5 steps to creating the right pricing strategy

5 steps to creating the right pricing strategy

5 steps to creating the right pricing strategy

8 October 2019

An effective pricing framework relies on intelligent, strategic planning. But how can you know you’re setting the right base prices, and avoid falling into the trap of constantly comparing yourself to competitors?

Start by taking control of how your customers perceive you and your prices. Evaluate where you, as a business, sit within the wider market.

Here are five key steps to creating the right pricing strategy for your business.

1. Set strategic goals

Price perception is NOT your price index

The pricing function is often done in a vacuum. The executive team understands the importance of price perception, but often lacks the knowledge of what specific levers to pull. In contrast, the pricing team is focused on getting prices right, but often fails to grasp the broader significance of price perception and how it influences the retailer’s market position.

In addition, the pricing process is a stressful balancing act that bounces between different objectives: drive traffic, hit margin rate, and refine competitive price actions. Finally, conflicting priorities (for example: new formats, wellness efforts, digital) often compete for the same pot of investment dollars and focus. 

The solution to this problem is a broad pricing strategy that includes both the executive and pricing teams. Identifying the price sensitivity of your customer base and how they perceive your prices when compared to your key competitors are outputs of the first step.

2. Ace your base prices

Focus on price perception, not price index

It’s important to remember you don’t always need to match your competitors on price. If you do, you’ll fall into a continuous loop of price-matching, each reducing your price to compete with the other – and nobody wins in that scenario. You should instead determine the key products that have the most influence on price perception and invest in them fairly and competitively.

Maintain base hygiene factors

Think logically. Making sure the prices displayed on the shelves match those on the system is key when it comes to establishing trust with the customer. Check that the base prices are logical, correct, and make sense across your banners.

3. Establish a customer first pricing policy

Put the customer at the heart of your strategy

Determine which categories your customers care about the most to pick and prioritise the categories that need to be more competitive. Define pricing rules using customer prioritization, competitive positioning, product roles and financial objectives. Document rules on how to maintain hygiene factors and logic at the shelf. Periodically revisit the policy and make tweaks as required.

This strategy worked exceptionally well for one of our North American retail partners. By focusing on products important to their customers’ price perception rather than lowering prices across the board to match the price leader, they experienced 95% sales growth over 10 years. Their prices remain 10% higher than the price leader. In addition, this approach increased the weekly spend of their loyal customers – who now contribute 21% to overall revenue, up from 16%.

4. Execute your plan

With your pricing policy in place, you should be ready to launch your strategy. Here’s a quick checklist:

  • Execute pricing that follows the rules set by your policy
  • Check that products have been priced or are being promoted based on that product’s role within your market
  • Monitor competitor price changes
  • Pay close attention to market impacts, competitor price changes and vendor cost price changes
  • Keep track of performance and adherence to the pricing policy

5. Review internal price and promotion capability

Across your service, a unified view is as important as a unified process, and everything you roll out depends on capability. Having a strong Price and Promotions team who have power within the organisation and the right data and tools will help you implement your strategy more quickly, and to a higher standard.

The outcome

Following these five steps can help you create a pricing strategy you can trust and careful planning is the key. By understanding your position in the market, you can set a clear roadmap, monitor performance, and rise above price wars with the competition. An effective and sustainable pricing strategy is the bedrock for a thriving business and happy customers.

 

Need support? Our P&P Strategic Advisory Services help retailers around the world to understand and improve their Price Perception. Contact us to find out more.

Director of Price & Promotions - APAC

Senior Price & Promotions Analyst – APAC

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