Is it time for a new perspective on pricing?

Pricing is generally at its most effective when it’s close to the customer. But in recent years this thinking has played second fiddle to an approach based purely on the numbers, without considering the nuances of customer behaviour. See what can be done to bring the customer front and centre of pricing decisions.
Hugh Barker, Price and Promotions Director - Intelligent Shopper Solutions

We can start by mentioning one company that implemented a unique – and crucial – organisational difference. In the early 2000s, Tesco placed their pricing team within their marketing team. This meant the customer stayed central to their pricing tactics and they reaped the rewards. Cue improvements in price perception and measurable LFL growth due to customers switching to Tesco because of price.

So, what changes can you make to ensure customers stay centre-stage in pricing decisions?

Let’s look at some key factors affecting this.

 

The current landscape of pricing tactics

Working in the Grocery Retail sector for many years has given us the chance to work with companies and in markets around the world. Predictably, levels of pricing maturity and sophistication vary widely across both.

Initially surprising, but now a recurring theme, is the extent to which grocery retailers (often with well-established loyalty card schemes) fail to connect their pricing function to their customers. There are understandable reasons for this – and ways to get round them.

Organisational design

Pricing teams often sit within commercial/merchandising functions, disconnected from marketing colleagues – and as a result, disconnected from their data and research priorities. A pricing team without customer input + a marketing team without pricing input = misaligned customer propositions. Which can, of course, affect sales performance.

Structural change may not be the right answer, or even possible, but it’s worth thinking about how to establish stronger links and governance. Then, when it comes to decision-making, all parties clearly understand the potential repercussions.

Financial and competitive focus

We know how much the classic pricing team considerations matter. But too much focus can lead to blinkered vision. Pricing done right should blend financial science with both the science and the art of the customer – to offer insights that complement rather than contradict.

The art of the possible

At times, pricing teams simply haven’t been exposed to powerful ideas or concepts around incorporating the customer into their decisions. Some of the most rewarding conversations or projects can start with a simple ‘Have you thought about using your data to look at things this way….?’.

Think about how different customer segments have responded to recent pricing initiatives. Have you defined your KVI list based on customer data and knowledge of the factors that drive price perception? Expand your view point.

Customers and pricing need to be in sync – now more than ever.

Connecting customers to pricing decisions has always been powerful. This is the case in 2020, and increasingly will be for the foreseeable future considering the current market and increasing demands from the consumer.

 

Why it pays to put customers at the heart of pricing decisions

 

Customer behaviour is volatile

Take this simple pricing example. One of our clients found that their top (customer-data-derived) KVI list saw a 50% churn in the first weeks of the pandemic. Pricing teams need to be connected to the impact of changes like these. They may need to respond rapidly to avoid losing a competitive pricing edge.

Customer price sensitivity is paramount – particularly during COVID

Many markets have entered, or will soon enter, a period of economic downturn which could last for a while. In times like these, customers place even more importance on value for money. So it’s more vital than ever to offer the right price, for the right customers, on the right products.

Can you identify price-sensitive behaviours among your customers? Do you know which groups care most about price?

Financial modelling alone isn’t enough

Many pricing models are based on regression analysis of historical data. Right now, they’re probably creaking under the onslaught of interruptions to their historical inputs – such as range rationalisation, supply chain issues or customer stockpiling. And that data input may not stabilise for some time.

Which is why, at the moment, over-reliance on financial models may not yield the best pricing decisions.

What pricing professionals need to do right now is to go back to basics – and dust off the customer playbook.

 

Like to find out more?

If you’d like to find out how we can help with your pricing, contact us now.

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