In the current economy, everyone is talking about retail price. Many sales people subscribe to the philosophy that if low price sells a lot of goods, then a lower price will sell more. However, that is not always the case. We need some caution and a little scientific evidence before driving retail prices to all time lows. Product pricing cannot be developed in a vacuum and there are many variables to consider. Today, we will discuss price gap strategy. Look for upcoming articles on EDLP strategy and on price elasticity.
Price Gap Strategy – What is your product’s price gap relative to Private Label and/or other sub-segments (such as the value versus premium segment) of your category? A viable pricing strategy must consider price gapping between segments as well as between Private Label and competing brands. If the price gap dynamics are not understood, both the retailer and the manufacturer risk lost sales revenue.
For example in the dairy category, there is very little perceived quality difference between branded and Private Label milk by the average consumer. In some cases, the store brand quality and taste might even be as trusted as the leading brand. In lieu of a perceived product differentiation by consumers, branded products are forced to maintain a narrower price gap relative to Private Label products.
In the Orange Juice category, the product dynamics are different than the milk category.
- Private Label sells nearly 51% of the Reconstituted Orange Juice (Recon-OJ) segment’s gallon sales.
- Private Label sells 8% of Not From Concentrate Orange Juice (NFC-OJ) segment’s sales.
- Both products are located next to each other in the refrigerated case.
- NFC-OJ is perceived as a premium product appealing to high income, older, more educated urban and suburban consumers.
Recon-OJ (and frozen) Orange Juice appeals to blue collar, lower income, and rural consumers.
Consider the level of interaction between these Orange Juice segments and how their interaction impacts the price to value relationship perception for the consumer.
Let’s look at a consumer decision hierarchy. When a consumer walks into a store; what triggers the purchase decision?
- The first decision trigger is quality: Do I want to buy a quality product? Yes, of course!
- The second decision trigger is brand: Is my brand available?
- The third decision trigger is price: Is my brand on sale? What is my brand’s price relative to other products in the same category and to Private Label? Are there more economical alternatives available to meet my needs, outside the direct category?
If a non-price sensitive Orange Juice consumer is shopping for Orange Juice, the decision sequence might be;
- Is this a quality product? NFC-OJ tastes better and the national brand consistently delivers a higher quality product.
- Is my brand available? Yes
- How much does it cost? The price is more but it’s worth it.
NFC-OJ consumers are less likely to switch between branded NFC-OJ and Private Label NFC-OJ unless the price gap becomes drastic. How drastic that gap is can be determined through consumer and statistical analyses. NFC-OJ manufacturers can afford a larger gap between their brand and Private Label alternatives. Their consumers are not as price sensitive.
If a price sensitive Orange Juice consumer, who is not convinced of the perceived benefits of NFC-OJ, is shopping for Orange Juice, the decision sequence might be different.
- Is this a quality product? There’s no difference in quality.
- What brands are available? Any brand will do.
- How much does it cost? The NFC-OJ national brand is $2.99 for a half gallon of and the store brand is $1.99 for a half gallon. The Recon-OJ is for $3.99 for a gallon. The store’s brand saves me even more at $3.79. There’s no difference, so I will pick the least expensive product.
The economy segment is shopped by consumers who are more price sensitive, so the price gap to Private Label must be more narrow or they will switch. The concept of price gap is an important consideration for a complete price strategy. The impact of segment interaction needs to be quantified in order to predict volume response. You must understand how to structure the gap between your product and related products and segments by understanding consumer interaction. How interchangeable are competing products in the consumers’ mind? With a lower consumer interaction between products a higher price gap can be tolerated with minimal volume loss. If you know the volume response for each 1% of price gap between competing products, you can predict how much volume will flow from higher priced products to lower priced products.
Contact Rick Pensa at 770-425-4243 to schedule a free 1 hour consultation on ways to get a better handle on your pricing. Visit our website at www.insightinformation.net to browse our services and deliverables.