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Taking the Fear Out of Retail Pricing

A Holistic Approach for Retailers
December 11, 2012 by John Budd, Jeff Robinson, and Javier Anta
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In This Article
  • In challenging economic times, smart use of pricing techniques can be one of the fastest, most direct, and least expensive ways of spurring immediate performance improvements.

  • A BCG survey uncovered the pricing challenges and capabilities gaps that face senior retail executives at global companies.

  • To make better pricing decisions, companies must rely on more sophisticated approaches, overcome organizational barriers, and update pricing systems and tools.

 

In challenging economic times, smart use of pricing techniques can be one of the most direct and least expensive tactics that retailers can deploy to spur immediate performance improvements. Appropriate pricing boosts not only top-line sales revenues but also store traffic, brand perception, purchase frequency, and customer loyalty. And it delivers results much faster than most other revenue-enhancement changes.

It’s not easy to sync the many complex elements of a pricing strategy. But retailers that manage to do so often reap substantial rewards. We believe that companies undergoing a top-to-bottom realignment of strategies, tactics, and processes can turn pricing into growth opportunities and competitive advantage—as well as spur annual EBIT margin improvements of 2 to 5 percent of sales. Through our work with a wide range of companies, we have found that top performers with holistic pricing strategies often realize the greatest benefits, although potential profits are available to any company.

Poor retail pricing decisions, however, can chase away customers and drive a business into the ground. Sometimes companies discount or heavily promote their products to turn around falling foot traffic yet fail to produce the desired boost in basket size or margins. Other times, they make sweeping, highly public changes in their pricing strategies but neglect to fully test the concepts with consumers, causing the initiatives to flop.

Why do companies allow this to happen? The reason: Pricing decisions are too often made by gut instinct, based on incomplete or wrong information, or executed without proper planning and follow-through. To make better pricing decisions, companies must overcome three key challenges.

  • A Reliance on Unsophisticated Pricing Approaches. Some businesses respond too aggressively to competitive pricing moves, often hurting their own profits. Others directly pass along a cost increase to consumers to maintain their margins in key categories. Consider fluctuating commodity prices, for example. In the process, they ignore more sophisticated approaches that capture much greater profits.

  • Organizational Barriers. Success can be elusive when many people and functions are involved in pricing but no one person holds a systematic, integrated view of the strategy overall. Poor decisions also result when senior management does not pay enough attention to pricing.

  • Inadequate Systems and Tools. Often pricing is not regularly tracked, analyzed, and managed. Most retailers have plenty of data, but inadequacies in IT and analytics often thwart effective segmentation and dynamic pricing strategies.

We discerned many of these issues in a BCG survey of approximately 80 senior retail executives at global companies. The organizations were mostly headquartered in North America, but Asia, Europe, the Middle East, and Africa were also represented.

Fifty-three percent of respondents believed that pricing should be one of their top two priorities, but only about 38 percent felt that their company currently prioritized pricing that way. Most reported that their company’s pricing strategy generated significant short-term value, but fewer than a third of respondents felt that their pricing approach was a competitive advantage for the company. And though 91 percent of executives said that the complexity of pricing had increased over the past decade, 34 percent of retailers reported that they did not have dedicated pricing teams to help manage that complexity.

Basically, retail executives saw the crucial importance of pricing, but few of them said that their companies had figured out how to turn it into a means for consistently winning in the marketplace. Their skills, resources, and tools were falling far short of what they needed to achieve their potential.