When we look at the classic four Ps of marketing – Price, Product, Promotion and Place – it’s easy to identify the last three within promotional and assortment planning processes. However, with many retailers, it can be harder to spot this kind of structured planning around Price. As a result, pricing is often seen as less central to the category management process, when in reality it carries much more weight than it’s given credit for.
Let’s explore the reasons why you shouldn’t overlook pricing when it comes to managing a category – and how you can embrace it, fully and holistically.
Harvard Business Review, 1992, Assessment of 2,400 companies
As pricing has evolved as a discipline, we’ve become increasingly aware of its potential impact on business – positive or negative. So, if category managers don’t take a structured approach to understanding and managing prices, they could be neglecting a key lever which plays a fundamental role in determining profitability.
There can be many reasons for a lack of focus on price. Even when managers do give pricing due consideration, their planning can easily be eroded by trading conditions. Why is this?...
Prices are much simpler to change than long-planned promotions or in-store assortments. This makes them by far the easiest lever a Category Manager can pull to adjust to trading performance, perhaps as a result of abnormal supply or demand, which can lead to unintended medium or long-term consequences. A reduction on a single SKU can have superficially short-term benefits, but at what cost to the pricing architecture or logic within the category, or the re-balancing of demand within the category?
But in the long run, these increases or price volatility erode customer trust in a retailer’s prices and have a consequent impact on price image.
Such changes can lead to poor pricing hierarchies or misaligned prices, which results in an illogical or confusing experience for the customer at the shelf-edge. Again, this can undermine consumer trust.
If so, that’s a good start. And even if they can’t be removed, you can offset them via regular and structured pricing assessment.
It’s incredibly valuable for category managers to have simple insights at their fingertips into the role pricing plays in trading performance. This encourages a less tactical or reactive mindset and, instead, a more holistic, structured approach.
Cost increases are passed through as price increases and a customer trading diagnostic shows an increase in price per unit (PPU) Simple enough – or is it?
How much of the PPU change is due to changes in promotional activity, range or volume mix? And how much is genuine inflation? Customers at the shelf edge often have a choice as to how they experience inflation.
Which customer segments have traded down?
Which ones have traded out of the category in response to price increases?
It can be problematic to accept a superficial explanation of the PPU change without a full understanding of the true drivers and consequences. Not just in the short term, but also in the following year when the trading performance is lapped.
Once a category manager understands the true impact of pricing on category trade, they can modify or even reverse decisions which harm overall performance and aim for a more beneficial, structured approach.
This is the key to robust pricing that truly meets the retailer’s financial goals AND the customer’s needs.
If you’d like to find out how we can help with your pricing, contact us now.