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Who Does A Good Job of Pricing?

Strategy

Some days, despite your best intentions, you fumble the ball.  Such was the case at the Retail Customer Experience Executive Summit when I was asked “Who [among retailers] does a good job of pricing?”  My response was “most companies.”  What I should have said was ‘most companies initially.’

Most companies have a pretty good sense where they fit on the spectrum versus competitors.  Using the image spectrum:

  • Walmart is the low-price provider.
  • Target is viewed as more hip and can command higher prices to reflect that image.
  • JCPenney used to be (who knows where they’re headed today) known for dependable, but not readily recognizable brands and their pricing was 3 to 5 times the Walmart alternative.
  • Macy’s carried very recognizable brands that had strong image appeal and was able to get prices 6 to 8 times the Walmart alternative.
  • Nordstrom is the most upscale of these five companies and commands premiums of 12 to 14 times what a Walmart alternative would be.

Using image as the focal point for each of these companies, their initial price positioning makes a lot of sense.  Unfortunately it’s all down hill from there.

The first mistake they make is to price ‘competitively’.  That typically means at, or below, industry pricing for their segment of the spectrum.  They choose to price this way despite the fact that they claim to offer ‘more’ or ‘better’ of whatever they deem their value to be.

The second mistake that most retailers, indeed companies in every industry, make stems from the extremely poor job they do communicating value.  You don’t have to trust me on this.  All that you have to do is look at the ads the companies cited above then answer this question “Does the ad emphasize their position on the image scale?”

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Of course not, with the possible exception of Nordstrom, most of their ads are about their latest sale.  If their marketing messages did a better job of helping their customers experience their stores without being there, they’d be able to command higher prices than is typical for the area of the spectrum they occupy.

The third mistake is the sales these retailers regularly run.  Fluctuating prices confuse consumers about the real image value of their offerings.  These sales take many forms including discounts, rewards programs, coupons and loyalty programs to name a few.

These sales muddy the water for customers.  The concept of value, whether that value is image, innovation or time savings, gets lost in the myriad of sales that companies offer.  In the process we train our customers to wait until we offer a discount to buy.

That means that the customer is postponing the satisfaction of owning your products/services.  For you it means lower profit margins and additional marketing costs to acquire enough new customers to not only replace those lost profits, but to grow them.

Now back to the original question “Who [among retailers] does a good job of pricing?”  Companies that I think do a good job of pricing are:

Panera

They repeatedly raised their prices throughout the recession and experienced sales growth in excess of the price increase.

The only criticism I have of Panera’s pricing is their rewards program.  Reward programs are effectively discounts.  Rewards programs do not increase my desire for their offerings.  I’m not going to visit any more frequently or buy larger quantities because of the reward.  That means that they’re offering me a discount to buy what I’d have bought at a higher price.  Rewards programs increase retailers costs in two ways – establishing and maintaining the reward program and providing a discount to customers who are willing to pay higher prices.  Ouch!

Apple

The key word with Apple is consistency.  They consistently charge premium prices on all new offerings and tend to hold those premiums throughout the product life cycle.

The one faux pas I recall was reducing the price of the original iPhone by $100 within 60 days of its release.  The hue and cry of the early adopters resulted in a refund of roughly $100 million to those early customers.  That’s what happens when you move away from your value proposition in an attempt to garner market share which is what I believe the motivation was for the price reduction.

Apple may be on the verge of making another pricing mistake.  Rumor has it that they’re coming out with a new tablet to compete with Google’s Nexus 7.  If they do, it’ll be interesting to see how they launch that offering.  If they offer a better product and price it accordingly, the market will continue to view them as an industry leader who is entitled to premium prices.

If, however, they price the new tablet to compete with the Nexus 7, they’ll appear to have relinquished their industry lead and become an also ran in the eyes of the consumer.

Kraft Foods

I don’t recall Kraft having raised prices during the recession, but as soon as it appeared that the recovery was under way they immediately began raising prices and continue to do so with some frequency.  Like Panera, they’ve experienced sales growth in excess of their price increases.  Indeed, their sales growth was 50% higher than their price increase in the 3rd quarter of 2011.

The keys to these companies’ success in pricing are:

  • Consistency in their customers’ experience.
  • Charging prices that reflect that consistency and support their value claims.
  • Raising prices in good times and bad, further reinforcing the perception of value in their customers’ minds.
  • Continuously finding new ways to serve their customers in ways those customers want to be served.
  • Initiating change in their markets instead of mimicking others changes.

The pricing mistakes that companies like these are most likely to make are:

  • Focusing on market share growth instead of customers’ needs/interests.
  • Discounting in any form (sales, rewards programs, loyalty programs) confuses the customer.  It’s hard to tell what something is really worth when the price fluctuates for no apparent reason.  Can anyone tell me what a gallon of gasoline is worth?
  • Failing to raise prices in good times and bad.
  • Losing sight of who its ideal customer is.  Think JCPenney.

Basically, any company that:

  • Charges a premium to the market.
  • Continues to raise prices regardless of what the economy is doing.
  • Stays focused on its ideal customer.
  • Avoids the temptation to discount, reward their customers or create loyalty in ways other than a superior experiences.

is doing a good job of pricing.

For those at the summit, my apologies for the fumble.  Hopefully I’ve recovered the ball with this post.

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