“New Lower Prices”…..”Prices Locked In Until Next Thursday”, “We’re Dropping Prices Everywhere”, “Consistently Low Prices”
Does all of this look and sound familiar. You don’t have to shop very many stores before you see a new banner hanging over the aisle or a sign in the aisle, boasting about how suddenly, out of the blue, a retailer has found a magical way of lowering their prices. I maintain that so many traditional retailers are launching these new programs and promotions, that instead of invoking the excitement and trial intended, shoppers take a deep breath and keep moving down the aisle.
Too much of a good thing almost always dilutes the impact, and I think we are seeing just that. The consumer isn’t buying much of this anymore (literally or figuratively). All the banners and new signs that retailers spend millions on each year are wasted if the program that the signs communicate is not founded in a sold, sustainable, believable platform of reality. Instead most traditional supermarket retailers cut prices only in desperation, a last dreaded resort. Reactive price cuts almost always produce little or no sales bump, but do manage to negatively impact profit margins.
The culprits preventing successfully modifying a retailer’s pricing position are known to all of us, but primarily many retailers are just not designed to incur extended periods of lower margins rates. After a few months of viewing graphs and charts with arrows going in the wrong direction, the order is given to begin to raise prices, lots of prices on other items in hopes of recovering lost profit. As a consequence, the retailer’s poor price position is worsened, not improved.
Modifying a retailer’s position on price is a task that goes well beyond hanging signs and shelf tags, it must start with rethinking the entire operation. First the question should be asked. “Is price really our problem”? If you find you are perceptually 10-15% higher priced than the price leader in the market, the answer is likely, YES. If not, perhaps other issues need priority attention before embarking on a new pricing program. I recommend having a Price Monitor customer survey in place to track those important metrics.
The next question ought to be, “Can we profitably operate on one or two percent lower gross margin”? That’s right. Real price cuts means selling for less, not moving the problem from one department or category to another and hope that the shopper doesn’t notice. This means that EBITDA expectations should be adjusted down and for more than just a few months. Price cuts should be viewed just as much as an investment as a remodeled store is. They should be given time to payback.
Which leads to the final question, “What are the expected outcomes of the price cut investment”? I recommend having clear objectives mapped out for both short and longer term. Recovering lost market share, customer counts, increased basket size, improved dollars per square foot are all viable success metrics.
Changing long-standing customer perceptions takes time, financial investment, and consistency. If there isn’t an appetite for all three, save the expense on all the signs, banners, and shelf tags…..they won’t matter.