What is it that John Lewis and Poundland have in common? Both are very successful retailers with growing revenues and profits but they are very different in most other ways.
Poundland, for example, opened more new stores this year than John Lewis have in total while of course John Lewis has much bigger stores. Customers of the two retailers have different customer demographics, different average basket sizes and very different cultures. What they do have in common is business success and how well they both understand price relevance.
John Lewis and Poundland have different pricing strategies but what they do have in common is a strong understanding of price and it’s relevance to customers when they are making a purchase decision.
Some other retailers treat price as an absolute and rely on it too much. They believe that customers on the vast majority of occasions will make a rational decision and buy at the retailer who offers the product at the lowest cost. Particularly in grocery this has led to aggressive price cuts, an ever increasing percentage of products bought on offer and significant growth in “loyalty” programmes. The next step up to fight competitor’s actions is price matching and more complex offers. In spite of all these high cost actions and disruptions to retailers’ processes, customers still do not always buy all their products from the cheapest retailer. This is partially because with fast changing prices, promotions and loyalty benefits it’s hard for customers to work out who the lowest cost retailer is for the product that they want to buy. Ultimately they will distrust price and increasingly ask for discounts no matter what the price.
Price relevance at Poundland
Pricing at Poundland is very simple and I doubt that any customer ever asks for a discount. As everything is priced at a £1 the actual price is a constant. It’s therefore very easy for a customer to answer the question: Is this product worth £1 to me at this moment? Many of the shoppers in Poundland make buying decisions very quickly and often purchase other unplanned products while they are in the store because the price is so low. The pleasure of buying a treat outweighs the cost of buying a product that they did not intend to buy or perhaps don’t really need. Few Poundland shoppers examine the cost per unit of a product and compare it to prices for larger packs at other outlets. Why bother it’s only a £1.
A number of other retailers have tried to introduce one pound only sections into their stores but generally it’s had little impact on total sales. To work well in terms of price relevance this strategy needs the whole store to be at the same price point. A £1 only section could actually be a negative message in certain retailers stores.
Price relevance at John Lewis
John Lewis handle price relevance is a very different way. The core of their strategy is 88 years old. Spedan Lewis invented the term “Never Knowingly Undersold” to give customers confidence that their prices were highly competitive so there was little need to shop elsewhere. It’s been very successful. Spedan Lewis’s specific choice of words is very interesting because it does not include the word price. This gives John Lewis the opportunity to distance themselves from aggressive price wars and to also focus on the other two factors that form part of every sale, product quality and services.
Customers know that paying the lowest price for a product can be a false economy if the product needs replacing or if they can’t get help to install or repair it. So for John Lewis customers price is only part of the decision making process. They also want the confidence that comes from product quality and supporting services. This is particularly true when they buy products that they have never bought before. A good example is Apple iPads which are pretty much the same price at most retailers. John Lewis sold 8 iPads every minute last Christmas and their sales of smart TV’s rose by 20% too. Shoppers trust John Lewis for product quality, services and price.
Price relevance for products
If you are not a Poundland or a John Lewis how do you avoid price becoming an overwhelming factor in customers decision making which hits your sales and profitability hard. While price is an important factor many retailers have allowed it to become more important than it actually is. One example which shows how unimportant price can be is a product that every home has for free but that’s also on sale at every supermarket. Water. If customers only every went for the best price they would choose free and never buy water in a store. We buy water in stores because it’s marketed well and has a higher perceived value. We are even prepared to pay twice the price per ml, or more, for the same brand of water in a different shaped bottles on the same shelf.
The better that a product is marketed and presented the less relevant that it’s price becomes. This is particularly true for the quarter of all shoppers who fall into the category of “spontaneous shoppers” who often make unplanned purchases. The big opportunity for retailers is to get these spontaneous shoppers to make more non price driven buying decisions at the shelf edge.
Price relevance in stores
If you don’t have a price ticket on the shelf edge sales of that product will drop by up to 30%. So as well as meeting trading standards it’s also good business to ensure that all customers can easily see the prices of all your products at all times.
To attract those spontaneous shoppers to make an unplanned purchase at the shelf edge retailers could simply offer a very low price. The problem with that approach, particularly in grocery, is that the 25% of “habitual shoppers” who buy the same products every week will also be getting the price reduction resulting in lost margin. If the low price stayed in place for some time it would also set in their mind a new lower benchmark price.
An alternate to cutting prices or an across the board everyday low prices (EDLP) strategy is the increased use of smart promotions which do not solely depend on price, x for x offers or percentage discounts to increase sales.
A smart promotion markets a product where 76% of buying decisions are made – at the shelf edge. It’s purpose is to give shoppers a reason to buy the product now, at the shelf edge, without depending upon low pricing. One way to achieve this is for the smart promotion to highlight product features or user benefits. To be most effective different sets of benefits and features can be tested to see which give the best results. It may be that different messages work better in different stores. Another way of using smart promotions is to try different marketing messages and see what gives the best results. Again this may vary by store location because local marketing messaging for products in different stores is being seen as a key market differentiation.
Some customers need even more help to trust that they are making a smart buying decision. To help them star ratings from other customers and product reviews can also be part of a smart promotion and reinforce that they are making a good decision. There are many other ways to use smart promotions and I recommend reading how Amazon does their promotions.
Not all retailers can do all of these things in an integrated way right now but it’s becoming an increasingly high priority requirement. To fully capitalise on smart promotions a smart ticketing system like NetTickIT is needed to ensure full compliance and provide an easy way of producing and managing smart promotions in a joined up way.
Price will always be relevant for shoppers but some of the suggestions in this document to reposition it’s relevance will help to grow revenues and increase profitability. If you would like to find out more about the points raised in this document please get in touch.