Building a Competitive Pricing Strategy with Just Two Steps
To build a competitive pricing strategy in the current climate, retailers have to prioritise value over margins. The latter is central to the fixed markup pricing mechanism, which aims to boost profit by multiplying the cost of goods at a predetermined rate to determine the selling price. It is a simple and straightforward solution, especially when there is a lack of visibility on demand to optimise prices.
In an increasingly competitive retail landscape, retailers have found new ways to drive conversions than fixed markups. As more retailers gain access to in-depth insights to inform pricing, the fixed markup method handicaps those that still abide by it. Underpricing and overpricing resulted in the incessant cycle of markdowns that eat into profits. Retailers must approach prices with demand in mind instead of just margins to level with competitors.
How to Establish Competitive Pricing?
Unoptimised pricing not only hurts profit margins but prices that do not reflect consumer demand can damage brand equity. It’s more critical than ever to deliver pricing that is driven by customers’ perceived value.
#1 Adopt the ‘Good-Better-Best’ Pricing Ladder
To establish a competitive pricing strategy, fashion retailers should highlight distinct values in their products with the ‘good-better-best’ pricing ladder. With this approach, prices are set in tiers based on the perceived value of an item – higher prices are reserved for products with better attributes. Not only are profit margins more accurately ascribed to products with this method, but it also helps retailers meet consumer expectations and drive conversions.
The ‘good-better-best’ pricing ladder is mapped against three tiers of fashionability.
- Core (Good)
- Fashion (Better)
- High fashion (Best)
With this strategy, product prices reflect their perceived value. Core items, like t-shirts or plain cami tops, are priced lower while more elaborate blouses and shirts fall under the ‘better’ or ‘best’ category. The higher the product’s fashionability, the higher its perceived value and price.
To implement this competitive pricing strategy, it helps to first look at your main competitors’ assortments broken down by price. This will help you understand two things – the fashionability criteria for each pricing tier and what consumers are willing to pay for them at full price. Go as granular as possible, at least to the category level to spot optimisation opportunities.
The above chart shows H&M and Pull & Bear’s tops assortment segmented by price. From this viewpoint, identifying the price brackets for each tier in the ‘good-better-best’ ladder is straightforward.
H&M’ ‘good’ price range is capped at $15 as products that are priced higher have more fashionability qualities. Meanwhile, Pull & Bear’s ‘good’ price bracket exceeds H&M at $20. For both retailers, products under the first tier consist of t-shirts, cami tops and other core items. Pull & Bear’s ‘good’ tops are made up of solid colours while H&M offers some print variation.
Moving up to the ‘better’ tier, more fashion elements are immediately noticeable on the products offered. Blouses, shirts and bodysuits are some of the styles listed by the retailers in this tier. While cami tops and t-shirts are still offered at this price range, they generally contain better quality fabrics, unique prints and additional elements like puff sleeves and neckties. H&M’s entry point for its ‘better’ products is lower at $20. Pull & Bear is steeper at $25, but both retailers go up to $40.
At the highest tier in the pricing ladder, the products offered are designed with the most advanced fashionability attributes in mind. Elaborate designs, bold prints and high-quality fabrics are the prerequisites for this tier in order to align with consumers’ value expectations as the products are priced at $40 and above.
A flaw in H&M’s ‘best’ assortment is the addition of simple tops that do not fulfil the high fashionability criteria, which may affect full-price sales as the products do not match the perceived value allocated. In comparison, Pull & Bear ensures that its ‘best’ assortment meets value expectations even if the designs are simple. For example, the tops offered contain expensive materials like wool and sequin.
#2 Validate the Sell-Out Performance
Understanding the competition’s ‘good-better-best’ strategy is one thing, but validating their performance is the key to unearthing optimisation opportunities and fine-tune your own tactics. Visibility into the sell-out rates of different price brackets allows retailers to easily spot poor pricing.
Across the board, Pull & Bear enjoys better sell-out rates than H&M despite the former’s higher median price. Pull & Bear accomplished this with a clear distinction between its good, better and best tiers. The products in each of the tiers fulfil the expected fashionability attributes and meet consumers’ perceived value.
Meanwhile, the lines between the three tiers practice are slightly blurred for H&M. The retailer had simple tops that lacked fashion elements in its ‘best’ pricing tier, which clashes with consumers’ perceived value for a high price point.
Additionally, Pull & Bear’s strong sell-out performance for its higher price points indicate a white space opportunity for the retailer and its competitors. The products in the ‘best’ tier are meeting consumer expectations but the product contribution is small. Pull & Bear or other retailers can capitalise on this as long as the product attributes are consistent with consumer demand.
Optimise with Complete Visibility
The ‘good-better-best’ approach allows retailers to establish competitive pricing if they have visibility on the competition’s assortment and sell-out performance to determine consumers’ perceived value.
With Omnilytics, retailers can better grasp consumer demand and optimise prices to maximise profitability as well as strengthen brand equity.
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