March 23, 2009
R&FF Retailer: Pricing for Profit
By Warren
Thayer, Editorial Director, R&FF Retailer
Through a special arrangement, presented
here for discussion are excerpts of a current article from Refrigerated &
Frozen Foods Retailer magazine.
"Pricing private label off the national
brand is simply the wrong way to approach the issue, although this is what
everyone does," said Frank Dell, president, Dellmart &
Co. It’s not uncommon to see a 30 percent gap between national brand and
private label, but this gap just gives away private label gross margin, he
notes.
Typically, private label pricing should be
low when products are introduced, to create trial. Pricing rises as volume
builds and share rises, and reaches its highest point (or narrowest gap
versus national brands) when volume and share objectives are achieved,
said Mr. Dell.
Of course, when you’re talking about a commodity
product, it makes sense to price it off branded competition, he explains.
Don’t forget to do to competitive price comparison on commodity items.
But in general, Mr. Dell says it’s better to price private label off the
individual product’s strategy or marketing plan. For example, extremely
low prices on high quality, unique items simply undermine their quality
image.
Derek Smith, VP of retail industry marketing,
DemandTec, is seeing smaller price gaps between national brands and private
label, with private label also adding more tiers. This allows one tier
to fulfill the opening price point in a category, with the other tier playing
roughly on par with the national brand or even priced above it.
"You also
have to understand what price gap is necessary to get the consumer to trade
up or down," depending on your strategy, he adds. For example, you might
want to incent shoppers to trade down to your private label, so you get more
margin. So… do you raise the price on the national brand, lower the price
on the private label, or do a bit of both? Once again, it will depend on
your customer set and their purchasing history.
Lyle Walker, VP of marketing, KSS Retail,
has seen some of the retailers he has worked with raise prices on their
private label without losing sales – thus significantly increasing
category profits.
"We build demand models with two years’
worth of POS history, and then dynamically adjust elasticity values based
on weekly updates of POS data," said Mr. Walker. "I’m not talking
a 50 percent increase – it’s pennies here and pennies there, but
it all adds up."
Discussion question: What do you believe
is the approach for a retailer to price its store brands versus national
brands to achieve maximum sales and profits? Are there any retailers
you believe are particularly adept at this?
BrainTrust
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I do believe that the current state of private label positioning in the US says they must be meaningfully less expensive than branded products. At the same time, there is little research to suggest that the 30% lower rule is a good one. Retailers need to understand the price elasticity of their private label products along with the cross-elasticity vs. the branded product. This is a research question that is easily answered.
There are a number of excellent comments here already by the BrainTrust members, especially around the idea of private label migrating away from the white-label cheapo image to one of a legitimate mid-tier or even premium brand.
In the northeast, Stop & Shop has its Simply Enjoy products that are often priced at a premium to national brand products. Whole Foods has its 365 organics, and across the Atlantic, Tesco has dominated the U.K. market with its high-quality private label products.
One thing that is assumed by the discussion article, though, is that pricing strategy must be done at the brand (or potentially even the SKU) level. For instance, it talks about pricing at a discount when introducing the item to induce trial, and then migrating the price up later. The flaw in this approach is that consumers form brand opinions quickly, and those opinions are difficult to change. If a consumer tries “Brand X” because it’s listed at 30% less than national brand, they may not be willing to keep buying as it drifts up to 15% less, then 10% less.
A far better approach would be to introduce the brand at the intended price level to establish price as part of the overall brand image, and then to induce trial through targeted discounts to individual shoppers. Not only does this preserve the intended brand image, but customers often appreciate the personalized discounts. And, with proper targeting, the chain can even avoid subsidizing compulsive cherry pickers.
For many retailers, this type of targeting is prohibitively expensive and time-consuming today, if it’s even possible. Our company is trying to take the pain away and make these types of sophisticated brand introduction campaigns the norm, rather than the exception.
I may be simplifying too much here, but I’ve found that approach works better sometimes than drawing all the fine lines of separation.
To me, the price difference here is really reflected by the difference between whether you are creating a brand (albeit one that is available only in one chain of stores) or a lower-priced private label.
A brand needs distinctiveness, a private label is mostly a me-too. A brand needs to build its own relationships and desirability beyond the store it is available in, while private label sells because there is an existing customer for something else that it is knocking-off.
Finally, migrating up the price curve is difficult in the best of times. Believing that it can be done in the current economy quickly after an introductory low price would be highly optimistic.
Of course, Mr. Walker qualifies the argument by saying that the increment may be “pennies here and pennies there,” implying that the discount for private label may still remain large enough for the customer not to notice the “pennies” being added on gradually. Which sort of negates the whole question, doesn’t it?
I agree with Ryan that we should question the assumption that store brands must always be less expensive than national brands. If you need evidence, try visiting your local Costco, where products as diverse as extra virgin olive oil and premium vodka command higher price points than the national brands displayed nearby.
When it comes retailer-exclusive brands, a visibly lower price is just one of several potential reasons to buy. Visibly superior quality or better ingredients are others (shades of Dave Nichol’s strategy for President’s Choice). To this we might add healthier formulations, social responsibility and frequent shopper incentives.
Price gaps surely matter too, but we should be wary of rules of thumb for PL products, as elasticities will vary by category, shopper, trip and item. Pricing optimization tools are very helpful in making smarter determinations that can deliver a value story without unnecessary sacrifice of margins.
The days of giving away private label margin just to become price-competitive with branded products are gone. There are so many strategies to employ that make PL effective. Trader Joe’s is 95%+ PL and has an unbelievably loyal following. There are several examples of PL–in retail segments OTHER than food, especially–that are positioned in alignment with national brands. Not to cost less, but to gain share for the retailer. The consumer is unaware that the product is PL. Look overseas; Marks & Spencer in The UK has done very well, although in mid 2008 the company has seen share prices plunge, now worth well under 50% of their value of twelve months before, as M&S struggles to cope with more conservative shoppers amidst the credit crunch. No fault of PL. And no guarantee, by the way, that PL is recession-proof.
If you are providing a product that is a generic to the name brand, how else can you compete but on price? Certain categories for private label have products that are clones of the name brands right down to the label. The only way to get a customer to pick it up is by price.
Smart retailers are creating private label products that have no national brand equivalent. Loblaws and Shoppers Drug Mart have created private label products that have no equivalents so there is freedom in price points. A truly successful private label line should be marketed as a brand in itself, and not as an alternative to the name brand. As packaging and quality go upscale, it will be easier to market house brands on their own. It’s crazy to say, but less competitive distractions will ultimately lead to increased sales for that category.
While I agree that in the US the positioning is mostly at a discount to national brands, I think some retailers are working hard to change that perception–Safeway comes readily to mind with some of their recent PL efforts.
Taking a straight discount off of national brands is definitely the easiest–and riskiest–approach. I prefer a bit more portfolio analysis. Rather than just try to suck away from a national brand product, you’ve got to put some thought into your category strategy and identify the gaps that you want to fill. Those gaps could be product variety gaps, or they could be price point gaps. And understanding price elasticity is also definitely key.
The biggest take-away for me is that the role of private label in retail is definitely changing. If you’re approaching it in the traditional way, you better rethink your strategy.
While the most popular strategy for private label is to discount them versus national brands there is a counter strategy–first articulated by David Nichol at Loblaw–that suggested that one day retailer controlled brands could be sold at a premium. Nichol had argued that the appeal of private label was that it liberated the consumer from a “brand tax” but as private label evolved and retailers became more sophisticated marketers, Nichol argued that they owned the consumer-brand loyalty.
Was he right, or more correctly, will he be right one day?
Hard to say but it’s clear that retailers like Wegmans, HEB and independents like Mike Provenzano have built enough cache around their brands that they could close the “30 percent gap” if they chose to.
The notion of “Store Brand” is an obstacle to answering this question. There are different strategies to be employed based on whether the brand is a “Premium” brand, a “Competitive” brand or a “Price” brand. To paint ALL brands with the same brush is a poor strategy that does not incorporate the nuance of the brands, the retailer’s strategy, the competitive environment in the category, etc. Pricing is best determined AFTER the strategy has been identified and is not a strategy itself.
Regardless of whether the private label products are “El Cheapo” or higher quality, the only right way to know how to price is to test pricing in the marketplace. The arbiter of the “right” price is the consumer. She decides. When you test, and use the right analytics to measure the results, you find out what she’s really willing to pay, how that differs across categories, and how it differs across stores. Right now–in the current economic environment–not based on some historical regression. There are many millions of dollars of profit to be gained within months from this approach.
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I do believe that the current state of private label positioning in the US says they must be meaningfully less expensive than branded products. At the same time, there is little research to suggest that the 30% lower rule is a good one. Retailers need to understand the price elasticity of their private label products along with the cross-elasticity vs. the branded product. This is a research question that is easily answered.
There are a number of excellent comments here already by the BrainTrust members, especially around the idea of private label migrating away from the white-label cheapo image to one of a legitimate mid-tier or even premium brand.
In the northeast, Stop & Shop has its Simply Enjoy products that are often priced at a premium to national brand products. Whole Foods has its 365 organics, and across the Atlantic, Tesco has dominated the U.K. market with its high-quality private label products.
One thing that is assumed by the discussion article, though, is that pricing strategy must be done at the brand (or potentially even the SKU) level. For instance, it talks about pricing at a discount when introducing the item to induce trial, and then migrating the price up later. The flaw in this approach is that consumers form brand opinions quickly, and those opinions are difficult to change. If a consumer tries “Brand X” because it’s listed at 30% less than national brand, they may not be willing to keep buying as it drifts up to 15% less, then 10% less.
A far better approach would be to introduce the brand at the intended price level to establish price as part of the overall brand image, and then to induce trial through targeted discounts to individual shoppers. Not only does this preserve the intended brand image, but customers often appreciate the personalized discounts. And, with proper targeting, the chain can even avoid subsidizing compulsive cherry pickers.
For many retailers, this type of targeting is prohibitively expensive and time-consuming today, if it’s even possible. Our company is trying to take the pain away and make these types of sophisticated brand introduction campaigns the norm, rather than the exception.
I may be simplifying too much here, but I’ve found that approach works better sometimes than drawing all the fine lines of separation.
To me, the price difference here is really reflected by the difference between whether you are creating a brand (albeit one that is available only in one chain of stores) or a lower-priced private label.
A brand needs distinctiveness, a private label is mostly a me-too. A brand needs to build its own relationships and desirability beyond the store it is available in, while private label sells because there is an existing customer for something else that it is knocking-off.
Finally, migrating up the price curve is difficult in the best of times. Believing that it can be done in the current economy quickly after an introductory low price would be highly optimistic.
Of course, Mr. Walker qualifies the argument by saying that the increment may be “pennies here and pennies there,” implying that the discount for private label may still remain large enough for the customer not to notice the “pennies” being added on gradually. Which sort of negates the whole question, doesn’t it?
I agree with Ryan that we should question the assumption that store brands must always be less expensive than national brands. If you need evidence, try visiting your local Costco, where products as diverse as extra virgin olive oil and premium vodka command higher price points than the national brands displayed nearby.
When it comes retailer-exclusive brands, a visibly lower price is just one of several potential reasons to buy. Visibly superior quality or better ingredients are others (shades of Dave Nichol’s strategy for President’s Choice). To this we might add healthier formulations, social responsibility and frequent shopper incentives.
Price gaps surely matter too, but we should be wary of rules of thumb for PL products, as elasticities will vary by category, shopper, trip and item. Pricing optimization tools are very helpful in making smarter determinations that can deliver a value story without unnecessary sacrifice of margins.
The days of giving away private label margin just to become price-competitive with branded products are gone. There are so many strategies to employ that make PL effective. Trader Joe’s is 95%+ PL and has an unbelievably loyal following. There are several examples of PL–in retail segments OTHER than food, especially–that are positioned in alignment with national brands. Not to cost less, but to gain share for the retailer. The consumer is unaware that the product is PL. Look overseas; Marks & Spencer in The UK has done very well, although in mid 2008 the company has seen share prices plunge, now worth well under 50% of their value of twelve months before, as M&S struggles to cope with more conservative shoppers amidst the credit crunch. No fault of PL. And no guarantee, by the way, that PL is recession-proof.
If you are providing a product that is a generic to the name brand, how else can you compete but on price? Certain categories for private label have products that are clones of the name brands right down to the label. The only way to get a customer to pick it up is by price.
Smart retailers are creating private label products that have no national brand equivalent. Loblaws and Shoppers Drug Mart have created private label products that have no equivalents so there is freedom in price points. A truly successful private label line should be marketed as a brand in itself, and not as an alternative to the name brand. As packaging and quality go upscale, it will be easier to market house brands on their own. It’s crazy to say, but less competitive distractions will ultimately lead to increased sales for that category.
While I agree that in the US the positioning is mostly at a discount to national brands, I think some retailers are working hard to change that perception–Safeway comes readily to mind with some of their recent PL efforts.
Taking a straight discount off of national brands is definitely the easiest–and riskiest–approach. I prefer a bit more portfolio analysis. Rather than just try to suck away from a national brand product, you’ve got to put some thought into your category strategy and identify the gaps that you want to fill. Those gaps could be product variety gaps, or they could be price point gaps. And understanding price elasticity is also definitely key.
The biggest take-away for me is that the role of private label in retail is definitely changing. If you’re approaching it in the traditional way, you better rethink your strategy.
While the most popular strategy for private label is to discount them versus national brands there is a counter strategy–first articulated by David Nichol at Loblaw–that suggested that one day retailer controlled brands could be sold at a premium. Nichol had argued that the appeal of private label was that it liberated the consumer from a “brand tax” but as private label evolved and retailers became more sophisticated marketers, Nichol argued that they owned the consumer-brand loyalty.
Was he right, or more correctly, will he be right one day?
Hard to say but it’s clear that retailers like Wegmans, HEB and independents like Mike Provenzano have built enough cache around their brands that they could close the “30 percent gap” if they chose to.
The notion of “Store Brand” is an obstacle to answering this question. There are different strategies to be employed based on whether the brand is a “Premium” brand, a “Competitive” brand or a “Price” brand. To paint ALL brands with the same brush is a poor strategy that does not incorporate the nuance of the brands, the retailer’s strategy, the competitive environment in the category, etc. Pricing is best determined AFTER the strategy has been identified and is not a strategy itself.
Regardless of whether the private label products are “El Cheapo” or higher quality, the only right way to know how to price is to test pricing in the marketplace. The arbiter of the “right” price is the consumer. She decides. When you test, and use the right analytics to measure the results, you find out what she’s really willing to pay, how that differs across categories, and how it differs across stores. Right now–in the current economic environment–not based on some historical regression. There are many millions of dollars of profit to be gained within months from this approach.