Competitive Pricing Strategies for Retailers

Introduction

Just how do consumers choose one retailer over another if the prices for the same goods are similar - or even exactly the same? Being the cheapest doesn't always win the sale and chances are that those consumers will be swayed to choose the retailer that offers the best product information, customer service/support, ease and timeliness of ordering, delivery and returns etc.

As a retailer it stands to reason that you'll need to offer excellent service to your existing customers to keep them loyal - and to ensure you win new customers along the way. However, there are also some competitive pricing strategies you should try as well to win the day, so read on...

Competitive Pricing Strategies

Loss Leader

Goods advertised and sold at below cost price to entice customers into your retail store on the assumption that, once inside the store, customers will be persuaded to buy full priced items as well. A loss leader introduces new customers to your products in the hope of building a customer base and securing future recurring revenue.

Both bricks-and-mortar stores and online shops can benefit from this competitive pricing strategy. However, be aware that sometimes consumers leave with just the loss leader paid for and "flit" from shop to shop picking up the loss leader bargains, known as "cherry picking".

Psychological Pricing

Use psychological pricing to choose an attractive price based on the needs and wants of your target customers. Psychological pricing appeals to your customer's emotional rather than rational side.

For instance, a higher price than your competitors is associated with higher quality. On the other hand if you price your products lower than the competition then your customers will value them less.

Another psychological pricing strategy is charging, for instance, £9.99 instead of £10.00. Consumers associate the price closer to £9.00 rather than £10.00, even though it is only 1p less.

Odd number pricing is another competitive pricing strategy for retailers to give the impression that they have rigorously calculated the "best" price that is set at levels a little less than a round number, for example £8.97, £99.95.

Dynamic Pricing

When it comes to dynamic pricing, Amazon reigns supreme. Amazon maintains its low-price reputation by undercutting competitors on top-selling, high-visibility products, whilst protecting margins by charging more on less price-sensitive items.

Every time you look there is a different price for an item on Amazon because they are constantly matching competitive prices. Dynamic pricing is a critical capability for competing in e-commerce and even bricks-and-mortar retail to drive revenue and margin growth.

To build a case for dynamic pricing, retailers must first quantify the potential of introducing dynamic pricing by systematically comparing their price levels to those of their chief competitors, assessing how frequently competitors change their prices, and studying how competitors react to your price changes.

Conduct a pilot in a handful of categories and, if a success, roll out dynamic pricing across all product categories. This should yield meaningful improvements in revenue, profit, and customer price perception.

Temporary Discounts

Implemented to attract customers who feel they are getting a good deal with a discount and who may be tempted to stay loyal if there is a good chance of further discounts in the future, both on the goods that they usually purchase and new ones they may be persuaded to try.

I stress the word "temporary" unless you want to be forever known as a discount retailer, which could possibly become unsustainable.

Price Lining

Involves distinct lines of products, each in a different price range, such as budget, standard and high-end. The additional features on the high-end lines don't typically cost much but can allow you to increase prices significantly.

The increase in profitability offered by price lining is one reason marketing departments introduce multiple ranges, since it allows you to not only satisfy the needs of different customer segments but also presents an option for customers to "buy up" to a higher priced and more profitable model.

Product Bundling

"Bundling is pervasive in several markets, and it works in many cases," says Vineet Kumar, an assistant professor in the Marketing Unit at Harvard Business School.

Product bundling allows you to charge a unique, competitive price that cannot be copied by others. Multiple products or components are packaged together for a single price and offer benefits to both you and your customers.

Electronics retailers often bundle hardware, software and accessories, e.g. you might buy a computer and get a bundle deal with the monitor, printer, cables and antivirus software.

Some companies use bundling as a way to package less popular products with items more in demand. You can also create longer-term opportunities for add-on sales when you sell multiple products to your customers. If your product bundle addresses most or all of your customer's needs this is convenient because he/she can make all their purchases in one go.

Additionally, customers often experience economies of scale when buying a bundle of products because if they have a need for all the components in the bundle, they typically appreciate that the price of the bundle is lower than if the components were bought separately.

Typically, long-term benefits and better customer relationships develop if customer convenience and value is your motivation; tracking bundling performance and customer satisfaction helps ensure long-term benefits.

Try Packaging Products In New Ways

A convincing competitive pricing strategy for retailers that, for instance, allows a certain number of pieces per bag that is different to the number of pieces per bag offered by the competition.

The right design can compliment your desired product positioning too. If your product resembles an everyday basic class of product yet you are looking to attract premium customers, then your pricing is not going to work because you are sending the wrong signals to your customers, suggesting a lower perceived value.

With reference to pricing, product shape or height influences shopper perception - for instance, a taller bottle alongside a competing, similar product subconsciously informs your customers (inaccurately) that it holds more liquid - and could be priced higher.

Which strategies will you implement?

It's not rocket science - retailers need to ask the right price to the right customers at the right time. In order to find the optimum price and remain competitive they should implement one or more of the pricing strategies outlined above and use pricing software to make the job easy.

Simply revising your pricing structure can make your product suddenly seem like the greatest bargain on the market or elevate your luxury product to the top of all available options.

However, be wary of straying too far from the prices of similar products because this could make you less rather than more competitive.