Smart pricing: 5 steps to effectively improve profitability

It will be difficult to find any Singapore retailer nowadays that does not make influ encing consumers’ price perceptions a priority on its agenda.

Driven by technologi cal innovations and educated by retailers, it is now the consumer who controls the retailer. The last resort to obtaining customer loyalty for retailers seems to be a robust pric ing image, often realized only through promotions.

But when do prices reach their lim it? At 50% discount, or only at 70%? Price image, however, is something completely different than actual price levels: Smart Pricing enables retailers to price for profit without hurting prices!

Traditional pricing methods no longer valid
Methods based on margin guidelines, such as cost-plus, do not leave room for differen tiation in profit margin between prod ucts. Competitor bench marks turn out to be counter-productive as well, since they only lead to price de creases. When emphasis is put on setting prices as low as possible to realize a high volume, less attention is paid to profit. Opportunities to differentiate are ignored by limited use of thoughtful customer- or product segmentations.

As a result of these improvident tactics consumers no longer have an accurate view of the value of a product. They are approached with price instead of value persuasions, which only encourages price sensitivity and makes customers increas ingly unsure of the suitable price. The insecurity that follows influences the willingness to pay negatively. When con sumers are uncertain about offered prices they inevitably make even more compar isons thinking this will get them the best deal! This is how the vicious circle starts.

Way out: Five steps in Smart Pricing
Step 1 – Segment products according to strategic role
The strategic role of a product depends on (pre) defined category roles, for ex ample, a destination or convenience role. Based on target groups per product, retailers need to decide who will be the most important com petitor. One competitor for each target group is enough; the position of ‘cheap est’ is reserved for only one retailer in the market, all the other players will not win with this strategy.

Step 2 – Classify products in propor tion to price sensitivity
A classification can be obtained by looking at the rela tive buying frequency of products within the sub-category and the degree of com parability within the market. Variables, preferably quantitative, should fit the retailer’s specific situation since they need to appropriately forecast the price sensitiv ity of products. Based on their sensitivity the products will be divided into various price sensitivity classes.

Step 3 – Choose strategy based on pricing freedom
There are two ways then to decide on the opti mal price. The first focuses on competitor prices and the second uses the conceived value for the customer. Products with limited pricing freedom are priced on a preset interval from the competitor. Products with a high degree of freedom are priced based on consumer value (i.e. profit optimal).

Step 4 – Optimize final prices
Knowing psychological price thresholds for consumers is key in this stage, especially for rounding purposes. This knowledge is often underestimated but it is a powerful tool to distribute categories of groups of products in several consum er-relevant price intervals.

Step 5 – Test and evaluate select ed price levels
Often prices are determined once and never adjusted to changing market conditions. It is essential to periodically measure the impact of new prices on revenues and profits, especially prices of focus products. The best solution is to test these upfront, which is possible through differentiated pricing at individual stores. Fear to adjust prices of focus products often leads to an impasse, while a simple price test often yields valuable informa tion necessary for making the best pos sible decision. 

Dr. Jochen Krauss is the managing director of Simon-Kucher & Partners Singapore office. He specialises in developing market entry and pricing strategies and optimising pricing and promotions in the retail and financial services sector. Jochen can be reached at [email protected]

About Simon-Kucher & Partners
Simon-Kucher & Partners is a global consulting firm with over 600 professionals in 23 offices worldwide focusing on Smart Profit GrowthSM. Founded in 1985, the company has over 25 years of experience providing strategy and marketing consulting, and is regarded as the world’s leading pricing advisor. For more information, visit www.simon-kucher.com.