Starting situation – wasted potential because of an inconsistent price strategy and the wrong starting point
Our client, an international textile retailer, lost several percentage points in terms of gross profit margin because of unfavorably set base price ranges and the resulting necessary sale discounts (“red prices”). The reason for this was uncertainty about customers’ price expectations and competitor pricing. There was no coordinated concept between the category managers and procurement; the purchase price was the sole criterion. What is more, the German price was converted 1:1 into the foreign currency, without making any allowance for regional differences.
Project approach – you can set the right price points only if you understand the market and the customers
The first stage was to perform competitor benchmarking and international customer surveys to create transparency on price expectation and what customers were willing to pay. The Swiss (as might be expected) are prepared to pay higher prices – but so are Italians. Rigorous price ranges were then defined for each country, including base price ranges, but without losing sight of the purchase costs.
A standard pricing process was implemented in category management and procurement – one that was in harmony with the overarching product range strategy. A much higher sales ratio and profit margin was achieved because customer expectations were being met more fully, and also thanks to a lower number of “red price battles.”
Finding – “one for all” – NOT when it comes to price!
Too many companies still rely on a purely cost-based pricing policy. Such an approach does not take account of competitors or the value attached to pricing by customers. The combination of the two variables based on a continuous data survey brings rewards in the form of higher customer acceptance despite, at the same time, better absorption of the willingness to pay. This, in turn, boosts not only sales, but also the profit margin. The strategy of focusing purely on the planned margin can be torpedoed by a lack of sales and the resulting need to reduce prices.
Last but not least, the approach outlined offers internationally active trading companies better opportunities to apply price differences on a country by country basis – a flexibility that pays dividends.
- Increase in the gross profit and improved accommodation of customer pricing expectations through pricing that is customer- and market-based instead of purely cost-based
- Use of international price differences (tear-off labels) and identification of margin potential in future expansion countries