Retailers "Fine Tune" Discount Pricing Strategies

U.S. retailers are getting creative in their discount and pricing strategies, according to reports from multiple news outlets this month. In addition to continuing to follow the schedule of sales - preseason, post season, school's out, school's starting, holidays, etc. - retailers are starting to take a more focused approach on how and where they are applying their discounts and price breaks, all the way down to the individual store level. As The Wall Street Journal recently reported:

"At the Banana Republic store in New York's World Financial Center, a white pleated skirt was on sale for $39.99, marked down from $69. The same skirt was discounted to $33.99 at Banana Republic's SoHo store, just two miles away.

"The $6.00 difference wasn't a mistake. It's part of Banana Republic's parent Gap Inc.'s (GPS) very deliberate move to tailor prices to fit local demand and inventory - right down to the individual store level.

"The payoff: Gap's merchandise margins have either matched or topped year-ago levels in each of the past five months through May..."

Smart strategy? Without doubt. Setting prices differently to meet varying demands in diverse geographic areas is an effective strategy if you can properly manage your discounting and accurately predict changing demand patterns.

We have been publishing numerous articles on our blog and in our publications recently that point to this kind of segmentation in numerous industries - strategies all aimed at encouraging consumers to spend their reduced pools of expendable cash. We have seen demand and dynamic pricing strategies at play in air fare, software systems and professional sporting events. One PPS expert recently published an article (which will be in the July 2009 PPS Newsletter) highlighting how further price segmentation could help the ailing concert industry.

Marketwatch goes on to point out that these strategies, in addition to being developed for clearing inventory, are also being put in place to make up for limited expansion capacity in the current economy:

"Gap isn't alone. Other retailers, including Wal-Mart Stores Inc. (WMT 48.11, +0.28, +0.59%) and Home Depot Inc. (HD 23.58, +0.47, +2.03%) , have taken on or expanded some form of "localized markdowns," rather than slash prices the same amount at the same time across all markets. This helps boost profits whenever items selling well in one region offset the need for deeper discounts somewhere else.

"It allows you to be more surgical and dynamic," said No. 1 home-improvement retailer Home Depot Chief Financial Officer Carol Tome in an interview. "Rather than marking down by entire market, you can use your markdown strategy depending on the sell-through in each store."

"As the weak economy forces retailers to close stores or trim expansion plans, they've scrambled for ways to maximize returns from each existing store, analysts said. How much, when and where to slash prices can make a big difference to the bottom line, especially so soon after having to discount merchandise at least 70% off over the holidays to clear excess stock, analysts said."

Many retailers are also looking to implement "market optimization" software systems to further perfect their discounting and segmentation strategies by more closely targeting pricing by market demand(making it a good time for innovative pricing software systems and consulting bodies to make their mark).

Not all companies are slashing prices just yet. Sony is a great example. Despite threats from Activision - the company known for market leading games such as Guitar Hero World Tour - to pull support for the PS3 if Sony refuses to cut prices, Sony CEO Howard Stringer refuses to cut the price below its current level of $399 in order to meet short term capital goals. Another Sony spokesperson further explained the company's position (reported in USAToday):

"We feel that we're sacrificing the short term to pay dividends in the long term. People are having short-term thinking -- the platform is not even three years old. It was $599; it's now $399. The focus on pricing is something we appreciate, but you have to have the conviction and the confidence that you are on the right path for the long term and ultimately you'll get all the consumers you want."

At least some companies feel that they can still hold true to their value proposition instead of engaging in a price war to attract dwindling consumers. More to come. Warmly, EM

Retailer Backlash over Prices

The tension is mounting between suppliers and retailers. People are spending less, yet retailers are forced to raise prices to compensate for the lost profit of the suppliers. One great recent example is the price of milk - suppliers lost an average of .05 a gallon last month to stop the rapidly increasing price per gallon that had been passed on to consumers. Now, however, suppliers are in jeopardy, and the situation has become enough a problem to gain attention by state legislators and regulatory agencies, which is garnering backlash from grocers' associations:

"What's next? Are we going to do apples? Are we going to bread? Where do you draw the line?" he said. "This is America. This is not some dictatorship from Montpelier that says we know how to run private business and we know what's best for you and your customers." (see article here)

Here is another example from the Wall Street Journal:

" A big grocery chain has removed from its Belgian stores about 300 Unilever products that it says are priced too high, a sign of mounting tension between retailers and suppliers as the recession grinds on.

"The move by Brussels-based Delhaize SA, which operates the Food Lion chain and other grocery stores in the U.S., comes just days after Unilever reported strong fourth-quarter profit that was driven in large part by its ability to command big price increases despite the ailing economy. (Big Grocer Pulls Unilever Items Over Pricing)"

The problem has become so bad that grocery stores are even being downgraded by investors, which no doubt does nothing but exacerbate the issue. On an interesting counterpoint: one retailer is going against the flow and refusing to change its prices.

"Sales down by 19 per cent but Abercrombie & Fitch eschews inelegant option of cutting prices to suit its cloth

Abercrombie & Fitch appeared to have it all – a glossy catalogue filled with beautiful young men and women, glamorously photographed by Bruce Weber; gorgeous assistants in carefully lit stores that seem more like nightclubs than retail outlets; and fashionable garments emblazoned with the A&F logo, appealing to the upwardly mobile youth of America.

But when the economic downturn caused shoppers to think twice about their spending, A&F refused to reduce its prices – as much as £60 for a polo shirt – in an attempt to protect the brand.

Its reluctance to wield the red sticker has seen bargain-hunting shoppers desert in significant numbers, allowing rivals such as American Eagle and Aéropostale to steal market share with their cheaper products. Yesterday, A&F reported a 19 per cent decline in sales across its chains for the three months to January 31 to $998 million (£688 million), with like-for-like sales at A&F-branded stores down 25 per cent. Net profit also fell sharply to $68.4 million, down from $216.8 million a year earlier.

Mike Jeffries, chairman and chief executive, said: "The fourth quarter proved to be a catastrophe for the retail industry – a nightmare that included unprecedented promotional activity by other retailers in the malls and consumers who continued to show reluctance to spend, especially for premium brands."

However, he claimed that the company was "satisfied" with its results for the quarter, adding: "We will . . . continue to protect and position our brands for more promising times."

Read the full article: "Abercrombie & Fitch refuses to reduce prices". How long can this possibly last? We will see if their customer base is as loyal as they think they are, or if they can continue to pay premium prices for their teens' new clothes. If they do succeed, it will be an interesting case study for retailers examining their pricing strategy. More soon! Warmly, EM

Retail Pricing - How Retailers Communicate Pricing In-Store

One of our readers left a comment regarding the debate between customer service and pricing as the primary keys to success and customer loyalty in retail product pricing. (View post here).

His firm, RetailNet Group, just published a brief survey of their recent store visits and observations of how retailers are delivering price and value in new and interesting ways in-store. He was kind enough to share the retail pricing survey here. Warmly - EM

Retail Pricing - Customer Satisfaction Still Critical

Here is an interesting article from a retail industry blogger arguing that low prices are not the only key to retailer success and customer loyalty:

"While the retail industry has been hyperfocused on pricing, the retailers who have continued to focus on customer satisfaction, like Amazon and Apple, have emerged as the winners in a losing holiday season.

"The link between customer satisfaction and sales is not breaking news. The confirmation that overall customer satisfaction still matters in a price-conscious economy is definitely headline worthy. According to the "2008 Holiday Top 40 Online Retail Satisfaction Index" report from Foresee Results, the most satisfied customers still spend more, make more repeat purchases, and make recommendations to friends.

"...Retailers in all channels would do well to heed the warning. While pricing seems to be the main consideration for fearful consumers, it is still not the only consideration. A hyperfocus on pricing to the exclusion of other aspects of good retailing will result in a diminshed customer experience, decreased satisfaction, and eventually, the loss of reputation, the devaluation of brand, broken loyalties, and, as we will observe repeatedly in 2009, complete business failure."

PPS experts have been covering this aspect of pricing strategy for years and from all angles, and the recent economic hardships are doing a good job of bringing this fundamental principle of pricing back into focus.

At the end of the day, this principle applies across all businesses - low prices cannot make up for bad business practices or bad products. Smart pricers apply customer relationship strategies as part of their overall pricing strategies instead of using pricing as a stand alone - or in many cases this year - a last breath strategy.

Several more articles on this subject are available in the PPS archive, including "Applying Customer Relationship Valuation to Strategic Pricing Optimization," "Customer Value Driven Pricing to Enhance the Bottom Line," and much more.

In tough economic times, returning to foundational pricing principles is your best bet. Warmly, EM

Pricing Strategies for Retail Recovery

Retailers have been trying to weather the storm through strategic pricing and inventory management, and strategies are continuing into 2009 following a historic low holiday volume. This report provides and interesting insight into how strategic pricing plays a critical role in overall business sustainability and stability strategies.

From CNN Money.com:

"...research shows that holiday sales performance this year and competitive performance in 2009 will decide the tipping point for 'retail recovery' as 80% of companies are challenged by historically higher levels of cost of goods sold and low consumer confidence.

"The last six months leading up to the recent holiday season indicates a shift in value chain priorities and IT investments when compared to the beginning of 2008. Aberdeen's research data shows that during the last 2 quarters of 2008, technology and process spending was geared towards accelerated product campaigns, door busters, and promotions -- in terms of price discounts and frequency, customer loyalty programs, precision merchandizing, and lean inventory management.

"The objective over the last six months within key retail sub-segments such as department stores, fashion, apparel, specialty, and consumer electronics has centered on customer-pull strategies and lean inventory techniques," states Sahir Anand, senior analyst and chief author of the report. "The obvious reason for this strategic shift is to pull through the current tough environment with minimal business risks such as store closings, working capital squeeze, depleted customer satisfaction due to staff cuts, and low margin attainment."

Any insights from pricers in the retail space? What kind of pricing strategies are you implementing to weather the current economic storm? Warmly, EM

UK Retailers-Are they headed in the Wrong Pricing Direction?

The current economic situation isn't just affecting the U.S. Retailers in the UK are also facing sharply increasing costs including higher fuel and utility bills, as well as the sudden weakening of the pound and soaring cost increases from suppliers in Asia. In response, these retailers making gambles with their pricing strategies to attempt to pass some of these increased costs onto consumers. But will these strategies back fire and do more damage than good? Will this attempt to compensate cost only reduce volume from customers who are also feeling an economic pinch in their personal finances? The situation poses the question: "Is it more important to try and maintain sales levels with a slightly squeezed ... margin, or is it more important to have a better margin with a lower volume of sales?"

"British clothing retailers, facing sharp cost increases, are planning a gamble that could backfire by raising prices next year in what could be one of the worst consumer downturns in 30 years.

Top chains such as Marks & Spencer Group Plc, Next Plc, Debenhams Plc and Top Shop owner Arcadia are not only struggling with higher fuel and utility bills, but also the sudden weakening of the pound and soaring cost increases from suppliers in Asia.

The rising costs present retailers with a major problem.

If they cannot pass the increases on to shoppers -- in a market some analysts reckon could be as tough as the recession of the late 1970s -- their profit margins will be hit, and if they do pass them on their sales volumes will likely suffer."

Read the full article: UK clothing retailers' price gamble may backfire.

Update on the 99 Cents Store

Has Canada answered the 99 Cents Question with its $5 Store?

"First, five-and-dimes gave way to dollar stores. Now, inflation pressures are threatening to make the dollar store a thing of the past, too.

Dollarama Group LP, Canada's largest dollar store operator, is set to abandon its "all at $1" pricing strategy at its 536 stores in the new year, the company said yesterday.

After Feb. 1, Dollarama will introduce three new price levels - $1.25, $1.50 and $2 - though it says the majority of items will still sell for $1.

"After 16 years at a dollar, we've found in the last few years sourcing dollar products has become a little more difficult," Dollarama chief executive officer Larry Rossy said in a rare interview. "Meanwhile, during our recent buying trips [to Asia] we were consistently offered 'wow' items at the $1.50 to $2 price point."

Read the full article: Million-dollar question: Are $5 stores up next? Sounds like the the 4.99 idea is spot on. Thanks to our bloggers Per Sjofors and Rafi Mohammed for their thoughts

What Would You Do If...?

If You Were CEO if 99 Cents Only Stores?
As a new feature for our recently launched PPS blog, I invite you to participate and contribute your perspective, on some of today’s real world pricing issues.
Below is the first in this series of “What Would You Do If?
Eric Mitchell,
Founder and Chairman, the Professional Pricing Society.

Ninety-nine cents just doesn't go as far as it used to, and that's a problem for 99 Cents Only. Faced with rising inflation and soaring food prices, the large retailer ,founded in 1982 --- known for never selling anything for more than 99 cents — is re-evaluating its pricing strategy.

According to the LA Times (9/2/2008,) Chief Executive Eric Schiffer said "There's no question we're going to need to do something," said after the company reported its second consecutive quarterly loss. "When you are part of a family that comes up with a concept, sometimes you're the last to admit that it needs to be changed."

99 Cents Only, pioneered the single-price retail concept. It has expanded to 277 locations, mostly in California but also in Nevada, Arizona and Texas.
The deep-discount retailer sells groceries, household supplies, health and beauty products, and it remains one of the few true "dollar" stores.

Competitive Landscape

At discount chain Dollar General , current promotions include $8 backpacks and $2 for a box of Ziploc sandwich bags. Family Dollar Stores, a chain of more than 6,500 discount stores, currently is advertising Glad trash bags for $4.99 and Huggies diapers for $9.99. In fact, keeping prices at a buck or less was never part of the overall pricing scheme at Family Dollar, an large competitor based in NC.

99 Cents Only is able to offer such low prices because of a business model that is "not based on having every single variety of every product out there," said President Jeff Gold.

But lately, the company just can't get a wide-enough or attractive-enough selection of goods that it can turn around and sell for such a low price, Gold said. According to the Bureau of Labor Statistics' inflation calculator, 99 cents in 1982 has the same buying power as $2.26 in 2008.

By capping prices at 99 cents, the chain has had to play around with the quantity and size of its goods, which can confuse customers.

But "The number 99 is a magic number — deviating from that is something we absolutely are not taking lightly," said Gold, "I find significant discomfort emotionally about considering making the change."

OK Pricers ---What Would You Do ? -- If you suddenly were appointed as the CEO of 99 Cents Only.