The power of price

Written by Vernon Cheung

May 19, 2017

South African manufacturers and retailers face headwinds from every direction. In addition to rising fuel and electricity input costs and changing customer behaviour, an influx of international competition and escalating bad debt levels have placed further pressure on price and margin. Against this backdrop, experts suggest businesses may be ignoring their most powerful tool: price.

The keys to success

Understand the consumer

In response to economic pressure, consumers are changing their definition of value. “Tighter budgets are driving a shift in household priorities, with luxuries increasingly expendable. Purchases across all categories are being re-examined with an eye toward necessity and basic value, and rapidly increasing price sensitivity,” Ailsa Wingfield, Executive Director of Marketing and Communication for Africa and the Middle East at market research firm Nielsen, reports.

As customer values change, businesses need to maintain a deep understanding of consumer needs, of perceptions of value, of price elasticity, and of customers’ willingness to pay across various brand and product categories.This shift is driving multiple changes in consumer behaviour and the relationship between value and price. “During the economic slowdown, consumers have been surprised to find lower costing items could have good quality. This will make it difficult for leading brands to win back consumers,” notes Derek Engelbrecht, Africa Consumer Products Leader for Ernst & Young.

Through deeper research into customer needs, almost any product or service can be differentiated. Using data
on customer willingness to pay, price elasticities, and perceptions of value, along with knowledge of the product categories which drive customers to their stores, retailers can more precisely target deals and offerings to their consumers. This can be done through anything from merchandising layout, the timeliness of offerings based on a deeper knowledge of spending patterns.

Many larger retailers in the South African market have invested in systems to do just this through the loyalty shopper programmes.

Metrics to drive the planning process

A successful pricing strategy cannot be based on intuition or anecdotal information. Hard metrics are necessary for the planning process, and must drive the process from beginning to end.

Without analytics and information, inefficient promotion, with widespread and haphazard discounting is a common error, often undermining a company’s ability to realise the prices set. Companies find that its sales teams are frequently giving away significant margin through unnecessary discounts and promotions.

According to Nielsen, key metrics to observe include:
  • Current helf prices (regular and promoted) of all key items
  • Current and expected cost of goods for each brand/size
  • Most recent contribution to overall corporate sales and profits
  • Most recent annual trade spending by channel and region
  • Competitive prices in each channel and region
  • Create choices for spend

    Many companies adopt a more sophisticated approach to pricing by offering the customer a choice on how to spend. An example of this is flexible mobile telecommunication packages where the mix between voice calls, text messages, and data are left in the hands of the user.

    Apple has implemented a similar strategy for its iPhone 5, offering better options in the form of the 5c and 5s models. This enables a lower price point for price sensitive customers, without decreasing the margins gained from customers who are willing to pay. Airlines have similarly learned to unbundle their product, charging separately for luggage and meals to increase their overall takings.

    First National Bank has done this well by focusing on eBucks, cellphones, tablets, and computers which they are now retailing. This strategy has increased the migration of consumers to FNB in order to benefit from these value added benefits or products which has resulted in them far outperforming their opposition.

    Businesses that fail to identify what benefits they are offering each type of customer are likely undercharging some of them.

    Develop skill, enforce strategy

    An MIT Sloan School of Management review of top pricing companies in the United States suggests that these companies share the following traits: A culture dedicated to pricing, sophisticated tools to quantify customer willingness to pay and customer price elasticities, and robust pricing processes.

    “While competition, costs, and price sensitivity within a market affect the parameters within which companies set prices, superior pricing is almost always based on skill. The companies we found that had achieved better pricing all had top managers who championed the development of skills in price setting and realising optimal prices,” the review suggests.

    Increasingly, Engelbrecht reports, South African companies are putting in place functions and leadership roles with a specific focus on margin. A cross-functional team that looks at margin leakage from strategic pricing through to raw material costs.

    The rise of the internet

    With Internet access increasing rapidly across the South African consumer population consumers have become more price savvy, checking products, prices, and customer experiences online in real time, placing further pressure on prices.

    “Many companies deal with a better informed customer that move from store to store, literally picking off the promotional items, thereby undermining the retailer’s ability to manage profitability across a basket of goods,” notes Engelbrecht.

    For some retailers, the rise of the Internet has enabled another pricing strategy all together: Dynamic pricing. This is a form of segmented pricing based on customer profile or geography, and in some cases, using technology to make real-time pricing changes based on demand. Airline companies are perhaps the poster child for this strategy. Using a complicated algorithm that factors in the time before the flight and available seats on that flight, they offer unique prices that match current demand and supply.

    In 2000, Amazon made a less successful attempt when they tested selling DVDs at different prices based on which browser a consumer used. Consumers felt cheated though and Amazon eventually refunded the customers who had paid more.

    Today, US-based travel booking site Orbitz uses a similar strategy more successfully. Instead of offering the same product at different prices, they serve different products to different consumers, based on their operating system. The company noticed that Mac and PC consumer bases have different purchasing behaviours, so they adjusted their search result pages to better reflect these preferences. Companies refer to these techniques as personalised experiences, casting the practice in a positive light.

    Coca-Cola tested dynamic pricing in vending machines where prices would fluctuate based on the surrounding temperature. Their theory was that a soft drink would be worth more when on a hot day, while demand for soft drinks would decrease if it were cold. The idea did not resonate well with customers, however.

    Dynamic pricing is successful when customers have a difference in their willingness to pay (WTP) and businesses can find a way to segment consumers by this differing WTP, without violating perceptions of fairness. New technology is allowing the cost of implementation to not exceed the increased revenue from implementing the strategy, ensuring that greater experimentation in this area is likely in future.

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