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Tactics Watch - Pricing

Price Check

April 10, 2012
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As private label has burnished its image—and reality—from sleepy “generic” store brands to brands in its own right, retailers have needed to think more strategically about any number of aspects, not the least of which is how to price their higher quality, more upscale-oriented items.

The traditional price label still has its place in certain situations, so retailers need to first figure out whether they’re trying to take the traditional discount route, directly compete with national brands, introduce a product that’s national brand quality but not a direct response to any specific SKU—or some combination of the above.

DETERMINE YOUR OBJECTIVES
First determine your goal—Do you want to reach a certain percentage of your target consumer, or a certain percentage of sales in the category, says Frank Dell, president and CEO of Stamford, Conn.-based Dellmart Company. “Then I turn around and say, ‘How am I going to achieve that?’” he says. “When you first introduce a product, either it’s a national brand copycat, or you have a unique product. A lot of the private label products are totally unique today. It doesn’t have a national consumer brand equivalent.”

Armen Najarian, vice president, corporate marketing for San Mateo, Calif.-based DemandTec, an IBM company, suggests that retailers consider this tiered pricing approach. “Some are priced at parity or premium to national brands,” he says. “Some are a close follower of the national brand. And then, there’s the deep discount.”

Jon Hauptman, partner at Barrington, Ill.-based consulting firm Willard Bishop, says playing those lines off against one another can help position both of them. “Therein lies a double benefit for retailers,” he says. “First, it provides retailers a low opening price point … and secondly, it allows retailers more flexibility in pricing their national brand equivalent.”

Five Keys to Properly Pricing PL Products

  1. Determine your objectives.
     
  2. Build a large enough price gap to gain the consumers’ attention.
     
  3. Establish quality, then close the price gap.
     
  4. Know your category potential.
     
  5. Promotion can be helpful in moderation.

NOT YOUR GRANDFATHER’S PRICING
Price gaps between at least some private label and the national brands have narrowed over the past five years, Najarian says. “That [wider gap] was largely driven by the perception among consumers that private label products were inferior to national brands,” he says. “What was the standard of maintaining an ‘X’ percent gap in price with national brands …that’s now a hybrid strategy.”

Upon introducing a private label product, even if it’s intended to be a national brand competitor, retailers at first do need to establish a large enough price spread to gain the consumers’ attention, Dell says. “I need consumers to try the product, and hopefully like it, and turn around and repeat purchase,” he says.

But the conventional wisdom that one needs a 30 percent price gap is probably too high, Dell says, and the calculation becomes more complicated with products that are not direct competitors. “This is not just one product you’re taking sales from,” he says. In those instances, “You’ve got to understand what your competition is. You have to synthesize your price potential.”

ESTABLISH QUALITY—THEN CLOSE THE PRICE GAP
Whatever gap you start with, it can be lowered once consumers start repeat purchases—which retailers often fail to do, Dell says. “All of the sudden you wound up with 80 percent of the market share, but still at 30 percent [price differential],” he says. “Once I’ve achieved my goal or objectives of bringing the product to market, why do I need to keep putting the price gap so wide? I’m not saying it comes to zero.”

Agrees Paula Rosenblum, managing partner at Retail Systems Research, Miami, “The first thing you want to do is establish where you want your product to benchmark against national brands, and then see how much you can close your gap, price-wise, without losing the sense of values that private label brings. You try and feel around, and maximize gross dollars without sacrificing turn.”

KNOW YOUR CATEGORY POTENTIAL
Some categories have been more “penetrable” for retailers than others, Najarian says. “For example, in cookies and crackers, private label has done very well in terms of eroding or at least meeting national brands’ quality standards and pricing thresholds,” he says. “It’s somewhat less so in carbonated beverages.”
Because of this uneven category growth, different stores have ended up emphasizing different lines of private label, Dell says. “With the growth of private label, more products are in there but not necessarily the same products with every retailer,” he says, which can make comparing them literally apples and oranges.

PROMOTION IN MODERATION
Retailers need to be aware that some promotion of private label can be helpful, but everything in moderation, Rosenblum says. “Hyper-promotion is not such a good idea,” she says. “How do I get to a price that’s stable? How do I find the right balance of promotion and regular prices?
 

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