The Art + Science of Pricing: Four Tips To Consider

What’s in a price? Turns out a lot of things - some more tangible than others - which is why pricing should be approached as one part art, another part science. Item to item, customer’s perceptions of value change, and your brand positioning and messaging play no small role in this. Further layered into this notion of pricing is the increasing importance on convenience which, in some instances, allows you to charge a higher price. From a quantitative point-of-view, one item may have more margin buffer, while another may drive traffic to your store and can take slimmer margins because it provides other benefits.

So how do you know if you have a pricing strategy that is optimized for the market? Let’s discuss a few pointers to get you on the road to smarter pricing.

Take An Internal + An External View

While your pricing strategy must be informed by your selling costs - something you track internally - there’s far more data to be taken into consideration when selecting that optimal price point. You need to understand what your customers think about your prices. For example, do you know the products to which there’s a heightened price sensitivity - and why? And do customers find any of your price points surprising? Having a distribution of price points is fine - but it needs to be clear why one item demands a premium over another item. At the end of the day, this premium needs to be aligned with your customers’ value perceptions.

You also need to have a set of competitor benchmarks identified - an external set of data. Considering that consumers trade up and down all the time, your competitive benchmarks may cover a wide range of price differentials and those competitors may be different within each product category. We like to say there are both aspirational and actual competitive benchmarks. Say your pricing is 50% less than a competitor’s brand - you may want to consider that brand as more of an aspirational competitive benchmark than an actual one. Nevertheless, a consumer’s consideration set and how it shifts should be monitored on an ongoing basis.

Consider The Nuances of Competitive Benchmarking

Digging deeper into the idea of competitive benchmarking, there’s both the holistic and the category picture to consider. As your products live together both on the store floor and your online marketplace, the overall assortment mix should be your starting point. Does your having a category that a competitor does not - give you some wiggle room in your pricing? It may very well - particularly if convenience is a driving factor in a shopper’s purchase behavior.

Let’s start with a systematic approach to competitive benchmarking. First, identify your price bands in each category. In our analyses, we call these the entry (lowest) and exit (highest) prices. Are your prices tightly clustered around one amount, or have you employed a good, better, best strategy to your price distribution? Both can make sense - again depending on if this matches up to consumer needs and expectations. Below you can see an example of how we visualize price points by category.

Next, as you look externally at your competitor’s price points, what are the pricing differences? If your competitors prices are 30% higher, what specifically is enabling that higher price point? There could be design details in play that you haven’t considered - embellishments, material, and fit - that if you also employed - could help you nudge your price point upwards. (Yes, you can get that nitty-gritty with the data!)

It’s also worth a mention that you may take a different lens on pricing if you’re specialized in a particular category versus if you are a one-stop shop that caters to an entire universe of products and need states. If you’re a category specialist - a range of prices may make sense - versus if you are a department store that has limited shelf space for a given category. For a generalist, a tightly curated set of price points that fits within your overall price architecture is a good starting point.

Your Timing is Critical

Those who are first to market historically get to charge a higher price out of the gate. Why? Because the laws of economics state that when there’s a perceived sense of scarcity - prices go up. But in today’s market of “me too” movements, you don’t have a lot of time to capitalize on that opportunity. The longer you wait to bring products to market, the more margin pressure you will face.

Let’s take a look at an example of two competitors who released similar products in different time frames and how the discounting played out as a result. In this scenario, Retailer A released a rising trend 3 months before Retailer B, and over a one-year timeframe, Retailer B averaged more widespread discounting and had to take those discounts much earlier than the retailer who was first to market.

The lesson here? Map out the relationship between when you introduce products and the resulting pricing fluctuations. If there’s an opportunity to introduce products earlier - take advantage of that in order to maximize your full-price sell through.

Understand Core Vs. Trend Items Have Different Pricing Strategies

Speaking of trends, do you know which items in your assortment are trend-driven versus those that are core items? By definition - core items appear season over season - perhaps with small modifications made - but the base product remains similar. (And they are dependably bestsellers.) On the other hand, trends tend to have markedly rapid rise and decline in consumer interest. And as we spoke of above, the window to capitalize on trends tends to be shorter.

Depending on the nature of the core item, you have two choices. Let’s take a couple of examples. A t-shirt is something that is worn frequently and is oftentimes purchased in multiples. It’s also a commoditized product category - so it often faces price pressures. Remember how we talked about how some items are traffic drivers? For many a retailer, t-shirts could be considered this kind of traffic-driving category. It brings people in, but you’re not going to make a big margin on it. (But that’s okay! You have opportunity for add-on purchases.)

Another example of a core item could be a blazer. The nature of how consumers wear - and perceive its value - is quite different from a t-shirt. It is considered a more complicated garment - from its material to its fit - and the more formal nature of its “wear occasions” means it can be priced at more of a premium. Yet it’s still a core item that consumers will look to your collection to deliver, season after season.

The bottom line here? You are going to see more price fluctuations in trend items than you will in core collection items. And that is okay - with core (and the idea that it’s a repeat purchase) - you are required to navigate consumers expectations. If and when pricing changes need to take place, do so in a meaningful and clear way.

So there you go - you’re on the road to better and more thoughtful pricing strategies. Curious about how we can make your pricing more competitive? Learn more here.