A solid pricing strategy is a key lever to any successful (retail) business.
Currently, the retail pricing models are still set somewhere between
a) EDLP (Every Day Low Price) that Walmart introduced in the already distant 1990s
b) Hi-Lo -> Hi means regular prices while Lo is discounted sale price. If the regular price for end-consumer is 1.39 Eur (=HI) then your discounted price during the weeks of sale could be 0.99 (=LO).
Fueled by data processing power and huge market shifts, the above pricing models are on the verge of massive change. Some alternatives have been listed by Ray Gaul from Kantar Consulting in his Linkedin article about future pricing:
– Personalized Pricing -> one possibility is dynamic pricing known from airlines, the other membership loyalty incentives, subscriptions, etc.
– Opening Price Points -> marked by limited assortment, limited stock, and rapid rotation
– Price Match Policies -> a promise to offer the lowest market price
While such alternative pricing models are knocking on the retail doors, sellers shouldn’t be blinded: the key to success with customers remains perceived fairness. (The research paper below is a pretty solid proof of that.) And fairness links price with perceived value. Having that in mind: the innovative models described above could bring quick wins but also erode customer trust and therefore long-term business value.
The changed pricing model was also one of the core tenets of a new retail strategy tried at J.C. Penney. For understanding the scope of the failure you might check our blog article Retail Innovation: Thin Line between Failure and Success.
— CURRENTLY LEADING RETAIL PRICE MODEL
So what pricing models are currently setting the pace of the retail race?
For the answer, we shouldn’t look too far. Aldi (=Hofer) and Lidl are assertively pushing pricing models that are built on two main ingredients:
1. Own brands leverage low price perception
Having approximately 90% of its brands in its limited overall assortment, the ex-discounters can build on global supply-chain efficiencies, low-cost product development, negotiation power, other economies of scale, etc., and beat the prices of traditional retailers and branded suppliers as well.
2. Boosting quality perception
Supported by a combination of different tactics – local ingredients, quality checks, credibility – boosted by heavy advertising Hofer and Lidl are changing the perception of their brands. They are creating credible brands.
If in yesterday’s markets customers believed that higher prices mirror higher quality, Hofer and Lidl have succeeded to change that perception. The “trick” was to successfully put price and quality in the same equation.
An additional strength of that pricing model is that it is a key part of the low-cost blitzkrieg retailing business model itself. Hofer can openly deride the loyalty programs of traditional retailers. See their recent ads. No frills, no loyalty cards. Just value for money! Gaining traction with customers is also due to the increased customer mistrust about prices regularly being offed (permanent off-pricing).
While heavy Hi-Lo discounting is dangerously decreasing the profitability of the “traditional” retailers, and sometimes new pricing models seem to stem out of panic! ex-discounters don’t have such problems. Gaining market shares (in Slovenia close to 30%) organically increases their profitability.
So we can announce a current winner. The ones who set the pace of the retail race. The others have yet to find the alternative pricing solutions that work!
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For a little deep-dive into pricing models perhaps you could find these links useful:
Showing some examples of new pricing models
Price Differentiation and Dispersion in Retailing
The 20-page research paper from Dusseldorf University reinforces the meaning of “fairness” in pricing models
When Should You Consider “EDLP” Pricing Strategy For Your Product
The informative piece by Peter Shapiro defines the products most suitable for EDLP and states that EDLP is superior to Hi-Lo in terms of cost efficiency and ROI.
