Article 48- Pricing as a Marketing Strategy

How your price position communicates more than your ads ever will.

Retailers tend to think of pricing and marketing as two separate functions.

The buyer determines what something should sell for. The marketing department figures out how to advertise it.

But customers don't separate the two.

Price is marketing.

In fact, the price on a product may communicate more about your store than the advertisement that brought the customer through the door.

Price tells customers what kind of retailer you are. It influences their perception of quality, value and service. It determines which competitors they compare you with and, eventually, what kind of customer you attract.

You can spend thousands of dollars telling customers that your store offers exceptional service, carefully selected merchandise and expert advice.

Then you can undermine the entire message with a giant 20% OFF EVERYTHING sign in the front window.

The customer notices both messages.

Which one do you think she believes?

Price Creates Expectations

Imagine two stores selling shoes.

One promotes itself primarily around low prices:

“Lowest prices in town.”

“20% off this weekend.”

“Clearance up to 70% off.”

The other emphasizes fitting expertise, selection, service and carefully chosen products.

Before customers enter either store, they already have different expectations.

The first customer expects a deal.

The second expects expertise.

That distinction matters because customers don't judge every retailer using the same criteria.

If you position yourself as a discount retailer, customers will judge you heavily on price.

If you position yourself as a specialty retailer, customers may accept a higher price because they expect additional value.

The problem occurs when a retailer wants the margins of a specialty store while marketing like a discounter.

Customers aren't likely to cooperate with that strategy.

Your Regular Price Has to Be Credible

One of the most important assets a retailer possesses is the credibility of its regular price.

If a shoe is priced at $160 and customers routinely buy it for $160, that price means something.

But suppose the retailer constantly offers 20% discounts.

The shoe may have a $160 price tag, but customers eventually learn that its real price is closer to $128.

The regular price becomes theater.

This creates a dangerous cycle.

Customers wait for promotions.

The retailer experiences weak sales between promotions.

Weak sales encourage another promotion.

The next promotion reinforces the customer's decision to wait.

Soon the retailer concludes:

“Our customers won't buy unless we give them a discount.”

Maybe.

Or perhaps the retailer trained them not to.

Price Can Signal Quality

Consumers frequently use price as a shortcut for judging quality.

That doesn't mean higher prices automatically make products better.

But price affects perception.

Imagine seeing an unfamiliar pair of walking shoes priced at $39.95.

Now imagine the same shoes priced at $149.95.

Without knowing anything else about them, you probably form different assumptions about materials, construction, performance and durability.

That psychological relationship creates both opportunity and danger for specialty retailers.

If your store sells high-quality products with knowledgeable service, professional fitting and a carefully curated assortment, your pricing should reinforce that position.

Constant discounting can unintentionally tell customers:

Maybe this merchandise wasn't worth the original price.

A retailer can spend years building a premium reputation and then slowly discount the premium out of it.

Being the Cheapest Isn't Free

Retailers sometimes treat lower prices as though they are simply another marketing tactic.

They aren't.

Every price reduction has a cost.

Suppose a shoe retails for $150 and costs the retailer $75.

At full price, the gross margin is $75.

Reduce the selling price by 20%, and the customer pays $120.

The gross margin falls to $45.

That's not a 20% reduction in gross-margin dollars.

It's a 40% reduction.

To generate the same $75 of gross margin, the retailer now has to sell considerably more merchandise.

That doesn't mean markdowns and promotions are bad. A lower price that creates enough incremental unit sales may be very profitable.

But the additional volume has to exist.

“Customers love 20% off” isn't financial analysis.

Of course they love it.

I'd also enjoy my electric company giving me 20% off. That doesn't necessarily make it a good strategy for the electric company.

Price Position Determines Your Competition

Your pricing also helps determine whom customers consider your competitors.

If you constantly advertise price, customers naturally compare your prices with Amazon, large online retailers, department stores, outlet stores and anybody else selling the same product.

That can be a difficult game for an independent retailer to win.

Large competitors may have lower operating costs, greater purchasing power, vendor-funded promotions or strategic reasons for accepting lower margins.

But the independent retailer has advantages too.

Knowledge.

Service.

Convenience.

Fit expertise.

Community reputation.

Product curation.

Relationships.

The objective should be to make those things part of the value equation.

If the only question the customer asks is:

“Who has this shoe for the lowest price?”

much of the independent retailer's competitive advantage has already disappeared.

Consistency Matters

Pricing sends a message not only through the amount charged but through consistency.

Suppose customers see one price in the store, another on your website and a third in an email promotion.

Confusion begins to replace confidence.

Or perhaps a customer buys a shoe Saturday and receives an email Monday offering the same shoe at 20% off.

She may not think:

“What a wonderful promotion.”

She may think:

“I paid too much.”

That feeling matters.

Good pricing strategy considers not only today's transaction but the customer's long-term perception of fairness.

Customers don't necessarily expect the lowest price.

They do expect a price they can trust.

Value Is Bigger Than Price

Independent retailers sometimes become frightened when competitors sell merchandise for less.

But customers don't purchase price.

They purchase value.

Value might include having the correct size in stock.

It might include an employee who understands plantar fasciitis, bunions or orthotics.

It might include trying on several shoes instead of ordering three boxes and returning two.

It might include knowing that if something goes wrong, there is a human being standing behind the purchase.

It might simply mean walking into a local store, finding the right shoe and leaving with it 30 minutes later.

Those benefits have economic value even though they don't appear on the price tag.

The retailer's job is to make sure customers understand them.

Sometimes Higher Prices Are the Better Marketing Decision

Retailers spend considerable time worrying about whether their prices are too high.

They should occasionally ask whether some prices are too low.

A price that is unnecessarily low sacrifices margin without necessarily increasing demand.

Worse, it can position merchandise incorrectly.

If customers are willing to pay $150 for a product and you sell it for $140 because you want to be “competitive,” you haven't necessarily created value.

You may simply have donated $10.

Multiply that by thousands of pairs and generosity becomes expensive.

The correct price isn't the lowest price.

It is the price that best balances customer value, competitive position, unit velocity and gross-margin dollars.

Decide What You Want Your Price to Say

Every retailer has a price position whether management consciously created one or not.

Customers figure it out.

Are you the bargain store?

The premium store?

The fair-price store?

The store where everything eventually goes on sale?

The store where customers confidently buy at regular price?

The store where service justifies a premium?

Your advertising can tell customers almost anything.

Your pricing provides evidence.

That's why pricing shouldn't be treated merely as an arithmetic exercise involving cost, markup and margin.

It is part of your brand.

It influences customer behavior.

It establishes expectations.

It communicates value.

And it determines how much money remains after the sale is completed.

Before asking what your next advertisement should say, take a careful look at your prices.

They may already be delivering the most powerful marketing message your customer receives.

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About the Author

  Alan Miklofsky is a semi-retired shoe industry consultant and the former owner of Alan's Shoes in Tucson, Arizona. During nearly 40 years as an independent footwear retailer, he served 29 years on the National Shoe Retailers Association Board of Directors, including as Chairman from 2009 to 2011. Miklofsky now advises independent retailers and footwear companies on merchandising, inventory management, marketing, operations and profitability. He writes and speaks regularly about the challenges and opportunities facing independent retail.