Is your price strategy broken?

Retail is a fiercely competitive sector, but exclusive research shows that while shops might try to beat each other on price, consumer perceptions of how cheap or expensive brands are is not as simple as seeing what rings up when the barcode is swiped.

Click here to read case studies on Iceland, Ocado and Robert Dyas

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No one is worse than the British at judging how much it costs to shop. In a new study of five countries, UK consumers are the most inaccurate when estimating the prices they would be charged by retailers for a basket of goods, raising the question of whether marketers are getting their pricing strategies and communications right.

The study, by strategy consultants OC&C, shows that UK consumers are somewhat baffled by the cost of goods (see Methodology, at the end of this feature).

On average, consumers get prices wrong by a margin of 13.2%. American shoppers come second worst to the UK with a 9.2% margin. According to OC&C associate partner Tom Gladstone: “Britain is the only country where consumers have got poorer at judging prices [since the survey started in 2007].”

Price perception is a minefield for consumers because some retailers try to muddy the waters by excessively offering promotions, says Steven Round, chief executive of household goods retailer Robert Dyas (see Case study, below). He contrasts this with his experience in mainland Europe.

“Retailers use promotional mechanics more aggressively in the UK than they do on the Continent. I ran a French retailing outfit for a while in the kitchen sector, so I have first-hand experience. In the UK, some furniture stores will have 50%-plus off the listed price. On the Continent they call that ’the English way’,” he says.

Case study: Robert Dyas

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Price is not merely an aspect of brand positioning but also a variable that is influenced by a retailer’s business model. Steven Round, chief executive of Robert Dyas, points out that businesses will make a decision on the areas in which they want to compete, and price will not always be a priority. His own company’s approach to selling household goods is to offer “mid-market products at mid-market pricing”, he says.

“We think we add value by giving people access to those products in the middle of London, for example, which they would not otherwise be able to buy. Because of the economics, we do have to charge maybe 1% or 2% more than you would find in an out-of-town outlet.”

Robert Dyas is seen to be the most expensive of the retailers in the DIY category, according to OC&C’s study (see “The DIY view” in related files to the right of this feature). Its price perception is 3.6% higher than average for the sector, and in fact its actual prices are slightly higher than consumers believe. Its competitors in DIY are all cheaper than perceived, with the exception of Homebase.

But Round notes that not all retailers are focused on using price as a means of driving sales. Indeed, for some businesses, doing so would obviously limit their ability to supply the expected quality of products and services.

“Within retailing I do not think there are any fundamental truths that everyone needs to adhere to on pricing. For example, if you are a retailer who is pushing ’fashionability’, you are going to have a lot of failures. You therefore need to charge a higher price, so that the things that are successful cover the things that fail.

“On the other hand, if you are an out-and-out price retailer, you will engineer everything to make sure that you can do that. You will be in cheap locations, pay cheap rents, have limited ranges, and will probably not be the best employer in the world.”

DIY comes third of the six sectors in the report in terms of consumer price sensitivity – indicating that people looking for home products are prepared to shop around. However, Round says that Robert Dyas has performed a great deal of its own research on the products it sells, finding that consumers are less likely to be influenced by price in some areas than in others. In any event, retail brands have plenty of opportunity to price their products in the ways that are ultimately most profitable to them, says Round.

“Retailers have become more sophisticated over the past 20 years and have embraced category management, so they use different categories to do different things. Some categories are used to drive footfall, some they use to enhance their image, some they use to drive profitability. They will make different choices depending on who they see as their competitors and where they are located. They may not have a uniform price position across all the products they sell.”

Consumer price perception is far from uniform across the retail sectors (see “Does the price add up?” in related files to the right of this feature), and indeed across individual brands. In health and beauty, for example, consumers’ guesses are just 3.6% out on average. And within that, in the case of Superdrug, consumers think it is 11.2% cheaper than the average for the sector, when in fact it is 3% cheaper.

Superdrug head of marketing Dan Jarvis says its website has helped achieve this perception of being cheaper than it actually is. “We have focused on web exclusives and gifts with purchase offers. In general, we aim to offer everyday beauty and we know that price is a key part of that.”

The retail category in which consumers’ perceptions are furthest from reality is electricals, which is also the sector where consumers claim to be most influenced by price in their buying decisions.

Niall O’Keeffe, group marketing director of Dixons Retail, which includes brands such as Dixons.co.uk and PC World, says this could be because people are often confused by subtle differences in the technical specifications of goods. “The inaccuracies that people could feed back are quite often due to the complexities of the products,” he suggests.

Dixons
Dixons’ recent ad campaign featuring characters from Star Wars after a partnership with Lucas Films

OC&C’s findings show a marked disparity in consumers’ price perceptions of the Dixons brands, when compared with actual prices paid for a basket of goods. While Dixons prices are much lower than perceived – and of the 44 retailers in the study, only for six of them are prices overestimated by a wider margin than Dixons – Currys is perceived to be 0.7% more expensive than average for the sector. Competitors Ebuyer, Argos, ShopDirect and Comet are all thought to be cheaper.

O’Keeffe is surprised by consumers’ perceptions. He says Dixons prices are “micromanaged” in real time, while Currys and PC World run daily price checks on over 20,000 products. The company’s research puts its brands at least on a par with competitors on price, he adds.

O’Keeffe says the Dixons brands have undergone a shift in their price positioning in the past decade, adding many more mid- and premium-range products where they might once have been known for more affordable goods. “The stores offer a massive range, going from entry price point all the way up to the top end of the market. So you can buy a coffee machine in one of the stores for £10 or £1,000. You can buy a fridge for £79 or £4,500.”

While he notes that the brand’s recent marketing has focused on range, service and price, he says: “Is there more we could do to communicate our pricing? Probably.”

Consumers also manage to misjudge retailers that position themselves as low-price brands. For example, Primark is considered by consumers – correctly – to be the cheapest of the retailers featured in the clothing sector.

However, it is perceived to be 21.6% cheaper than the average business in this category, when its actual prices are cheaper still; in fact it is overestimated by the widest margin of the 44 brands included in the study.

The price of the Asda basket used for this research was 3.0% cheaper than that for Tesco, 6.8% cheaper than that for Sainsbury’s and 8.2%cheaper than that for Morrisons.

At the opposite end of the scale, House of Fraser is perceived to be 8.6% more expensive than average for the health and beauty sector and 17.7% more expensive than the average clothing retailer, coming out the most expensive in both categories. Its actual prices are even higher, and are the most widely underestimated of all the retailers.

But being thought of as expensive can have its advantages. Waitrose is seen as significantly more expensive than average for a supermarket, and it is so, but it couples this with a perception of higher quality and so maintains a steady market share. It is to open 39 stores this year, compared with 20 last year.

In the grocery sector, consumers are relatively accurate about prices, with an average error of 6.7%. Consumers’ ability to judge prices well comes as little surprise to marketers at supermarket brands.

Iceland executive director Nick Canning says: “In the food sector, customer price perceptions are pretty good. I do not think they are inaccurate at all. They know what value is, they know where to get value and all of the major food retailers in this country are working daily to communicate value. I think customers get it 100%.”

Case study: Iceland

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The UK’s supermarkets demonstrate a preoccupation with price that is unrivalled by any other retail sector. Given this, OC&C’s research into the price-sensitivity of shoppers holds some hidden shocks.

Consumers claim not to be greatly influenced by price when buying groceries. Only 32% measure ’high’ on the study’s price-sensitivity measure – shopping around for better prices and seeking out promotions. This compares with 61% in the electricals sector. It is a finding that does not ring true for Iceland executive director Nick Canning.

“I find that difficult to believe,” he says. “Consumers are very influenced by price when shopping for food. You only have to look at the money the big four have spent in the press [on advertising], which is 99% about value and price. If they did not think it was a contributing factor to help customers’ decisions and they were not price-sensitive, they would not do it.”

With marketing that positions it at the lower end of the price spectrum, it is unsurprising that Iceland is thought to be 4.2% cheaper than average for grocery retailers. Of the supermarkets studied, only Asda and Aldi are assumed by consumers to be cheaper. In fact, Iceland’s prices are higher than consumers believe them to be.

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Nick Canning

Tom Gladstone, associate partner at OC&C, suggests the brand benefits from simple messages targeted at what the report calls the “cash-strapped consumer”. This includes a policy of pricing to round sums.

Canning says: “We took Iceland to round-pound pricing in mid-2005 and have never looked back. Over 85% of our products are now at a round-sum price, which we define as a pound or a pound fifty. What we do is allow our customers to budget and shop the stores very easily. It allows for simple communication in the store, and I think they get the value as a result of that.”

Pricing strategy is still a balancing act, Canning says. To compete against other supermarkets, a brand cannot afford to be out of line on big promotions, even if aiming for round sums limits the options for moving prices around.

But he adds: “At the same time, from a branded perspective and what the customer expects, I think the consistency of communication in store is very important.”

Nowhere do retailers compete more aggressively with their pricing – and price-led marketing – than in the grocery sector. Most recently, rival supermarkets have taken umbrage at Asda’s claim to guarantee that its prices on a range of items will be 10% lower than the rest of the big four.

The price of the Asda basket used for this research was 3.0% cheaper than that for Tesco, 6.8% cheaper than that for Sainsbury’s and 8.2%cheaper than that for Morrisons.

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Notwithstanding the specific products on which Asda has made its pledge, the study suggests that consumers would be unlikely to be able to pick up their average weekly shopping at Asda for 10% less than at the other three stores.

OC&C’s Gladstone explains: “Our basket contained around 70 items that were a mix of both branded and own-label products. The basket was mostly like-for-like products or closest comparable own-label products, but on a few lines we also looked for the cheapest-on-display line.” However, it is worth noting that the baskets were selected in late 2010, before Asda made its guarantee and the national VAT rise came into effect.

Jon Rudoe, head of retail at online supermarket Ocado, says that consumers’ good judgment of grocery prices is likely to be because they buy from these businesses so regularly. He suggests, too, that as online retail becomes more prevalent – and more people compare prices on various websites as they shop – businesses will have to match their price claims to the reality. “Transparency and perception changes, to a certain extent, the way that you market and you price,” he says (see Case study, below).

Changes brought about by online shopping are more significant for some sectors than others. In groceries, it seems, the online proposition must compete on convenience as much as on price.

Case study: Ocado

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Ocado has a branding job to do unlike that of perhaps any other retailer. Not only does it have the task of positioning itself as an online-only business against supermarkets that have a large and visible presence in towns, it must also differentiate itself from Waitrose – the brand that supplies the majority of its products, but against which it also increasingly competes.

Selling many of the same goods as Waitrose, Ocado predictably takes on many of the same assumptions about the price and quality of its products. It is seen by consumers as 7.1% more expensive than the average grocery retailer, but Ocado is still thought less expensive than Waitrose (8.1% higher than average), while its actual prices are slightly higher than the perception, according to OC&C’s research.

As Ocado head of retail Jon Rudoe points out, the two businesses are independent and therefore independently set their prices. “We recognise we have a different shopper and ours is a different shopping experience from Waitrose, and as such price may be different. Our average transaction value is over £100. The average transaction value in most stores is in the low tens of pounds.

“People are shopping in a different way on a different occasion. Our shopper tends to be slightly younger than the Waitrose shopper, probably with children, possibly at a stage of life when they are perhaps a little more penny-pinching.”

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In spite of this, prices of many products offered on the two brands’ websites are identical. It remains to be seen whether this will change significantly in July, when the contractual embargo that prevents Waitrose from offering online delivery services in Ocado’s main London market expires.

Despite an upmarket positioning, Ocado does make an effort to compete against other super­markets on price, particularly with its Tesco Price Match. The retailer sets the prices of about 8,000 product lines to match those of the market leader. Rudoe says the initiative was the result of a decision to invest in reducing prices, rather than in marketing on price.

“The Tesco Price Match scheme is something we have done very little marketing for because it is so easy to explain to a customer. You can see it and you know what it means. We literally launched the scheme by writing an email to our customers, saying that as of today this is what we are doing.” (See “The Groceries View” in related files to the right of this feature)

The research reveals that people don’t see a price benefit in doing their supermarket shopping online, so apart from the convenience, there is no major reason to persuade the average consumer to switch away from bricks-and-mortar stores.

But it is a different story in the entertainment sector, where people believe shopping online is cheaper than going into a store. The importance of price here is readily apparent by brands such as Zavvi, formerly Virgin Megastores, disappearing from the high street. And HMV has moved away from being so reliant on physical CD and DVD sales, expanding into live events and sound equipment, for example, because it can no longer compete with the online players such as Amazon and Play.com, which can routinely undercut high street retailers on disc prices.

HMV’s case is one example where the accuracy of consumers’ price perceptions has not been helpful. People think it is 4.0% dearer than the average entertainment retailer, which is close to reality. Clearly, there is little scope to compete on range or quality, hence its movement into other business areas.

These examples show that being perceived as more, less or just as expensive as the reality is not necessarily an advantage or disadvantage for a brand. It is more about a brand’s positioning and the dynamics of the market in which it operates.

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As a result, retail brands must take into account several things when working out how to position themselves on price – both online and offline. Entertainment retailer Game specialises in video games. Marketing director Anna-Marie Mason acknowledges the importance of online, but says retailers in the sector still develop a competitive model through in store as well as internet sales channels.

She says: “What brings consumers back to us, regardless of the channel, is offering the right touchpoint for them, although price is clearly important in our sector. Consumers are price-conscious and pretty savvy about where they can get the best price.” She adds that offering trade-in services and selling pre-owned games at cut prices are also important in delivering value beyond the core product ranges.

Manufacturers as well as retail brands must consider the prices that will eventually be charged by shops when establishing their own brand positioning. Kokomo, which makes household goods under brand licences, has to consider the retailers it will use to launch its products according to the profile of the products’ intended customers, says commercial director Mark Wilde.

He continues: “We spend a lot of time studying the market and its competition before developing any range. If we are to challenge for shelf space we must be competitive. We must balance the scales of product development cost and innovation versus consumer awareness of the product and value for money.”

The firm has recently launched a range of Homes & Gardens cleaning products, licensed from the IPC Media magazine brand.

It needed to target retailers where the customer would be aware of Homes & Gardens brand and its values, while also appreciating that “the house wares category is very competitive and price-driven”. The products went on sale last month at John Lewis, Homebase, Ocado and Amazon.

As with the retail brands, manufacturers have to balance a number of factors when deciding how to present themselves to consumers. Price is just one of these, albeit an important one – and more so in some markets than others.

Just how important is not a simple matter. In spite of the apparent difficulties UK consumers have in grasping retailers’ pricing, brands would still be well advised not to take anything for granted in predicting people’s attitudes towards the sums they hand over at the till.

Methodology
Strategy consultants OC&C surveyed nearly 13,000 people in the UK, US, France, Germany and the Netherlands, assessing their perceptions of price at a selection of well-known retailers. Researchers then measured the actual price of a basket of goods, and compared the results with what shoppers said.

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