When you’re setting out your pricing strategy, remember that price perception—how customers perceive your price level—plays a more important role than your actual prices.
If customers perceive your product to be good value—like high price-tags for high-end fashion or low costs for Walmart groceries—all’s well and good.
But in reality, it's no easy task to reconcile the ever-changing demands of retail with effective pricing strategies that align with customers' perceptions.
Since we’re not telepathic and can’t predict the future, any forecasting faux pas or mismatching of supply with demand leads to one thing: product discounting.
Few retailers know this better than supermarkets.
Supermarket profit margins are narrow anyway, and the potential waste of perishable food means precarious decision-making when it comes to markdowns.
Add to this the issue of convenience. More people than ever are shopping around for the best deals online. And the sheer transparency of rival pricing is seeing a reduction in brand loyalty.
Discounting is trickier than ever. Any retailer who wants to overcome this challenge should first ask three important questions:
When is it expedient to mark products down?
Are short-term promotions more effective than lowering prices long-term? And most important:
How can you introduce discounts without impacting price perception and damaging your brand’s perceived value?
When does it pay to introduce discounts?
Unless you offer a luxury brand, in which case part of the aspiration is the price tag, discounting can be a pragmatic approach for end-of-life-cycle products.
The (multi)million dollar question then becomes how much to discount—whether to go with the average discount or the maximum discount.
Once a quandary of retail management, this dilemma is becoming easier to handle thanks to the rise of big data.
#Machine-learning software can predict optimal #discounts and #markdowns targeted towards maximizing #profitability. This frees up an organization's people to put their minds to other, as yet unquantified questions like brand image and perceived value. Tweet This
These questions are the most important and require human expertise. After all, even if it’s discounted, your customers won’t choose your product unless it fits within their perceived value range.
Pricing reductions or promotions: which better safeguards price perception?
In making markdowns, you have a choice between short-term promotions and long-term price reductions.
If you’re going to introduce discounts, however, you want to make sure you increase your products’ perceived value in tandem, keeping it reasonable and competitive.
Strategic discounting is fine; discounting out of desperation is not.
Take Procter and Gamble’s recent gamble (slow clap) in the face of increased competition from the Dollar Shave Club. Realizing they were losing ground in their share of the market, they shaved 20 percent off the price of their signature Gillette razors.
Barclays called the move “an act of desperation”; Wall Street jolted; the 115-year-old veteran brand suddenly looked infantile in its vulnerability.
Gillette’s stubbled users eagerly awaited further reductions, wondering if 20 percent was indeed the best a man could get.
Did Gillette manage to discount without impacting price perception?
Absolutely not. Gillette’s price slash came across as wholesale panic. But it was up against stiff competition in the form of the Dollar Shave Club.
Thankfully for many retailers, the Dollar Shave Club’s free-shipping, friction-free model doesn’t work for all industries.
The model wouldn’t work in the grocery industry, for example, because for all its convenience, the fact most of us don’t have smart fridges means it doesn’t have the affordability to go with it.
And the weaknesses of this model are strengths of retailers that draw on big data.
How to discount without damaging price perception
Where Gillette fell flat was in implementing a comprehensive discount across the board. Owing to their industry, and the type of competition they were up against, they had little other choice.
But more localized retailers, like supermarket owners, have much more flexibility in targeting their discounts.
Evo’s markdown management solutions allow for just this: targeted, localized promotions.
What does this mean? Retailers don’t have to apply markdowns across the board, but can measure demand elasticity at a more local level and respond to it accordingly.
Machine-assisted managers have the insight to apply discounts only where it’s expedient. So if a SKU is selling poorly in one place but well in another, they can make sure it’s well stocked in the second and not marked down.
The overall effect of this is that price perception remains stable and brand equity unaffected.
Rather than implementing price reductions across the whole chain (which screams poor performance), targeted discounting means the retailer comes across as responsive to the customer’s needs.
Moreover, because the discounts are responsive rather than regular, retailers don’t train their customers to expect them. The overall effect: their perceived value doesn’t dip.
As long as the retailer’s perceived value remains fair and competitive, data-driven retailers can introduce discounts while ensuring sure their brand equity remains unaffected.
Meaning that, their perception intact, their business can continue to prosper.
About the author
Alexander Meddings is Evo's content expert on artificial intelligence, machine learning, and related topics.
He is an experienced journalist who covers branding, social media, marketing, and technology, with degrees from the University of Exeter and University of Oxford.