Seven-Point Checklist For A Successful Price And Promotions Strategy
The steps outlined in this story will improve a retail brand’s price perception, drive sales with valuable customers, and enable it to compete effectively and hit financial targets.
When a shopper places bananas from the produce display into a shopping cart, a price and promotions executive is more apt to notice the units sold than the flesh-and-blood human being who selects the fruit.
That’s a serious problem because counting units fails to place customers in their central retail role. And so too does matching the price discounts of a competitor. Why? Because customers are savvier than ever. They arrive at the shopping aisle armed with smartphone apps that enable them to compare offerings—in every channel. They can easily find the best prices and promotions on everyday goods. And every trip informs their perceptions about a retailer’s value. If they don’t like what they see, they have a growing list of options. They can travel to a nearby alternative or order goods online, never to return.
Fierce competition for shoppers makes price discounts common. Chains such as Dollar General and PriceRite in the U.S. and Lidl and Aldi in Europe are aggressive price slicers. New entrants like Amazon Fresh and its delivery service add to this price-deflating mix. But for most, joining this me-too race is a broken strategy that diverts executives’ focus to rivals instead of customers. In a typical supermarket, as many as half of the items sold are the subject of a promotional campaign, most of which lose money. A Nielsen study last year found that 67% of trade promotions do not break even.
And it’s not just me-too promotions that lead to losses. Poorly-designed promotions can compound the problem by encouraging consumers to switch brands (buying one cola instead of another, for example) while the new choice returns less profit to the retailer. Such moves run the risk of disconnecting a retail brand from what makes it dependably valuable over time—strengths such as convenience, quality, selection, and service—and instead leads customers to believe the brand is about cheaper soft drinks that week.
Twenty-first century retailing calls for an approach to price and promotions that places the customer at its center. It requires developing a deep understanding of customers’ behaviors by analyzing their shopping tendencies, what goods matter most to them, and creating personalized offers on goods and services. With these insights in hand, price and promotions leaders can execute programs more relevant to customers’ wants and needs. They can collaborate with category managers and marketers to create a superior shopping experience that meets customers’ expectations, drives long-term loyalty, and leads to increased sales while avoiding a costly, profit-eroding discounts contest.
Making customer data central to the pricing process helps retailers to understand what goods consumers value at which prices. More specifically, retailers can:
- Know which customers are the most valuable based on their purchases—and who, therefore, should benefit from price and promotions investments.
- Understand which customers care the most about which items.
- Create personalized offers for shoppers to enhance loyalty and increase shopping visits and basket sizes.
- Prioritize competitive offers for price-sensitive customers on specific items, rather than defending market positions on all items.
Adopting the practice of “customer science” (analyzing shoppers’ purchase data) to drive business decisions in retail is not a new concept and is commonly used to optimize product ranges and shelf space. However, most managers do not use scientific principles when setting price and promotions strategies.
Working with companies including Raley’s in the U.S., Tesco in the UK and Korea, and Canada’s Metro to execute and embed the customer science approach, we have developed a checklist for planning effective prices and promotions. The steps below will improve a retail brand’s price perception, drive sales with valuable customers, and enable it to compete effectively and hit financial targets.
1. Remove ineffective promotions to conserve margin: Understanding at a fine-grain level how customers react to pricing changes and promotions allows a retailer to make better calls. Data can include: the location of an item for sale in a store floor plan, how it was advertised, and its position in a promotional flier. In a business with low margins, understanding what drives consumers to switch choices from one brand to another is a game-changer.
Retailers often fail to do this because of the math required—but it is a source of insight that can save millions. For example, a soft-drink promotion may work with some customer segments, but not others. Analyzing customer data determines which shoppers found the offer appealing. Advanced analytical tools can highlight whether these customers also filled their shopping baskets with other goods or if they were only interested in the soft drink. Retailers also need to understand category cross-effects and other unintended consequences of their promotions to identify whether they are really making the desired impact or just cannibalizing from other sales.
2. Reinvest in base prices on essential products: Use data analysis to identify which products or key value items are most important to your best customers. Invest in promoting these price-sensitive items to enhance loyalty from these customers to drive sales volume. Avoid promotions that cover an entire product category because such a scattershot approach is bound to waste precious resources while not yielding data relating to customers’ real preferences.
For example, premium orange juice will have a different value based on the customer segment. Some shoppers will prefer the lower-cost store brand. Using data to know which is which can lead to more effective everyday pricing strategies. In addition, it’s important for retailers to analyze the results of pricing and promotions on these items to test assumptions about which products are most important to their customers.
3. Invest in targeted, personalized loyalty rewards (or rolling campaigns) for valuable customers: In this omnichannel world, customers expect retailers to offer personalized promotions. Individualized offers demonstrate the retailer understands what is important to those customers by giving a special deal on goods and services the customer likes.
Understanding what your customers bought, are buying, and are likely to buy enables you to offer them the right prices, right promotions, and right discounts at the right time, over the right channel.
- If they shop online, send them e-coupons; if they shop in store, then load their coupons to their loyalty card. Whatever you do, make sure the coupons and offers are relevant.
- Provide relevant and personalized suggestions for complementary or substitute products; if they buy low-salt butter, why not suggest to them low-salt pasta sauces as an alternative to the regular sauce? If they add strawberries, why not suggest cream if they have bought that combination before?
- Make sure the customer’s core and usual shopping basket is priced competitively.
Retailers that do not make personalized offers now may need to invest capital to gain this capability—or they risk giving customers a reason to abandon them.
4. Compete on price, but do not overinvest: Competitive pricing data has become widely available, but it’s important to react intelligently to competitors’ moves rather than responding to every action. With data showing which customers care about which products, retailers can target competitive price discounts on goods that price-sensitive shoppers care most about and avoid leaving money on the table.
For example, a retailer should respond to a competitor’s price cut on bananas if this product is important to price-sensitive customers. But if ice cream is not important to them, don’t discount prices just because a rival retailer did. The important measure is overall customer price perception.
5. Target assortment competitiveness to demonstrate brand quality: Selecting the right product range is a big part of customers’ price perceptions. Including top-quality products in the array of offerings allows the retailer to appeal to a range of consumer segments, including price-sensitive and high-value customers.
This is especially important in supermarket fresh goods categories like fruit, vegetables, meat, and fish. Display a competitive range of offerings, including up-market products at premium prices. The mix of products a retailer offers drives customers’ perception of price.
6. Manage the full product portfolio to retain pricing integrity: A price and promotions strategy must make sense to customers to retain their trust. Communicating consistency and coherence is vital. If a retailer varies too much in its approach, customers will spot unusual item prices on the shelf. Not only will shoppers pick the item with the lowest price (which means a lower margin for the retailer), but they will begin to question the retailer’s integrity in the prices they charge.
For example, price and quantity need to remain proportional and appear logical to the customer within a product line. The two-liter container of a soft drink shouldn’t cost more per milliliter than the smaller size container. Prices also need to make sense across different brands in a category. Retailers that want to sell more private-label yogurt should leverage automated size and parity rules to ensure that the price is lower than the national brands. All of this is difficult to do with tools like Excel. A science-based optimization solution can help ensure price consistency.
7. Communicate price and promotions in the context of a retailer’s overall strategy: Prices and promotions represent one element of a retailer’s merchandising and marketing strategy. A retailer’s price and promotions investments should balance factors that drive its brand perception with factors that drive gross margin and other financial measures. They should also align with other priorities that lead to long-term loyalty.
For example, supermarkets must consider the freshness of items offered, the quality of selection, loyalty rewards, convenience, store location, store configuration, hours of operation, multichannel services, and mobile applications. Retailers need to ensure that their price and promotion messages make sense in the context of all these elements.
The Human Factor
All of these steps involve analyzing data. But the effort is really about understanding the behavior of people so that retailers can serve their needs better. The mathematics help retailers to respond more effectively to individual customer behaviors (many times over).
Effective application of the steps listed here will help retailers grow their customer base, increase what customers spend on their shopping trips, improve the perception consumers have about pricing policies, enhance customer loyalty, and grow the brand. We all know that customer science enables a retailer to analyze shopping data to cultivate relationships with individual consumers based on their preferences.
But taking this approach one step further into the price and promotions decision-making process gives retailers an alternative to joining “the race to the bottom” and could revolutionize how retailers respond to the rise of the discounters and the growing array of competitors they face today.