes a lot of deep surfing and understanding how those websites operate. Sometimes, they don’t even show the whole picture. They are basically a commercial operated site and use low price comparison deals to attract the consumers. However, it is not a free site and they make their money out of the advertisers.
More people are going online to transact their business from grocery shopping to booking a flight or a hotel room. It is predicted by Cybercrime magazine that by 2022 there will be 6 billion Internet users and more than 7.5 billion by 2030. That is almost 90% of the world population. Many of them don’t go outside of their homes to do business.
A Digital Open Book for Online Retail Pricing Strategies
Since the 21st century is an open digital book, any information you provide to websites are being sold to companies studying the effect of pricing strategy on consumer buying behaviours. This is to better market their products. No one is safe from companies pushing their products on the web.
Commercial comparison sites like to show themselves as the consumer’s best friend, but as always that is not the case. Take, for example, Trivago. They don’t actually always show the cheapest deals for hotel rooms. They use marketing automation software price comparison to promote advertisers who paid them the highest fee. Hotel room rate rankings were based “on which online hotel booking sites were willing to pay Trivago the most”.
Most hotels pay 30 per cent booking and commission fee for using their sites. Hoteliers also say they lose about half of their business if they don’t sign up to such agencies. They’re further hampered by tight contract conditions that prevent them from offering special deals directly to customers.
Consolidators of Airline Bookings
It’s not only some of the hotel booking sites that are misleading the consumers. Airline booking sites are up to some price tricks as well. All of them are “consolidators” which essentially is a wholesaler of something. Whether this is: airline tickets or hotels, etc. They buy a large volume of tickets at a discounted price, which they resell on their websites. This “high volume pricing strategy” is how they can offer a lower price than the airlines.
The problem is though, these low prices carry more restrictions than ordinary travel agent or airline. Sometimes more risks too. You might not even get frequent flyer points and perks that are usually part of the airfare. Also, these booking sites have limited staff. Customers’ common complaints include not getting through to a customer service representative to answer a question or solve a problem.
Real-world examples of Online Retail Pricing Strategies
The energy sector is no exception either. For example, in 2018, the Australian Competition and Consumer Commission (ACCC) published a report saying that commercial comparison websites often duped customers about the best energy deals. The vast majority of sites operate on a ‘commission’ model. Meaning, the energy retailer pays the website a fee whenever a consumer clicks to the retailer’s site.
The listed energy companies pay the website for the ad placements. In turn, pass the overall cost of the advertisement to the consumers. Adding more burden to an already expensive electric billing.
ACCC also reported another online retailer, Kogan.com for misleading customers way back in June of 2018. ACCC alleged that Kogan raised prices before holding their “end of financial year” sale, offering a 10% discount on most of their products.
However, the said advertisement was believed to be false because Kogan already raised the prices before the promotion. Generally, the increase applied to most of their products was 10%.
In reality, there was really no 10% discount because customers won’t get real savings from the said “promotion” as they already hiked up the prices before the sale.
Steps to prevent not getting duped by the comparison sites using Online Retail Pricing Strategies
- Make sure you read the fine print on these booking sites. Sometimes going through the site’s terms of agreement can be a lifesaver. Clauses like, “no refund” or “no cancellation” in the fine print will save you a lot of trouble.
- Find a site to give a number of reliable online tools (from state and federal governments that can help you find the best plans from all providers). It can also notify you if it’s time to review your plan.
- Don’t always believe what you see. Some of these sites contain eye-catching graphics and great deals that can tempt you. Don’t allow price gimmicks to suck you. Use your common sense if the sites are leading you on.
- Always check more than one site. Don’t rely on one site. Shop around and see who can give you the best deal.
- Double-check the URLs. If the site doesn’t have a secure connection. it’s probably a phishing site and out to get your identity details. Check if they have a subdomain of another URL or part of a longer URL.
- Watch out for too-good-to-be-true deals. If it’s too-good-to-be-true, it probably is. Avoid it at all costs. There is no such thing as something for nothing.
- Know how they make their money. Comparison sites don’t sell the products themselves. The companies pay advertising placements on their sites.
- Go directly to the retailers themselves. Eliminate the middlemen and get the quotes from the sellers. You’ll get a much better deal than having to pay the finder’s fees of the comparison websites.
- Essentially, the comparison sites are just the middlemen of the retailers especially the service-oriented sector. They just negotiate the price of the product where they get a commission once purchased.
- Retailers and not consumers pay for these websites. Whoever pays the most will get the most prominent display on the websites.
- They charged the retailers to advertise on their website. Thus, the price of the advertisement is passed on to the consumers.
- In the end, use your better judgement to see if the sites are trustworthy.
- Most of the time, these websites have no interest in the consumers’ welfare. They’re there for profit – and are not a consumer pricing strategy really.
- If ranking or ordering of results is based or influenced by advertising, they should be upfront and clear with consumers about this so that consumers are not misled.
- More transparency needed in the price comparison market place. These websites are meaningless unless they can guarantee the prices quoted.
Australia’s Pandemic Retail Bloodbath: 💥 Rocked by Bad Retail Pricing Decisions
Retail brands are rocked by bad retail pricing decisions. With the year only starting its first quarter, a record number of Australian retail stores are closing shop. What is going on?
The brutal 2020 retail bloodbath has truly begun, with 161 popular Australian bricks-and-mortar stores already expected for closure just one month into the new year.
It started on January 7 when it was disclosed that department store Harris Scarfe was set to close its 21 stores across five states in just one month after the business was put in receivership in December.
While this isn’t the so-called “End of Days” for the retail industry as a whole, it is truly in the midst of a “market correction” which is compared to Australia’s economic downturn in the 1990s, that was described as “the recession we had to have”.
Experts think that this could only be the tip of the iceberg as consumers continue to turn more to online shopping over bricks and mortar stores. It appears Australian companies may not be quick enough to adapt to the changing retail landscape and consumer preference and this is largely apparent from their under-performing marketing and failing retail price formula.
In this article, we’ll discuss factors influencing retail pricing. At the end of this article, you’ll learn how to price your product for retail.
Lazy Retailing a Part of Bad Retail Pricing Decisions
Many experts and critiques of the Australian retail apocalypse, are saying that a large part of the problem is “lazy retailing”.
An example would be supermarket retailing. Large Australian supermarket retailers have had it easy for decades. They haven’t really had to compete or understand their customers. And prior to Aldi and Amazon showing up, there weren’t that many significant price wars between the major retailers here.
In fact, it’s only really been up until the last 5 years, that the oligopolistic supermarket industry in Australian was shaken up – with major retailers finding themselves under pressure to re-think and re-invest in a customer-focused strategy and a high-performance business culture, for instance:
- upskilling and or hiring more skills and capability
- increasing private label own brands
- closing unprofitable regional megastores
- opening new metro stores
- speciality food and products for new segments
- new health and beauty ranges
- online revenue model
- new partnerships
- new suppliers with innovative offers
- better distribution and targeted discount promotions
Now even fashion and footwear categories are exposed to not just competition from fast fashion, but also a much more improved discount department store offer.
They were mistakenly hoping to rely on their longevity in the market to maintain share; and have for too long now resorted to tactical pricing (i.e., heavy discounting and blanket promotions) to ride out the retail apocalypse.
This reactive pricing strategy has clearly not been working well at all. Instead of sourcing better products and setting up a pricing team to drive profitable revenue growth, many retailers have been cost-cutting and or excessively discounting and promoting their suggested retail price to the point now that customers don’t trust prices, sales or value brands. Retail industry profitability is at risk and declining as a result.
For example, discounting by 20 or 30 per cent means retailers have to sell more stock just to get to the same sales levels as last year, but there are more logistics and costs involved with each sale, which in turn, eat away at next years’ earnings.
What’s more, there’s no guarantee that customers will buy on bulk or on promotion just because you’ve offered them more at discounted rates. Many customers are sceptical when they see a big discount. Others don’t buy because they don’t want more stuff for free. A volume-based pricing strategy based on simplistic cost-plus calculations often devalues the brand and indicates problems with the RRPs as well as with the company’s finances and business model.
Can the market correction be halted? Let’s examine some of the solutions:
- Keeping pace with the customer with retail pricing decisions
As customer expectations continue to rise, brands have a real challenge in keeping up. Retailers need to understand what their customers really want, what they value and why they buy from them.
Buying and selling are fast entering the domain of digital retail, while shopping is an inspirational, aspirational and emotional conduit for the consumers. They shop for the experience or to fix a problem or need. They do not shop for the item.
Many retailers seem to have geared their businesses for network growth over the past 10 years, which is a CAPEX heavy strategy often incompatible with customer growth. Moreover, some retailers have trained their customers to expect a sale or discount, and are now finding it very difficult to un-train bad habits. Other retailers have assumed all their customers are price-sensitive shoppers and have been underselling themselves for years; throwing away, in turn, millions of dollars each year which they really didn’t need to do.
These days, 55% of millennials use their mobile phone to shop online. However, it may surprise you to know that 1 in 2 millennials actually still prefers to shop at shopping malls/in-store.
With this in mind, it’s time to strategize and bridge the gap between online and in-store. E-commerce and retail are no longer separate. Indeed, they are one and the same.
Digital Retail is a Pressure but Not an Excuse for Bad Retail Pricing Decisions
Digital makes it a lot easier for customers to shop around. Australian retailers shouldn’t be focusing solely on local brands that are posing a threat, but also international brands.
Though this adds pressure to the Australian retail problem, it shouldn’t be an excuse to stop trying or lower retail selling price. Think about how you can connect the online and in-store experience. No need to invest in technology to understand who your customers really are. The pricing team can effectively determine how to price your product for retail.
Retailers at this point should know how to use social media to build customer relationships. They want to be thinking about engaging with customers, not just during pre-sales or through the sale, but also through post-purchase and aftercare support. Although most people love to be self-sufficient when using digital, they also like to rely on real feedback and advice from real people, especially when they are buying something new or when something goes wrong.
Automating everything to AI is a mistake. People like to deal with people when they have a problem. Think about automating the delivery rather than the problem-solving part.
How can a Retailer Sustain its Business Amidst Bad Retail Pricing Decisions?
- Stop prioritising acquisition – find who your most profitable customers are and take care of them. Deliver the right value for the right customer. Network value is a diminishing asset. Find the balance between brick-and-mortar and online. Customers want both. You’ve got to find out the ratio required for your business. Not all businesses are the same.
- Don’t be discount obsessed – focus on the actual customer experience. A satisfied customer will spread the word around about their store experience. A pricing team would also be a good investment for retail companies now too as they can produce safe options to make more revenue and margin per segment.
- Accept multiple communication channels – no matter how a customer contacts you, you need to have access to the same information. If a customer complains via social media, then calls the contact centre – the agent should immediately respond and solve the problem quickly.
- Don’t open new stores – if the existing ones are under-performing. Before even considering opening a new store, you need to be sure your existing stores are doing well and have a true grasp of your existing customers needs, wants and desires – and ultimately how to bring them back to the store.
- Employee retention – although customer experience is essential, the employee experience is more important. Good front line employees can really make a difference to your business. Hence, look after them. Consequently, they will look after your customers and your business.
- Retailers who use simplistic markup on costs to set prices often end up under or overcharging customers and underselling themselves.
- Australian retailers need to work smarter not harder. Give people a reason to be in your business and stores beyond just high pay or massive discounts.
- Companies need to have the will to adapt to the changing retail landscape around them. Especially as consumer preferences are changing so quickly now, and there’s a confusing multitude of choices competing for your customers’ attention.
- It is not only digital disruption that’s causing the closure of so many Australian retailers but the quality of the products, customer satisfaction and bad retail pricing decisions which are accelerating the decline. Don’t make difficult problems an excuse to give big discounts because they don’t fix the issue.
- Retail businesses need a strong online presence and a world-class pricing team to compete in the current marketplace. Category managers doing pricing on a part-time basis is not good enough. Pricing is a full-time role and an expert’s function. Not everyone can do it.
- Customer retention is essential to succeed in today’s market. Consquently, retailers should know their existing preferences and how to work out retail price in order to influence future behaviour. Segment your customers, and identify the customers who can help you achieve business growth. Be prepared to stop pleasing everyone, and focus on the right customers.
- You’re already experiencing high customer churn. So, why not experience more profitable sales from customer segments that really want and get the value of your offer?
Shoppers That Seek Discounts Can Be A Gold Mine For Retail Businesses 👛
The ‘Factory Outlet Retail Segment’ has now become too big and too profitable for retailers to ignore. According to the latest research from the Europe Union, total revenue for the fashion industry in this region was €368 billion in 2021, with mid-market, premium, affordable luxury, and luxury price categories accounting for 11 percent, or €40 billion. This share is projected to rise to 12 percent in 2025. Hence, it’s worth examining what the most effective pricing strategy for retail factory outlet business in Australia is too.
The Australian factory outlet retail segment – a segment defined by midmarket shoppers with a penchant for affordable luxury at below recommended retail price – has all the signs of being a high growth and high value consumer segment. With accelerated growth in online channels.
The problem is though, outlet shoppers and factory outlet sites are still a relatively immature and misunderstood area. Especially in Australian retail. Much more effort and resources in Australia retailing are directed to traditional retailing strategy based on budget, everyday ‘Westfield mall shoppers and sites. Online retail is still an area that is relatively immature in Australia too.
In this article, we will continue to discuss this profitable outlet shopper retail segment in Australia while making ongoing comparisons and evaluations of UK and US trends in the same segment.
Including: What is the outlet shopper retail segment? What’s changing in fashion and premium goods retailing? And key revenue and margin opportunities available to retailers selling affordable luxury and premium goods either online or in-store.
We argue that implementing a unique customer experience for this outlet retail segment, as well as differentiated pricing and product strategies to address significant differences in buying online compared to brick and mortar are all golden yield opportunities for both Australian outlet sites and midmarket high street retailers alike.
We believe there is a growing need for a separate retail strategy for midmarket factory outlet shoppers buying affordable luxuries below RRP and that this strategy should be treated as a complementary segment to full-price offerings.
Is There An Optimal Pricing Strategy For Factory Outlet Retail Business?
What Is A Factory Outlet Retail Business Segment?
The ‘Factory Outlet Retail Segment’ are a growing group of shoppers that buy premium goods for less than the retail price but not necessarily at rock bottom promotional prices or during a sale as is common in regular department stores, malls or high streets.
The goods outlet shoppers buy include: midmarket, premium, affordable luxury, and luxury price categories.
Examples/Opportunities For Developing Pricing And Marketing Strategy For Retail Factory Outlet Business
One of the distinct features of outlet retail is unique customer experience through better site design and location. Outlet shoppers have for many years endured pretty grotty customer experiences compared to the average shopper.
For example, in Australia, outlet sites are invariably tucked away and a good distance outside built up, urban areas; and not that easy to get to at all. The overall sites and their stores are not much better than drafty warehouses with very few amenities and restaurants and dusty air conditioning tubing and electrical wiring hanging precariously from the ceiling.
Premium goods are often piled onto tables and racks for outlet shoppers to sort through.
Pricing and product assortment is all over the place. Little effort is made into making outlet shoppers feel welcome or special. Customer service is non-existent. Overall, the customer experience is very transactional: get your affordable luxury and leave.
In the US and UK, however, outlet shoppers are considered to be a valuable source of revenue for retailers. Much more care, attention and money is also given to creating a unique customer experience and sites for outlet shoppers. In fact, outlet malls and sites are now rather unique, with customer experiences on par with midmarket malls; and even some luxury retail sites showcasing luxury brands.
For example, the Westfield mall in Stratford near the London Olympic stadium is a prime example of a mid market retailer evolving its retail strategy to not only include outlet shoppers but set them aside as a high value segment.
This is how it happened.
In 2012, Stratford in London was in the process of gentrification. The area had become headline news overnight as a result of the London Olympics; and consequently more government and investment money was flowing into the suburb.
People entering the suburb were not wealthy as such, but certainly had disposable income to spend on affordable luxuries. Young families, young professionals – really target market customer groups for midmarket retailing.
As the suburb’s midmarket appeal grew, so too did the need for a new type of shopping experience.
The local, run down high street with its 1970 tired shop fronts, and outdoor markets were well and truly out of date and considered undesirable and dangerous to visit.
Westfield stepped in to fill the gap in this suburb and market. But not with the usual Westfield mall experience found at its Notting Hill site. Rather, it offered a new and distinct experience for outlet shoppers. A first of its kind in the UK.
Stratford Westfield mall is unlike the norm in the UK in that it is rather like a luxury outlet mall with an strategic assortment of affordable fashion and select premium goods with many of its items selling below the recommended retail prices as well as a strategic assortment of premium ultra premium selling at full price.
Today, Stratford Westfield is a focal point for all types of shoppers. It is a destination for outlet shoppers, but its unique appeal has drawn in all types of shoppers and spending budgets too. What’s more, Stratford Mall is not hidden away at all.
In fact, it is located really close to Liverpool street and has convenient transport links; great restaurants, artistic/architectural pieces, and outdoor / in door space with nice gardens, and walkways. A totally different experience to the grotty Australian factory outlet experience shoppers continue to endure to get premium goods just a little bit cheaper than usual.
Creating A Pricing Strategy For Retail Factory Outlet Business
The Outlet Factory Shopper segment in many regards is a sort of an outlier in the Australian retail industry; and perhaps an after-thought in most retail strategies. Saying this, however, its size, rapid growth in online channels is a significant opportunity for retailers. For example, research shows that 40 percent of shoppers looking for affordable luxuries below RRP buy online, which is actually a higher percentage than the whole of the retail industry alone.
Another key differentiator is that outlet shoppers also show a higher propensity to buy midmarket, premium, affordable luxury, and luxury brands than other segments. Their style of purchasing also accounts for 80 percent of total spending in the online below RRP online channels.
It is forecasted, for example, that almost all of the growth in this type of shopper segment will come from online channels because of highly regarded value drivers such as: greater convenience, simplicity in filtering and browsing, and breadth of assortment.
This means that outlet shoppers are not only on the increase but highly profitable on a SKU level basis. What’s more, unlike the average Westfield shopper, outlet shoppers aren’t necessarily seeking out the lowest-priced items. Rather, they care more about – and are willing to pay more for – brand selection and exclusive offers.
It is not surprising, then, that retailers are gradually introducing a more strategic approach to pricing at the SKU level to capture the $ value of brands that appeal to the outlet shopper segment without losing volume or margin.
In fact, SKU level price setting and analysis is becoming increasingly important to retailers with complex product portfolios— especially for retailers with more than 10,000 SKUs, along with color and size variations, this season, last season and old inventory. This is because SKU level price setting not only helps retailers manage brands to avoid brand dilution, it also enables them to optimise prices, price promotions and order quantities.
For example, many brands use price promotions and discounts to manage their supply and demand levels. It is becoming more common for UK retailers to use discounts to appeal to outlet shoppers and draw in new customer groups as well. It is also a common technique for retailers to use discounts to manage volumes and inventory levels and dynamically price when demand for items is higher or lower than expected.
Discussion On Pricing And Marketing Strategy For Retail Factory Outlet Business
High street retailing for the midmarket has changed a lot over the past few years. The first generation of highstreet retail, for example, was all about protecting margin by making sure shoppers couldn’t buy premium versions for less than the retail price.
Retailers put a lot of effort and still do in making sure range, price and assortment of goods does not dilute brand equity. Retailers have long considered outlet shoppers a segment that can potentially undercut the full-price market and destroy brand equity.
However, as the Westfield Stratford example above shows, retailers are gradually realising that outlet shoppers are, in fact, high $ value shoppers based on what and how they buy. They are also far less price sensitive than ‘budget’ shoppers.
When they buy, for example, they tend to buy in volume, they also like bundles and they really understand the value of brands. In effect, they are willing to spend a lot more (in terms of money and number of items) for just a little bit off the RRP. For many instances, these shoppers are a retail pricing dream.
In terms of online retail platforms, retailers that offer ‘outlet shoppers’ affordable luxury at lower prices will also win more share and share of wallet online.
We say this knowing that retailers have for a long time now thought giving outlet shoppers online access to SKU level pricing and discounts was dangerous as prices were just one click away.
In fact, for years now, price visibility online was the main reason why so many luxury brands were reluctant to participate in the outlet shopper market in any meaningful way – either in store or online. However, the emergence of closed website portals for shoppers like the ‘outlet shopper’ actually enables retailers with premium and luxury brands to disclose prices and discounts while keeping barriers in place.
Saying this, however, retail brands must remain disciplined in how they price and keep barriers in place to ensure prices and value is understood, guarded and well managed at the SKU level – no more price complexity or price elasticity calculations/ generalisations at the brand or category level.
Implications Of Pricing And Marketing Strategy For Retail Factory Outlet Business
To fully capture the value of the off-price retail segment, retailers must develop pricing, product and marketing strategies that attract these medium and high spending outlet shoppers online. It must first however, create a separate retail strategy to recognise that outlet shoppers are also a profitable source of revenue growth and invest funds to build well crafted customer experiences and pricing strategies for outlet shoppers across both brick-and-mortar and online ecommerce platforms.
To avoid brand dilution online, though, retailers must stay up to date on new membership-based revenue models and latest value based price setting techniques. Online portals and a well structured price structure are a great way to prevent shoppers from buying premium brands and goods on markdown a week later.
Based on the research and retail trends to date, offline outlets and villages are highly likely to remain major destinations for all types of shoppers. But only if they provide outlet shoppers an exemplary experience.
Investment in upgrading factory outlets is important because exposure to brands at physical outlets are a gateway for extended engagement that can be reinforced by online channels.
The best operators of outlet malls and villages have created an excellent experience for shoppers. They did this while avoiding too much price and volume transparency.
Brick and mortar stores must evolve unique shopping experiences for outlet shoppers. There must be a special kind of experience that appeals to this segment.
Online and in-store platforms and pricing offers shoppers both immersive brand experiences and an opportunity to raise brand awareness among consumers – with outlet shoppers being the easiest to upgrade and educate because they already understand the value of many premium brands.
Pricing Strategies In Retail Management To Boost Revenue Before Christmas
Christmas is approaching and consumers are all being blasted with sales and promos. Retailers are hungry to revive both the top and bottom lines after slowing sales growth and compressing margins. Many are using pricing strategies and gimmicks in retail management to win market share. At the same time, consumers have an acute sense that they are being targeted by retailers this year. Almost all consumers know that retail prices are going up significantly as a direct result of heightened inflation. Everyone is ready for an avalanche of sweet deals and promos that may not be so sweet to get money flowing over Christmas.
The problem is though, over-leveraging discounted prices and using price gimmicks to confuse customers into spending is risky and short-term thinking. What’s more, more consumers than ever are onto price tricks and rejecting traditional approaches much more than they used to.
In this article, we will continue to discuss pricing strategies in retail management and how retailers are utilising them to boost revenue before Christmas. Including the top pricing and sales trends being used right now to soften spending.
We argue that caution should be taken with over-using pricing tricks and tips before Christmas. We believe pricing tricks and tips are in themselves limited; and when over-used or implemented without a value-based pricing strategy or price framework lead to margin loss.
Most Common Pricing Strategies In Retail Management During Holidays
Here are the top 4 among the most common pricing and sales tactics being used by retailers this year to boost revenue before Christmas:
Pricing Strategies In Retail Management #1: Differential Pricing
Differential pricing is a strategy in which a business sets different prices for similar items based on customer type/ group. It is also recognised as discriminatory pricing, flexible pricing, multiple pricing, or variable pricing by some. This involves charging different prices for similar products within a category to different customer groups.
Differential pricing is used quite extensively in business. For example, FMCG corporations, such as Procter & Gamble (P&G), use differential pricing through branding to strengthen their pricing power. For example, a large proportion of their Olay skin care products, including bundles, are priced under $50. Whereas the majority of SK-II products are priced at or above $100. The Olay price range appeals to more price conscious/sensitive customers. The price range for SK-II, on the other hand target customers with the propensity to spend more and who value premium products. Differential pricing, therefore can be used to appeal to different customer budgets; and depending on how sophisticated a business’ price setting capability is, it can also be used to appeal to different customer groups based on how much they value the product.
How is differential pricing implemented?
The initial step to implement this strategy is to define market segments. Before you set different prices for your product, you must first learn about your customers. When developing your differential pricing strategy, consider the concepts of elastic and inelastic demand. Finally, decide whether your differential pricing will be focused on your products, geographic locations, or discounts.
What are the advantages?
Differential pricing enables your company to grow and reach out to a wider range of customers, especially during holidays. Thus, the company’s overall sales may increase. For instance, when you employ coupons, sales, or rebates, your products can be more attractive to new customers. If they like it, they may continue to buy at full price after the discount expires. While existing customers who are less price sensitive can enjoy the premium experience and remain loyal to your brand.
What are the disadvantages?
Differential pricing becomes inefficient when your higher-priced products do not compensate for the loss of profit from your lower-priced products. This means you’re pricing at an unprofitable low level. Besides that, when prices eventually rise after a sale or the expiration of a promotional offer, some businesses lose new customers who are not willing to pay the full price.
Overall Value Of Differential Pricing: Profitable prices are generated because prices are aligned to the market, customer consumption patterns, demand, supply, and value driver analysis or segmentation. Although there appear to be gaps in commercial capability here.
Pricing Strategies In Retail Management #2: Loss Leader Pricing
Loss leader pricing strategy lowers the price of a specific product to attract new customers or cross-sell and upsell to existing customers. For any loss leader product, sellers hope that once customers enter the store, they will buy other items at full retail price. Then, the profits from the additional purchases can offset the losses from the first.
For example, an electronics retailer may decide to offer a heavily discounted TV in the mid range category to draw in foot traffic to the store. But even so, they will also sell and often place the loss leader next to or near high-margin televisions. As a result, the store will leverage the chance that customers drawn to the discounts will also be enticed by their premium products. A loss leader strategy is like a nudge into upselling. However, at a unit level, loss leader pricing is intentionally loss making to drive unit volume. A strategy largely based on unitary price elasticity.
What are the advantages?
There are three main circumstances in which businesses can reap the most benefits from loss leader pricing. The first is when you first enter a new market. Pricing some of your products lower than your competitors’ prices can be a good way to get into the market and gain customers. The second is when attempting to increase sales, as discounts can draw more customers to businesses. Finally, it can help to build brand loyalty. This happens when despite lower prices, customers believe they are getting the best value from your products.
What are the disadvantages?
Underpricing too much or without a proper strategy can destroy profit margins. Customers are more likely to adjust their shopping habits to anticipate the next sale. There is also no guarantee that loss leader pricing will entice customers to purchase non-discounted products. If they don’t, a lot of money is lost. Businesses may run out of stock without generating enough revenue. Further to that, if the reason for the lower price is not clearly communicated to customers, they may presume that your products are of lower quality.
Overall Value Of Loss Leader Pricing: Loss leaders can work well for large retailers that sell a wide range of products and gain from one-stop shopping. Research shows customers who buy loss leaders are also more likely to purchase non-discounted products as well. However, overusing can damage brands.
Pricing Strategies In Retail Management #3: Time-limited Offers
Limited-time offers are promotional deals that are only valid for a limited period. These include free delivery, coupon codes, or a free product. Limited-time ads, sales campaigns, web page banners, email offers, or pop-ups are common examples of time-limited deals. It is an online sales tactic that creates a sense of urgency to buy based on time limits and/or demand for a specific item.
For example, some retailers display pressure-selling messages like “30 people are looking at this right now!” or “2 left in stock.” Even price-conscious customers may be caught off guard and forego their usual price checking and comparing.
What are the advantages?
The most significant advantage that businesses can gain from time-limited offers is that pricing your products lower than usual for a limited period can increase sales and attract more customers to your business.
What are the disadvantages?
Limited time offers can give the impression that your pricing is inconsistent. Customers might end up hating your promos. Some will leave your site without buying anything. The end result is that your conversion rates drop.
Overall Value Of Time-limited Offers: Research shows that customers can often be caught off guard and forgo their usual price checking and comparison when they are placed under time pressure. Overuse, though, or false messaging (i.e., there is no relationship between the message and actual supply or demand) increases dropout rates and raises more buying barriers.
Pricing Strategies In Retail Management #4: Psychological Pricing Tricks
Psychological pricing is an approach of setting prices lower than a whole number in order to give the appearance of a good deal. The idea behind psychological pricing is that customers will read the slightly lowered price and treat it as lower than the price actually is.
One of the most commonly used psychological pricing tricks is the 9-ending prices. The overuse of 9-endings in retail stems from the simple fact that 9-endings can and do drive sales: 99-cent pricing is still widely associated with good deals among consumers. Even when the deals are bad. Having said that, a growing number of consumers are also becoming aware of this trick.
Another psychological pricing method is to offer free items or discounts in price sales. For example, “Buy one get one free” or “50% off two items?” People prefer the 1st but they are the same. Researchers find a large proportion of consumers are unable to understand fundamental math principles as they apply them to everyday life.
What are the advantages?
Psychological pricing increases interest in your product. Who can say no to a 50% off deal? Or discounted items with before and after prices, such as “from $100 to $89.99.” Customers’ decision-making processes become simpler. It provides a high return on investment, particularly during high-volume seasons such as the holidays.
What are the disadvantages?
Some customers may accept the tactic as necessary for doing business, while others may see and perceive it as manipulation. Others may even feel duped. Psychological pricing strategies are not long-term pricing solutions. It may increase your sales temporarily, but only for a limited time. Some customers are willing to pay higher prices if they prefer a different brand.
Overall Value Of Psychological Pricing Tricks: Psychological pricing may appear to be a wise choice for your company, but customers who thoroughly think before purchasing will recognise deceitful pricing schemes because it psychological pricing is based on the assumption that customers are buying on impulse rather than well-researched thinking.
Discussion On How To Boost Revenue Using Pricing Strategies In Retail Management
With discounting and psychological pricing strategies you can provide an immediate behaviour change and psychological impact that delivers a sense of urgency in customers. As the examples above show, retailers are able to change the perception of a product’s value simply by adding an odd number, anchor prices, and simply by hinting at the scarcity of a product.
The most important part about this, though, is that retailers must not just employ their tactics randomly to push up sales. Rather, they must do so in conjunction with a clear articulation of the value of the products they sell. What’s more, the articulation of value must resonate with the customers.
We have observed, for example, several innovative e-commerce retailers increase revenue and profits by three to five percentage points using a highly differentiated analytics process and often achieve improved customer satisfaction and loyalty as well. The best prices being ones which have been calculated using input factors such as customer, competitor, and company.
In essence, the price is how retailers articulate and sum up the value of a product to customers. While the marketing and sales communications address directly what your customer’s value about your products.
Nothing here is guesswork. In fact, retailers must measure and monitor what their customers value about their customers. No amount of psychological tricks and gimmicks will make up for a lack of strategy, commercial capability or improperly set prices.
Implications Of Pricing Strategies In Retail Industry Revenue Management
As you can see, discounting is yet again very popular this year. And, yes, discounting can be a good way of segmenting shoppers and consumers. Especially at this time, when people are more conscious of what they are spending due to interest rate hikes.
Often, though, these very same pricing strategies and discounting tactics are overused before Christmas to extract more $ value from consumers. To some degree discounting, then, works well during the Christmas/gifting season. At the same time, discounting must be aligned with an overarching value-based pricing strategy and executed precisely to avoid product cannibalisation and poor customer experiences; and to protect the $ value of higher-margin products and brands.
Executives must recognise that a value-based culture is essential for successful capability building and pricing transformation. A sustainable business adheres to both organisational and individual employee values, which you will observe in customer interactions, product/service development, and other critical decisions. This is only possible with proper diagnostics of current capabilities and needs, road mapping business strategies and approaches, problem-solving and performance-improvement coaching techniques, tracking results, and making necessary adjustments. In fact, we’ve already seen companies with an internalised value culture typically generate 3-10% more margin each year.
Consider building a dedicated pricing team to assist you in developing the best pricing strategy, thereby enhancing your commercial capability. 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.
The decision to use these pricing strategies in retail management is up to you. Some may see these techniques as taking advantage of consumers’ inherent mathematical and psychological weaknesses, while others may find them to be an essential part of everyday business. Regardless, the lesson here is to be transparent and open with your customers. The worst thing you can do is to leave your customers feeling tricked after they buy your product, because then, not only will they never return, but they will also tell everyone they know not to buy your products either – or give you bad reviews and comments.
For a comprehensive view on maximising growth in your company,
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
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