For decades, pricing was more art than science. This pre-technology age provided little in the way of hard data to support informed pricing decisions. Times though have changed radically and retailers now have access to a wide technological arsenal that is, however, not yet being put to full use.
Elsevier Food International, Vol. 8, Number 3, September 2005
Len Lewis

Deep price-cutting continues in the US and Europe as discounters march into every marketplace. However, retailers may be ignoring pricing strategies that would set them apart from competitors.
In a retail environment seemingly controlled by discounters, a proactive pricing strategy is more critical than ever. However, the majority of chains and independents are still shunning  such elements as price optimisation and continuous price management.
For decades, pricing was more art than science. Retailers knew instinctively what to charge for an item and, if there was any doubt, they could always send someone down the street to check on the competition. This one-size-fits-all strategy, sometimes driven by manufacturers, was only designed to meet or beat local competition - not regional, national and global  rivals. This pre technology age provided little in the way of hard data to support informed pricing decisions and no way to gauge their impact on sales and profits. Times have changed radically and retailers now have access to a technological arsenal that includes electronic shelf labels (ESL) and several generations of price optimisation software. Nevertheless, many  companies have yet to make use of them, preferring to simply slash prices in a misguided attempt to become low-price leaders, according to observers.

Cutting to the bone
For example, California-based Raley’s, which has a reputation as a somewhat upscale chain,  recently cut prices on 5,000 SKUs and has adopted an everyday  value price strategy in order to avoid constant price fluctuations.
The Irish government is on the verge of allowing retailers to adopt below cost pricing strategies, despite a government-sponsored study that said it would work against consumers and fuel inflation. ICA, the Swedish-based chain owned by Ahold, created a huge marketing campaign around lowering prices in order to reach parity with chains in other EU countries.
Even Wal-Mart is not immune to deep and widespread price cuts by competitors. A report in the German press said that the chain, beset by discounters, has permanently reduced prices on  1,000 product lines and is still not finished.
Meanwhile in the UK, Wal-Mart owned ASDA spent an estimated US$41 million on price cuts, the most extensive programme ever undertakenby the chain. Angela Spindler, ASDA’s trading and marketing director noted: “There are those that talk and those that deliver.” Meanwhile, ASDA’s move prompted Tesco to retaliate with US$128 million in price reductions.
“Wal-Mart has caused a worldwide storm by pushing the low price line. But low price for  many retailers can be a waste as a selling point,” said Paul Vogt, retail global practice leader, Zebra Technologies, Vernon Hills, Illinois, marketer of handheld printers and pricing systems. “You don’t have to be an EDLP leader to be proactive,” he said.
Jorgen Wigh, senior partner, PriceGain, a Stockholm-based consulting firm, agrees. “I don’t  believe Wal-Mart is pushing others toward an EDLP strategy. Some retailers started out that  way, but gave up. It takes years of communication, persistence and discipline in order to gain credibility and convince customers you are what you say you are.”

ESL rollouts
Instead, retailers are becoming more proactive in other ways specifically electronic shelf labels, which industry observers have called a key enabler of  precision pricing and a way to implement proactive pricing strategies faster and more  productively. For example, Carrefour is spending US$16 million to roll out electronic shelf labels at its 74 hypermarkets in France. The technology will also be installed in nine hypermarkets in Spain by the end of 2005. Whole Foods is also expanding the use of ESLs to a second store in Texas for centre store, dairy, frozen foods and health and beauty categories, thus allowing for thousands of simultaneous price changes. As aggressive as these and other moves might be, Wigh believes a key element is still lacking.
“Retailers need to institute differentiated pricing across several dimensions -including geography, channel of distribution, product, type of customer and also based on time of day, day of week or season.” Whatever the method or process, the payback on stronger pricing strategies can be significant, according to a report by Accenture, a global consulting firm and a staunch proponent of ‘precision pricing’. In fact, a differentiated or precision-pricing strategy has yielded retail sales gains up to 15 per cent, profit increases of 30 per cent and a 10-15 per cent improvement in margins. However, reaching this level of return means that retailers must closely examine their operations and ask themselves a number of  questions. Among them
-Does the company have a clearly articulated pricing strategy in place?
-Are internal processes efficient enough to support timely pricing decisions?
-Who is the competition?
-Is pricing a reaction to others or is the company making its own statement in the marketplace?
-How often can prices be changed?
-What customer segments are stores trying to attract?
-At what point should a company set prices chain, regional or store level?

Continuous price changes

Kaufland's striking communication of clever prices.

PriceGain’s Wigh noted that while many retail strategies in recent years have focused on lowering prices or creating a low price image, the real potential lies in continuous price changes. “One UK retailer increased profit by 40 per cent through  more frequent changes. This figure isn’t easy to get. But most retailers are working on a one per cent or two per cent gross margin. So even if you can wring out a small additional percentage on price, profits can be improved quite a bit,” he said.
Despite the potential, retailers balk at being more aggressive. “Quite a few are afraid of  consumer reaction if prices are changed too much. They are worried about the negative  press and think that they will be perceived as trying to rip off customers. But we’re starting to see greater acceptance of more frequent prices changes. One reason is the Internet. Look at all  the changes you see on a daily basis. Some companies don’t even post prices on websites because they change so frequently. But people accept it.”
However, retailers need to do more behind the scenes than simply changing or lowering prices, Wigh said. “They are becoming more sophisticated in price differentiation, but still  need to do it by segment with margins shifting over a week’s period. We’re working to help  companies improve profitability through pricing and revenue management,” he said.
PriceGain is a proponent of differentiated pricing strategies over five dimensions. These include:
1. Geography-including regional differences, rural versus urban store locations and city versus suburban locations.
2. Channel-differences based on such formats as hypermarkets, supermarkets, convenience stores and online sales.
3. Product-determining whether an item is strategic, tactical, a staple or a niche item.
4. Customer-high volume versus low volume customers and loyal versus those less loyal.
5. Over time- seasonal, weekday versus weekend or day versus night.

Timing is everything

Prices at Extra Future Stores can be changed via a Limited Area Network(LAN) which is linked to checkouts.

Retailers have yet to change pricing based on time of day or day of the week, but have greater ability to do so with electronic shelf labels, said Wigh. “For example, Tuesday might be the day to attract elderly and retired people. Or, prices for some items should be higher on the weekend when business people, or others who are not as price sensitive, do the majority of their shopping. This becomes possible when entire point-of-sale systems are connected to the shelf via electronic shelf labels. In theory, you can change prices several times during the course ofa day for different customers,” he said.Vogt of Zebra Technologies believes that an EDLP strategy is fundamental to frequent pricechanges by retailers. “It’s all about customer perception that the retailer is being active interms of running promotions, product placements on the shelf as well as pricing,” he said.
“Consistency in pricing throughout a chain is key.” The best way to achieve it is by having store employees in the store with handheld computers and a label printer both of which can be connected to the company’s radio network. In this way, headquarters or store managers can beam new pricing, in real time, to store associates. As a result, associates can run promotions, do markdowns or re-price products that are not moving any time during the day.
“Maybe it’s 4:30 on Thursday and the kids are out of school. Maybe that’s a good time to sell candy. “That’s being proactive in real time without necessarily low prices, but a promotion mentality that makes the store a dynamic marketplace,” he said. “It’s about attracting customers, getting a larger share of their wallet and making sure they buy something every time they come into the store.”