Leveraging Retail Margins: Getting Price Right Leveraging Retail Margins: Getting Price Right....

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Transcript of Leveraging Retail Margins: Getting Price Right Leveraging Retail Margins: Getting Price Right....

  • Leveraging Retail Margins: Getting Price Right Pricing remains a retailer’s biggest margin lever. Yet the potential for getting price wrong has grown exponentially. Price has moved from an art to a science — compelling retailers to find new ways to set and manage prices to attract and retain more customers.

    Executive Summary No factor dominates shoppers’ decision-making processes like price. Other influences — products’ intended use, shoppers’ levels of wealth and the degree to which they desire a product — play sup- porting roles, but price is paramount.

    So how do retailers win the pricing game?

    First, they need to get prices right from the start; getting close is not enough. Today’s shoppers show a high propensity for walking out of stores when prices don’t meet their expectations. Relying on price-matching can be a “too little too late” strategy, and can result in retailers unneces- sarily giving away margin dollars. High-perform- ing retailers base their pricing decisions on their customers’ changing needs, not on the pricing moves made by their lowest-cost competitors.

    Second, retailers need to recognize that we are not in a “one price fits all” world, even in today’s environment of ever-increasing price transpar- ency. When it comes to price, most shoppers understand and accept a range of reasonableness determined by product type and use, the timing of a purchase and the level of customer service, and

    recognize that the cost to serve can vary. These factors provide the “cover” for such tactics as zone pricing, channel choices and personalized offers.

    Finally, retailers can win at pricing by letting tech- nology be their ally. Managing price with outdated methods — intuition, rules of thumb and spread- sheet analyses — no longer works in today’s fast- paced retail environment, which relies on volumi- nous amounts of rapidly changing data. What’s more, the potential penalty for getting price wrong has grown exponentially in terms of lost sales and foregone margins.

    Price is Paramount In 2013, Cognizant and RIS News conducted a survey of 2500 shoppers in the United States and Canada1 (see Figure 1, next page). The results showed that price and promotions are the top influencers of in-store purchase decisions. What’s more, price has consistently reigned in the annual survey over the past four years. Product selection is a close second, but with multiple sources available for almost every type of product, selection carries less influence — especially for everyday consumable products.

    • Cognizant 20-20 Insights

    cognizant 20-20 insights | january 2014

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    The same study revealed that price also dominates in the online world. Plus, shoppers cited price as their top reason for “showrooming,” the much talked-about practice in which consumers first browse in physical stores for merchandise they later purchase online — usually at prices they consider more favorable.

    Needless to say, getting price wrong poses a major threat to retailers — leading to lost sales for both brick-and-mortar stores and e-tailers. Shoppers have several options when they are dissatisfied with a price. The most popular, according to our survey, is simply leaving the store and purchasing

    the product from another retailer — in a physical store or online (see Figure 2).

    How can retailers retool their pricing to avoid lost sales? Many are turning to price matching — beefing up in-store technology so store asso- ciates can more easily grant price matches, then heavily promoting the retailer’s new price- matching policies. Anecdotal comments from store personnel and retail executives, however, suggest few shoppers request price matches. Our research echoes those comments, revealing that shoppers send mixed signals on price matching. They identify it as an option they want retailers

    cognizant 20-20 insights

    Source: Cognizant and RIS News Fourth Annual Shopper Experience Study Figure 1

    Importance of Influencers of In-Store Purchase Decisions

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    3.0

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    4.5

    1 2 3 4 5

    Comments about the product on social media sites

    Other customers’ online ratings and reviews

    Compelling loyalty program

    Visibility and accessibility of product

    Ease of returning products

    Quality of customer service

    Fast, easy check-out

    Right product selection

    Competitive prices and promotions

    Source: Cognizant and RIS News Fourth Annual Shopper Experience Study Figure 2

    Shopper Responses When Dissatisfied With Price

    Purchase the item at the listed price.

    Purchase an alternative, cheaper item available in that store.

    Ask an associate to price-match.

    Leave the store and look for the same product at a lower price in another store.

    Leave the store and look for the same product at a lower price online.

    Use your mobile phone to check prices at other stores and/or e-commerce sites.

    38%

    21%

    19%

    10%

    8%

    5%

    0% 10% 20% 30% 40%

  • 3cognizant 20-20 insights

    to offer, yet almost 75% had not requested a price match in the preceding three months. For retailers, investing in price-matching policies and the advanced verification and compliance systems to support them is of little use if shoppers won’t take advantage of them.

    We believe a better investment is to get the price right from the start. This means setting prices that are consistent with customer expec- tations and that factor in competitors’ prices. Getting price right also requires consistency with retailers’ overall value propositions.

    Price transparency has altered retail forever. “In the old world,” said Amazon CEO Jeff Bezos, “you could make a living by hoping that your customer didn’t know whether your price was actually com- petitive. That’s a very tenuous strategy in the new world. [Now] you can’t convince people you have the low price; you actually have to have the low price.2”

    But the low-price mantra is just one of many pricing strategies available to retailers. We believe the predictions of a low-price-only environment are premature. Today’s technologies and tools enable retailers to take a more strategic, nuanced approach to managing multiple prices. With zone pricing and smarter selection of key value items, retailers can protect their margins and drive revenues.

    The Resurgence of Zone Pricing Zone pricing helps retailers home in on the right price. Yet not long ago, retail analysts were pre- dicting its demise, pointing to the proliferation of easy price comparisons driven by Web apps, shopping services and the like, and forecasting an era ruled by low price. The theory was that retailers would soon have no need to get the price right because there would be only one price everywhere.

    Research suggests the opposite is happening: Tech-savvy retailers are becoming more adept at executing on zone pricing and protecting their margins. In the past year, many have increased their investments in zone-pricing capabilities and refined the granularity of their pricing zones. From 2012 to 2013, the number of retailers reporting effective policies for managing cross- channel prices and promotions roughly doubled, from 20-38%, according to a report by Retail Systems Research, a Miami-based research and advisory firm.3

    In an environment of increasing price transparen- cy, what’s behind retailers’ growing confidence in their ability to manage multiple prices? We have identified four factors:

    1. Consumers understand that the cost to serve differs across markets. It’s more expensive to do business in New York City than in Peoria, and store prices reflect those factors. Consumers may not like that reality, but they accept it. Similarly, the airline industry’s tiered pricing structure has driven consumers’ acceptance of multiple prices. Moreover, most consumers value shopping-experience variables — such as service, selection and return policies — that affect price. They realize that not everything is a commodity.

    2. The math is compelling. Pricing is retailers’ biggest margin lever. The margin gains from varying pricing, and from charging higher prices when possible, can often outweigh any lost unit volume.

    3. Shoppers are not driving the market to a single price. From an economist’s standpoint, today’s market is closer than ever to being efficient. Yet factors such as need, budget and intended use continue to drive shoppers’ perception of value. What’s more, those factors vary by market, customer base, time and brand. That variability, combined with shoppers’ reluctance to request price matches, produces a complex environment in which shoppers are not forcing the market to set a single price.

    4. While shoppers have more information than ever before, so do retailers. Price setting is one of those rare instances in which improvements in retail science and technology have kept up with changes in customer behaviors. Access to price recommendation tools is making it simpler to get the price right, and increasing retailers’ capacity to do more price reviews (both the number and frequency of products). Price-intelligence services provide more localized, competitive prices, and the advent of advanced price optimization and manage