Cost Effective? Part 2 of 3
In the second installment of this three-part series on how catalogers’ pricing strategies are evolving in response to the Web’s effect on branded products, this week I’ll provide options on how to increase sales without cutting prices across all merchandise.
(For part 1, click here.)
Catalogers often mistakenly assume that cutting prices will increase sales enough to deliver additional profit. Sales can go up, but profits can go down. Even worse, sometimes cutting prices yields no increase in sales; then profits really decline.
To successfully achieve a 10 percent-plus sales increase based on cutting prices, you must first test the price sensitivity of the market to lower pricing before making a universal price cut for all branded commodity products.
Before cutting prices across the board, try some of these alternatives:
1. Selectively lower prices on a few branded commodity items, and highlight those items. Target items for which prices are well-known by consumers.
2. Use promotions rather than across-the-board price cutting. Promotions have strong advantages over universal price discounting, including the following factors:
* not all customers redeem promotions, greatly reducing the overall margin hit;
* promotions can increase response rates dramatically; conversely, overall price decreases often don’t increase response because customers are unaware of the lowered prices; and
* promotions typically don’t violate manufacturers’ price guidelines; therefore, you don’t risk losing manufacturers’ cooperative advertising funding.
3. Post lower prices on the Web. You can e-mail special promotions to select Web buyers without cutting prices across the board.
4. Drive Web traffic with e-mail. Offer limited-time e-mail price promotions.
5. Test some items with higher prices, and measure the falloff in unit sales. Maybe your merchandise niche isn’t as price-sensitive as you think.
6. Bundle select products with “Buy X, Get Y” offers to see if you can attract extra sales by sweetening the offer rather than lowering the price. For example, offer a sleeve of golf balls with every golf club purchase.
7. Highlight your catalog’s price guarantee. If you have a strong price guarantee, let customers know they’ll always be getting the lowest price. Monitor how often you have to rebate customers based on the price guarantee.
8. Monitor the prices of your branded commodity items against the price-comparison engines to make sure you’re offering the lowest price and receiving proper acknowledgment. Don’t be undercut on a $399.95 item by another merchant offering it at $399.00!
9. Work with your vendors to increase your margins by having manufacturers defray some of the catalog costs. Remind your vendors that catalogs drive traffic to retail and the Web, and that the manufacturers should financially support your advertising, especially if you’re a force for maintaining price discipline in the market.
Remove the Myth
Part of the myth of the Internet is that Web merchants can lower prices below market price and still grab enough market share and volume to build a profitable, sustainable business model. Catalogers and retailers have resisted this temptation because they’ve lived through enough business cycles to know that preserving your merchandise margins is absolutely essential for long-term profitability.
Examine all the pricing tactics available to you before cutting prices. Certainly, the price-comparison engines are turning brands into commodities. But you have lots of options before cutting prices below market price in hopes of driving profitable sales volume.
Next week, in the third and final part of this series, I’ll address the economic factors that can affect promotional pricing strategies.
Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. You can reach him at (505) 986-9902 or jcoogan@earthlink.net.
