The Art and Science of Finding Consumers’ Right Price

By David Merrefield
VP, Editorial Director

Right pricing: Is it science or art?

That, in a nutshell, is the conundrum considered in the front-page news feature in this week’s SN. The headline on the presentation’s inside pages refers to the “New Science of Pricing,” which suggests an answer. Naturally, there is a scientific dimension to pricing. Certain metrics must be applied to ensure that a retailing enterprise isn’t thrown into a loss position. These metrics involve consideration of the cost of goods, operations, occupancy, capital and like factors. Price can then be determined by adding all costs to the margin level that’s expected or tolerated.

Yet, a question remains: Is the resulting price the one that substantial numbers of consumers are willing to pay, given competitive alternatives that are in front of them? Maybe not. It has long been surmised that there’s a sort of breaking point beyond which many consumers won’t go. Specifically, it’s thought that consumers are willing to pay a little more than they would at another store if the product they want or need comes readily to hand in a convenient context. That form of convenience arises during a shopping trip as consumers decide to select a few products that appear to be overpriced to them just to avoid the expenditure of time and energy involved in going to another store for those items. Typically, these are Center Store and health and beauty care products, although any high-velocity item is a likely suspect.

However, if a certain breaking point is reached, consumers may leave the store to buy a few items elsewhere, and they may not return in the future. That breaking point is about an 8% price spread. At that level, also referred to as “insult pricing,” shoppers decide that the prices a store is asking go beyond what they are willing to endure. More important, they will also decide that if the prices on the few items with which they are familiar are so far out of line with what a competitor offers, maybe everything in the store is grossly overpriced.

Dynamics such as these sometimes lead conventional food retailers to consider how to burnish their price image. That is a particularly vexing challenge for those who are in direct competition with a low-price provider, since there is no way a conventional store can lower all prices sufficiently to match the discounter. This has often led to food retailers adopting limited or targeted versions of everyday low pricing, usually by lowering prices on price-sensitive items and leaving prices on all else high, or even increasing them. There are many software programs that can be used to analyze prices.

Now let’s take a look at the art of pricing, some of which is mentioned in this week’s news feature. One method is to customize prices to fit the needs of individual shoppers. This can be done by an analysis of frequent-shopper data to offer individual customers coupons that reward their usual shopping choices. Other prices are left intact.

It’s also important to price with a store’s primary offer in mind. Prices need not be at rock bottom if the store offers intangibles that shoppers will reward, such as service, cleanliness, choice and the like. The good news is that there’s still a little room left for merchants who know strategic pricing.