A new year, a fresh start. But as we usher out the old and bring in the new, it’s time to reevaluate your pricing strategy for 2019.
Before we delve into the must-tick checklist for the year ahead, we have to understand what the phrase “pricing strategy” means. Is it just changing the numbers on a price tag and adjusting your discounts? According to McKinsey, a pricing strategy is “purposeful pricing by channel and customer to maximize value perception and business results and to increase customer engagement and loyalty.” So what does the playbook for a purposeful pricing strategy look like in today’s competitive retail market?
#1: Do You Dare Raise Prices?
The US retail scene is heavily focused on discounting, and its customers are too, used to huge sales and never paying the original asking price. Savvy customers have acclimatized to a mentality of plentiful inventory that enables them to wait for a ‘lower price later.’ Meanwhile, retailers have gotten really adept at showing their cards too soon in the game by offering a string of high and nearly continual discounts. With this being the market and consumer reality, it’s not surprising that increasing prices seems to be a counter-intuitive, or even abhorred, notion. However, they can and do happen, whether it’s by way of increasing cost of materials, or say, new tariffs on imports.
The first step to tackling this pricing conundrum is not a foreign concept - identify your key value categories (KVCs) and key value items (KVIs) first. Key value categories are the best-selling categories for a retailer, for example, outerwear. As you would expect, key value categories contain a high proportion of key value items, which is otherwise known as your best-sellers. For example, Cult Gaia’s KVI would be their signature Ark bag, a silhouette that propelled their brand into mainstream fashion. This means that consumers are looking at your brand for these unique collections, and are more likely to remember the price points of your shop through the price tags on these key pieces. Changing the prices of these key pieces will have much more ramifications than non-key value items.
Raising prices confidently is both art and science - it requires accurate identification of emerging fashion trends as well as constant tracking of competitor movements and pricing. Seasonality matters too. A quick look at our database depicts an extended ‘wave’ graph for outerwear - lower average original price in summer, and higher average original price in winter, particularly for wool outerwear. With that kind of real-time competitive price monitoring, you can effectively tag the prices of your KVIs to that of your competitor set, and keep a continual tab on external pricing movements.
#2: Are You Timing It Correctly?
That said, do you always have to lower your prices when your competitors throws out a huge sale? That’s a difficult one, and one that depends on many different factors, such as seasonality and branding. We probably all agree that a poorly timed promotion is definitely more dire than no discount at all - one that could affect your goods’ perceived value and branding in the minds of consumers.
A quick look at our data shows that there is a visible upward trend in discount penetration in the month of June for the summer sales. Being late to the discount game during summer could mean your customers flocking to other brands instead - it’s better to always keep tabs on when your competitors starts discounting more than usual.
If it’s not the usual seasonal promotions, start by analyzing what your competitors are discounting on, and try to pin down the reason why. More often than not, they are salvaging profit margins and trying to push out inventory with an expiration date on it. However, it goes without saying that the rule of thumb here is to be sure that slashing prices will not undercut profitability and set up long-term customer expectations that you cannot profitably sustain.
#3: Are You Attuned To Your Local Market?
Next on the list: How attuned are you to your local market pricing? Selling in international markets is not simply a matter of converting currencies. It is crucial to know who are your competitors in the market, the market conditions, as well as how much they’re pricing their assortment compared to yours. Simply put, if your competitors in that market have a similar brand appeal and assortment to yours, but are priced more attractively, you lose.
Let’s take a look at our data and a typical competitor set: Adidas and Nike, in the US and China market. These 2 brands are dominating China’s sportswear market, and are fighting head-to-head for more market share and brand popularity. Both companies have done their due diligence and after all the currency conversions, have priced their shoes in China at about 125% of their US prices. Meanwhile, their current prices (i.e. discounts taken into account) show some slight differences, where Adidas is priced 15% more than Nike in China.
Of course, there’s a lot more to entering a different market than just pricing, but that’s a topic for a another day. Not satisfied? For even more tips on pricing, check out our article on the art and science of pricing here.