How to Sustainably Compete With Retail Giants on Price

In my previous article on retail pricing excellence, I discussed how traditional retailers are facing threats from all corners. Domestic and foreign competitors, direct-to-consumer (D-to-C) brands, and entrants from nonretail sectors are fighting for market share. Against this competitive backdrop, shifting consumer preferences, high-end expectations, and new business models are adding to the pressure.

To address these threats, a knee-jerk reaction from retailers is to immediately develop digital capabilities. They see the winners grabbing headlines with new technologies and try to follow suit. However, it’s a myth that digital capabilities answer all of retail’s problems. While they're of course essential, price needs to come first. Otherwise retailers will never realize a return on their digital investments.

The hard truth is that retail giants have already won on price. They've established a compelling pricing mix with consumers who, in the back of their minds, constantly think, “How does that price compare to Walmart and Amazon.com?” There’s no use in making the binary tradeoff between price perception and margin.

However, it’s not all doom and gloom. Other retailers are succeeding by being surgical in their investments based on a clear definition of price image and pricing rules. They deeply understand the needs of consumers, and how to project simplicity, transparency and value to them. Here are five ways to build your price image and pricing rules around the customer to compete with the retail giants:

1. Be organized and systematic with your assortment. First, clean your data and identify SKUs with low volumes that can be deactivated. Then group products by similar product attributes (e.g., brand, size), price image, price sensitivity, and consumer behavior. Organizing your entire assortment by product groups is the first step in getting everyone thinking cross-category rather than in silos, and allows for line pricing and promotions for all SKUs within a group.
2. Use your assortment to your advantage. Defining product groups is only as good as an understanding of the role each group plays relative to your entire assortment. When D-to-C players focus on one specific product, use your breadth and depth to remain the consumer’s one-stop shop. Which products drive price image and enhance traffic? Which compensate for competitive prices? When a consumer or household recalls a price for a product, they're (not so subconsciously) applying that “perceived value” to your entire assortment. Accurately remembering the price point isn’t important; what matters is perception. If you plan to slash prices, determine how much the customer will actually remember and value.
3. Understand roles using a pricing power matrix. This all culminates in defining your pricing power matrix, a useful approach to viewing prices from the consumer’s perspective. Leverage your mountain of transactional data and insights into relative sensitivity and price awareness to classify your product groups into A-E roles, keeping chainwide objectives in mind. “A” and “B” products should be managed to an index to your most relevant competitor, whereas “C”, “D” and “E” products serve to balance those investments as margin builders. In other words, know which “A” and “B” products drive households to your store, and which ones you can use to drive basket size once they're in-store.
4. Align pricing goals and financial key performance indicators. Now that your products are organized into both groups and roles, you can think about how to balance price image with margin growth. For example, if with “A” items your pricing goal is to match to a primary competitor, then the financial KPIs could be the number of units sold and the increased traffic to the store. If your pricing goal for “D” items is to have a large premium over a competitor, the financial objective is to extract maximum margin.
5. Apply pricing rules to create a differentiated pricing strategy. To really give this approach some teeth, the next step is to determine role-specific rules such as price bounds and index caps for the product groups. Here's where consumer research insights are key to gaining an understanding of the perceived competitive set, primary competitors, and ideal price gaps. This will be essential for differentiating prices and defining the competitive indices that attract the most households. Combine this with rigorous financial modeling based on your current sales data and price elasticities to identify margin-optimal prices. Define price boundaries to prevent price wars, and finalize based on additional rules — e.g., seasonality and size.

Price Image and Rules: One Step Closer to the Consumer

Yes, new technologies, strategic moves, and the investments that succeed are dominating the headlines. However, what’s actually going on behind the scenes with the most successful retailers is that they're using their digital capabilities to brick wall their price image advantage. Investments will only pay off if they're directed at fulfilling customer needs and keeping offers relevant. This is the guiding principle of retail pricing excellence: always approach decisions, starting with price, through the eyes of the consumer.

Hubert Paul is a director at Simon-Kucher & Partners, a global strategy consulting firm.