February 14, 2019
What Is The Right Price? – Promotional
Pricing is always an important and sensitive topic. This is never truer than when the issue is how to price items on promotion. As with all pricing decisions, promotional pricing is dependent on a number of factors including, but not limited to, the category’s positioning, the nature of the item, its cost, required gross margin (% and/or $), the c-store retailer’s competitive environment and the length of time it will be promoted.
As discussed in the last two articles, the category’s positioning can drive a great deal of the pricing strategy surrounding an item whether it is on promotion or not. If the item is in a traffic builder category, retailers should price more aggressively than if it is in a profit builder. Impacting this is the nature of the item. Let’s use the carbonated soft drink category. The package on promotion certainly impacts how it should be priced. For example, retailers should use a different pricing strategy for the most popular take home package in the market (12 pack cans) than it would for the most popular single serve size (20 oz.).
The brand may also make a difference. Continuing with our soft drink example, in most markets either Coke or Pepsi will be the dominant brand. If you are trying to generate traffic, it probably takes a more aggressive price on the less popular brand to get the same number of customers to make a purchase, sell the same number of cases or generate the same level of gross profit dollars.
Which comes first — the reduction in your cost or the drop in your retail price? Most retailers would prefer that their suppliers provide them with a fixed cost and allow them to determine the retail. However, in many cases the promotional retail strongly influences the discount that the supplier will provide. In these cases, the c-store retailer must balance their desire for the lowest possible cost versus the margin impact that results from securing it.
As discussed in the earlier pricing articles, pricing should not be done in a vacuum. Your promotional pricing strategy should take the actions of your competitors into consideration. If the item is something that is very price sensitive, and when the “typical” promotional price is known in the market, you as a retailer would be foolish to ignore this intelligence. Again with our soft drink example, if 12 pack can pricing is 2/$5 in your marketplace, you should not expect a large increase in sales if you price your 12 packs at 2/$5.99. It doesn’t mean you should do it, (maybe you did it simply to secure a somewhat lower cost or to fulfill a contractual obligation), but do so with an understanding of what the results are likely to be.
b2b Solutions is often asked how long should an item be left on sale. Our industry has “adopted” promotional cycles that generally last a month for variety of reasons which include the time it takes for customers to become aware of the decrease in price, but not so long a time that they believe it’s a permanent price reduction and the time frame for which suppliers typically offer a cost reduction.
However, remember to “bridge buy” enough product the last week of the promotional cycle so you can “recoup” margin by selling the product you brought at the reduced cost at full retail.