Dec 13, 2021 | Customers, retail
A dictionary will define price as something like: “The amount of money for which something is sold’
Pretty obvious.
However, price can mean many different things to different people in different contexts.
Years ago, I ran a food manufacturing business that sold product through multiple distribution channels. Supermarkets, route trade, distributors, food service, direct via our own vans, and export.
The pricing architecture had a common starting point, the ‘List price’ after which everything changed depending on a wide range of factors such as: the relative power of the channel, volumes, payment terms, negotiated promotional and incentive programs, supply and demand at any specific time, geography, variable freight charges, seasonal factors, clearance prices, rebates, and others.
Exactly the same products, subject to a whole range of variations, both formulaic and negotiated.
In that complexity, how do you define what the ‘right’ price is?
At one point we made the attempt to calculate the actual price based on the net cash flow from the products and customers. In the days before flexible digital tools, this was a brain buster, and consumed too much time and effort to deliver a return, but was a good idea at the time.
Added to the complexity which discourages most from developing the understanding necessary to optimise whatever the net price ends up being, is the impact of unintended consequences and the channel conflict that is almost inevitable.
For example, the small retailers we serviced saw their competitors as the supermarkets and were very noisy indeed when they could buy a case of product at Woolies cheaper than they could buy it direct or via a distributor. They did not care about the nuances of our pricing architecture, or the fact that they might buy a case, and a supermarket buy multiple truckloads. Their concern was serving their customers by not having them go to Woolies for cheaper prices, while remaining profitable.
As a young bloke doing the backpack thing around Europe, I stayed at one point for a few weeks on a small Greek island. On the occasions a cruise ship came in, the retailers of all types simply substituted one price list and price display for another, somewhat more expensive. The locals knew not to buy that day. Amazon takes that flexible pricing strategy to the limit with its use of your browsing and purchase history to automatically set the price their algorithms indicate gives them the best combination of the purchase being made at the maximum margin.
So, what is the right price?
Whatever you and the buyer who completes a transaction determine it to be, in those circumstances, on that particular day.
Dec 1, 2021 | Branding, Innovation, retail
Promotional pricing is often the only tool used to generate volume. Ask any salesperson ‘Why’ and they will say ‘because it works’. Go next door and ask a marketer, and their response is more likely to be something like: ‘to encourage non-users to try the product, and if they like it, to come back, become loyal customers’
Therein lies the paradox. The well intentioned promotion of a brand results in killing it.
By promotional pricing the product down, you reward current users who would have bought at full price, while not being effective at persuading potentially new users to try for any reason other than price.
The power of habit is huge in routine purchases, like the ones we make every week in the supermarket. A regular consumer is not necessarily loyal to a particular brand, they are more unthinking, more habitual than most marketers will concede, especially to themselves. If a choice is to be made to change brands, that decision takes up cognitive capacity better dedicated elsewhere, and involves risk, which we are programmed by evolution to avoid.
To change habits, we must change behaviour, an extremely challenging thing to do.
Psychologists have found over and over, the best way to change habits is to change little things, one at a time, progressively leading to the changed behaviour that in its turn becomes a habit. Each stage takes 3 or 4 times to become sufficiently entrenched to start to take on the characteristics of a habit.
Back to our supermarket.
Price promotions follow each other on a weekly basis. No brand is given the time to establish its routine purchase as a new behaviour, as there is a price promotion of an alternative brand every week, often several at the same time.
The net result is that for every product on shelf, the discounted price becomes the ‘real’ price, which becomes less and less relevant as consumers are trained by the retailers to think that the discount price is the real price for the products and the categories.
That, in a nutshell, is why we are seeing less and less brands on the supermarket shelves, and as a direct result, less and less innovation, as suppliers have little chance of recouping development costs in such an environment.
Nov 29, 2021 | Customers, retail
On Friday last week, I had to go into the city. About 10.00am I turned up at Town hall station, and the shopping precinct around it was crowded, people lining up to get into shops that a few days previously were deserted.
It took me a while to realise that it was ‘Black Friday’.
Retailers were making extreme offers to generate a sale, and seemed to be succeeding. When I got back to my home office and opened my computer, it was deluged with digital ‘Black Friday’ specials from everyone to whom I had deliberately or inadvertently given my email address since 2010. ‘90% off Black Friday Special’ was not an uncommon header.
‘Black Friday’ is the wrong description, coming as it does from the US where it joined Mother’s Day and Father’s Day created by Hallmark cards, as a marketing construct. In contrast, Black Friday should be called ‘Stupid Discount Day’ or ‘The day we went broke’.
The attraction of deep discounts does a few things to a retailer’s sales numbers:
- Generates volume, (hopefully) sometimes at a loss on the discounted item, so retailers are hoping you buy something else at the same time to recover margin. This volume comes, if it comes, with the advertising costs. For a small retailer, these costs might be just a few banners in the window, and someone outside the store spruiking, but are more likely to include some email marketing, and social media posts, and usually some of which are paid to generate reach.
- Rewards non-customers who buy once, try, and you hope come back. Rarely happens, especially in the madness of a mass discount.
- Attracts the worst customers, those who never buy anything at full price, who only chase discounts. It is often these same customers who create most customer service costs.
- Rewards existing customers who would have bought anyway at full price This usually results in a ‘pantry stock’ that kills sales and margin in subsequent periods.
- Erodes brand positioning, sometimes built up over years, establishing a new ‘base price’ for their products and brands.
Most of the offers in my computer were for digital products, where the marginal cost is zero, so they can give away 90% price and not go into the red. Bricks and Mortar retailers, the ones with queues outside them in the QVB, Town Hall station underground mall, and the giant Westfield next door do not have the luxury of zero marginal cost.
I suspect many of these retailers are desperate after 2 years of struggle, and desperation often leads to very poor decision making.
Hopes that deep discounting will increase volumes sufficiently to recover margin are almost always in vain. When you do the numbers, depending on the gross margin, and additional promotional expenses, volumes have to increase by a factor of at least 3 or 4 in order to break even. The more frequent outcome is a very nasty shock when the P&L is done at the end of the month.
Anyone can sell anything at a deep discount. It does not make you successful, just thoughtless, desperate, stupid, or a bit of all three. The lesson should be, not to go broke being successful.
Sep 15, 2021 | Analytics, Category, retail
‘Elasticity’ is something most of us did in economics 101. Why have we not used it more than the evidence of my eyes would suggest?
The price elasticity of demand is usually defined as the relationship between changes in price and the resulting changes in volumes sold.
Elasticity = % change in quantity/ % change in price.
For example, assume you raise the price of a widget from $100 to $120, which causes the volumes sold to go from 1,000 in each period to 900. The price increase is 20%, the volume decrease is 10%. Elasticity is therefore 10/20, or 0.5.
It is the absolute value of the metric that is important, the distance from zero, rather than if it is positive or negative. If the number of widgets sold had been 750 after the price increase, the elasticity would have been 1.25. (25/20) a more elastic response to the price increase than the 10% drop in the example.
It is crucial for marketers to understand the elasticity of their products if they are to optimise the price/volume relationship, as price is the most sensitive driver of profitability.
The challenge is that there are a whole bunch of psychological and competitive factors that weigh into the equation in a consumers mind, simply not accommodated by the simplistic price/volume curve we all saw in that economics 101 class.
You can speculate all you like about price elasticity, but the only way you will know is to evaluate it in the marketplace.
We are currently (September) in the season where there is a glut of avocadoes available. My local Coles store seems to be altering the prices daily, anywhere between 1.00 each to 1.69 each. It is probably that they are partly reflecting the deliveries into their distribution centres, but the data collected at the checkouts will give them a detailed view of the volumes at differing prices, and even the time of day. This data is invaluable market intelligence that can be used to optimise their profitability for the product category.
Given that cost is a lousy starting point upon which to base price, it may be that this Coles is leaving money on the table by reducing the prices below $1.49.
How many less avocadoes would be sold at $1.49 than at $1.10?
Someone in their data analysis system, somewhere, has the data to make this call with close to absolute certainty as it applies to this store.
Theoretical price research, outside of the real purchasing decision making, is at best inaccurate, at worst, misleading. A/B testing used to be a challenge, but increasingly we can use digital tools to interrogate the data that digital capture, in this case the checkout, that has become available to us.
Companies like Amazon with vast amounts of data are so good at it that they know the price elasticity of individuals in particular product categories. They display prices accordingly every time you search, in order to maximise the chance you will buy at the highest price they can charge, based on your history. ‘Dynamic pricing’ is the now common term being used to describe this process.
Once you understand the elasticity of the price/volume profile of your product, you are in a better position to maximise profitability, while delivering value to your customers.
Header cartoon credit: Scott Adams. Not sure the analogy is a great one, but the idea was amusing.
Jul 11, 2019 | Change, retail, Strategy
As Bricks and Mortar stores, (B&M) except those run by on line monsters, Apple, Amazon, and a few others flounder, retail needs to rethink itself.
Easy to say, hard to do.
It is hugely ironic that the most successful B&M retailer on the planet, by the retail industry’s own measure, margin/square foot, is now Apple, and I suspect Amazon is not too far behind.
Rent is the 3rd biggest cost in most retailers P&L, after staff and Inventory. Rent is in effect the cost of distribution, or the major part of it, and is always raised as a cost that on line retailers do not have, which is their competitive advantage, along with convenience.
Of course, on line retailers do have distribution costs, increasingly absorbed in the price paid by the customer, or cunningly disguised as some form of membership, as with the sensationally successful Amazon Prime.
Distribution is the battle ground of retail. Reshaping the traditional retail model by cutting out the retail store, and delivering by some combination of post/courier/pigeon. However, B&M retailers have gutted themselves by electing, on mass, to walk away from their primary competitive advantage: stores, and the relationships they can create and nurture with customers.
The competitive advantage of a store is that a customer can go in, look at, touch, try on the merchandise, and talk to a person, who hopefully has some level of product knowledge, and is able to build a rapport. This is a hugely potent competitive advantage if used well, but instead of using it, most retailers are cutting back their investment in stores, staff, and product knowledge, cowed by the spectre of on line price competition.
It is like a golfer, who when comfortably ahead, stops using his driver because his competitor is better at using his putter, so he uses his putter to compete, on what becomes uneven terms.
Stupid.
If retailers looked at rent, inventory carrying costs, and most importantly the cost of customer facing staff, as the cost of customer acquisition and retention, they may make startlingly different strategic choices. They become items in their marketing budget, which can be subject to creative experimentation, and customer service and retention optimisation, rather than a cost to be minimised.
I suggest that this seemingly simple change in mindset, would lead to a huge change in their capacity to compete and succeed.
Bring out the driver again lads, stop playing the whole game with your putters!
Mar 13, 2019 | Branding, Governance, Marketing, retail
Quantifying the ROI of marketing investments remains the single most challenging task of marketers. While marketing costs remain being seen as a variable expense, stuck in the monthly P&L , it will remain hostage to the whims of expediency, corporate politics, and short term thinking. The real KPI of marketing investment should be the sustainable margin delivered over a considerable time, as you would with an investment in machinery.
The obvious problem is that you can measure the output and productivity improvements associated with a piece of machinery, the numbers become available with use, although, they are all in the past. Marketing investment is all about influencing the future, and measurement, even with the benefit of hindsight is very hard, and useful only as a learning tool.
Is there something we marketers can learn from elsewhere?
The Kaplan Meier curve is a basic concept used all the time by medical and pharmaceutical researchers. For example, if they are testing a new drug for say, patients with diagnosed terminal prostate cancer, you plot on a daily curve the lifespan of those on the test drug, and those on the placebo.
Assuming there are 100 patients in the trial, at day 1, all 100 are alive, then you plot the numbers who remain alive daily with, and without the drug. If the plot line of those with the drug goes above the line of those without, you can imply the outcome of longer life, and you have some numbers to support the conclusion. If the line of those on the drug dips below the placebo line, you are killing patients. Lines that stay together indicate the drug has no impact.
Simple idea, widely used in medical research.
For years I have watched suppliers to supermarkets being screwed by those supermarkets, and increasingly allocating advertising funds aimed at brand building , which delivers margins over time to the brand owners, and indirectly despite the protestations to the contrary, to the retailers. This reallocation of advertising to working capital and margin via in store promotional activities, and supermarket profitability, at the expense of advertising, has been a huge mistake.
It has seen the demise of some great brands. To be fair however, consumers have benefitted by cheaper prices, at the expense of choice.
A few weeks ago, the recently merged businesses of Kraft and Heinz, announced a disastrous profit result. This came about as progressively brand advertising that gave consumers confidence in the brands has been redirected to price promotion that is the primary competitive tool of supermarkets. Meanwhile, those same retailers have introduced house brands that look very similar, and that trade off the value proposition developed by Heinz and Kraft over many years.
The same thing has happened in Australia, perhaps more so given the concentration of supermarket retailing.
I was around as a junior product manager in the early days of Meadow Lea brand building, at what was then Vegetable Oils Pty Ltd, a long gone business, swallowed up by corporate stupidity.
‘You ought to be congratulated’ is one of the great propositions of Australian brand building. In a hugely crowded margarine market, Meadow Lea held at its height, a 23% percent market share at premium prices, four times that of its closest rival. This was a direct outcome of a good product, great advertising, and a brand that delivered.
I had a look in a supermarket yesterday, and had trouble finding anything labelled Meadow Lea.
What happened?
Retailer power happened, combined with the lack of understanding of the power of great brand building consumer propositions by retailers. Meadow Lea was squeezed by retailers for more and more promotional dollars that ended up being funded by reductions in the brand advertising and building activity, with the end result that the brand in effect no longer exists.
It has become nothing more than a label!
I wonder where the next market building initiative will come from?
Certainly not from the manufacturers, as they know that immediately they create a market the retailers will undermine it with cheap versions, so there is no value in the risks involved in the innovation necessary, and no reward.
Back to where I started, and I do not have the data for this, but I bet that applying a Kaplan Meier analysis to the delivered margin from Meadow Lea over time, both to the now owners of the brand, and the retailers, would show that the allocation of brand activity to the low prices demanded by retailers had hurt everybody concerned, including consumers.
Image credit: Wikipedia
