CHICAGO -- In a society that's increasingly value-driven, traditional high-low price operators are costing themselves profits and failing to create a positive price impression.
The solution is not to abandon the high-low strategy, but to retool it behind research, planning and new ideas, according to speakers at the Food Marketing Institute Show here.
In a presentation called "Smart Pricing and Promotions: How High-Low Retailers Can Rebuild Their Declining Price Images," Josh Chernoff and Mir Aamir, vice presidents at the Chicago-based consulting firm A.T. Kearney, said unless high-low retailers are willing to challenge their existing strategies, they will increasingly lag competitors in price perception, lose money on their promotions and lose market share.
Consumers have become savvier in their pursuit of bargains and increasingly fragment their shopping trips among different retailers and "cherry-pick" sales, Chernoff said.
"Value-seeking behavior is not a new phenomenon," he said. "The difference is, there are a lot more options these days. Consumers have a lot more information and they are smarter about how to seek value across different channels."
Everyday-low-price retailers have capitalized on this consumer mind-set by offering products in large sizes, featuring low opening price points, promoting everyday values and encouraging a "treasure hunt" atmosphere, Chernoff said. At the same time, high-low retailers have lost primary shoppers while gaining the occasional shopper who hunts their ads for sales.
A.T. Kearney figures showed that the bottom 30% of shoppers -- those least loyal and least profitable -- purchase more heavily promoted items like carbonated soft drinks and front-page ad items than a store's most loyal 30% of shoppers.
Retailers typically attempt to address the lost market share with more aggressive promotions, but that often does not work, Chernoff contended, because it will depress margins, leading to higher prices in an attempt to make up those margins, which in turn hurts the store's price image. Chernoff called this a "vicious cycle of declining share and margin," and a "zero-sum game."
"You start with aggressive promotions, which attract cherry pickers, who are coming in for that carbonated beverage and are not necessarily filling their market basket productively," Chernoff said. In addition, he said, advertising often creates a negative price impression by reinforcing the idea that certain brands are higher priced unless on sale.
A further difficulty is that retailers "historically have had difficulty evaluating the economic effectiveness of their sales and promotion strategy, and don't know whether they've made money or lost money on the promotion."
Retailers can address these issues by revamping their pricing and promotion strategy behind consumer research, and better integration of pricing and category management functions, said Aamir. A successful pricing and promotion program begins when a retailer determines what drives the price image, then "fine-tunes" pricing and plans promotions based on consumer research.
Retailers can look beyond top-volume brands when seeking items to drive a price message, Aamir contended. He suggested retailers should also look at items that are purchased frequently, those that have strong brand loyalty, those with price elasticity and items that have high household penetration. Considering these factors in addition to sales will turn up additional items -- in an example Aamir cited, Campbell's Soup and Hot Pockets -- that might not turn up based on sales volume alone. Promoting such items can improve a retailer's price perception, he said.
Pricing those items correctly requires retailers to apply a "bandwidth" pricing strategy that attempts to cut the gap between the retailer and its lowest-price competitor. Margin pressure that strategy invites can be offset by reducing wasteful promotional spending, Aamir said, which is a key to an integrated program. "Price and promotion strategies combined together can start to close the pricing gap," he said.
Retailers may also find opportunities to increase their prices on items such as private brands, which traditionally are priced according to "gut-feeling" rules. "There is a feeling that private-label pricing should be really, really low, but that is not true," Aamir said. Considering issues such as the frequency of purchase, the propensity of consumers to switch brands and other factors could allow retailers to price private label more in line with the everyday prices of national brands.
Finding optimal pricing levels may require trial and error, Aamir cautioned, saying "pricing is a science only to a certain extent; after that, it's an art."
Promoting items effectively calls for more consumer research and a willingness to study a promotion's return on investment, Aamir said. Retailers generally plan promotions based on sales lift data, instinct and manufacturer recommendations.
