All businesses want to believe that the quality of their products and services will keep them out of the rat race on price, but the reality is quite different.
Pricing does not occur in a vacuum, so instead of avoiding price competition, the best harm reduction plan is to safeguard margins.
There will always be another retailer willing to do away with profit temporarily to beat you. Don’t underestimate the sneaky tactics of your competitors. When you cut prices, know that your competitors will never be too far behind. How can retailers discount, while still keeping margins top of mind?
1. Find your pricing power
Getting the lay of the land is crucial in retail. On certain brands and categories, you have pricing power, meaning you can raise prices (and profit margins) and still remain competitive. On the other hand, commodity and in-common items will have to be priced more competitively. Learning which products fit into which category and acting accordingly is the only way to compete on price without throwing margins into the wind.
This process boils down to competitive intelligence. Knowing where you stand in the market should influence your strategy around the clock, and it is especially important when it comes to your pricing. Price elasticity varies widely based on product category and brand. A mix of competitive intelligence and internal historical data can provide the information needed to determine the best pricing strategy going forward.
2. Add value
Adding value is a significant way to compete on price within reason. Experiences are the new trend in retail. Athletic wear companies invite consumers in for yoga classes and home repair stores offer classes on DIY backyard projects. These are add-on services that cater to the interests of the people that shop at these specific stores and it gives them an additional reason to spend time there.
After getting to the store and reaping the benefits of the class, getting these consumers to buy something while they’re already there is much easier than targeting them with ads and getting them in-store or on your website to make a purchase. Experiences are the latest pull tactic to encourage purchases and loyalty.
There are many other ways to add value, such as free shipping, free gifts, and additional warranties. When a retailer adds value that is unique, their price doesn’t have to dip as low as their competitors’ in order to garner as much attention. Knowing that the bike you buy from the shop down the street will offer free tune-ups for life legitimizes a higher sticker price because of the additional lifetime value. Of course, the sticker price still needs to be competitive, because if a shopper balks at the price, it doesn’t matter how much additional value you try to tack on. They’re still going to move on to a competitor.
3. Compete on price within limits
After conducting a study on pricing, Paula Rosenblum, partner at RSR stated, “Consumers may be sensitive about price, but no retailer, not even the lowest-priced retailer, can win on price forever.” Trying to win on price all the time is a losing battle. Your margins will be nonexistent and your brand value will take a huge hit. Even if you see an increase in sales volume, the customers you’re gaining will become accustomed to low prices and jump ship once you start offering items at prices that allow you to actually make a profit.
Discounts are a natural part of retail and they always will be. Discounting within pre-set rules is the only way to protect precious margins. This might be a certain percentage off (especially if you have minimum advertised price agreements established with brands and manufacturers), or maybe it’s a specific dollar or cent amount above or below a competitor.
One of the biggest questions retailers have when considering a pricing engine or in-house pricing solution is: “If my competitors also use a pricing engine, will the race to the bottom be never ending?” That’s precisely why retailers who inevitably compete on price have to set rules or some sort of parameters in which they can reprice. Both a price floor and ceiling need to be in place before any kind of price testing can be successful.
4. Have unique assortment
Target isn’t exactly seen as a loss leader, and to compete in a hyper-competitive industry where price often comes first, it has perfected the draw of exclusive designer collections. These collections have had their share of hiccups, such as the website crash during the Lilly Pulitzer launch, but in all, they have been a massive success.
With these collections designed only for Target, they bring in new fashion-conscious shoppers to make the brand’s image a bit more luxurious and provide a line where Target could set its own profit margins. These items were still competitively priced, compared to items that these well-known designers usually have in their collections because Target still needs to cater to its somewhat price sensitive customers.
Target is getting this right because it is infusing scarcity into its offers, making it unnecessary to compete fiercely on price. Therefore, it doesn’t have to be priced quite as low to get shoppers to buy these limited time only items.
Discounting is a facet of retail that will never go away, but doing it in-line with competitive analysis and internal goals is the only way to save margins. There’s no need to ever drop prices far below competitors’. Knowing how competitors are priced in real-time keeps this from happening.
Retailers of all sizes can protect their margins if they make sure every discount agrees with their revenue and profit goals and ultimately contributes to an ever-improving brand image.