Do you know that supermarkets could be throwing away millions of pounds in revenue? Do you know why? Well it’s because they may not be pricing their products correctly.
It is estimated that UK and US consumers spend 9.4% and 6.1% of household total expenditure respectively on grocery products. Yet despite this significant share of your wallets, grocers’ net profits are only 1.5% on average and this places grocery retail 190th out of 215 industries in terms of profit. In a famous research study, the authors calculated that a 7% reduction in price requires a 39% improvement in volume and, conversely, a 10% hike in price resulted in a 33% improvement in profit. So why aren’t the supermarkets raking it in?
That’s because most supermarkets use a cost plus or market base for their pricing policy instead of a customer focused pricing approach, (see the Marketing Course module 12). The concept of Internal Reference Pricing (IRP) is pivotal to a customer centric pricing policy. IRP is a predictive price expectation that is shaped by a consumer‘s prior experience and the current purchase environment and so a shelf price does not necessarily represent the customer’s price expectation. Demand for a brand, therefore, depends not only on the brand price but also whether the brand price is greater than the IRP (a perceived loss so no buy) or is less than it (a perceived gain so a buy). No wonder we marketers suggest that pricing is one of the most difficult decisions to make. Get it wrong and you could be throwing money down the drain or worse still, be left with lots of unsold stock! (Source: Iain Watson, DBA thesis Edinburgh Business School 2013).