How to Build a Demand-Led Pricing Model
In a consumer-driven landscape, a competitive pricing model is one that tallies with consumers’ value perceptions. The knee-jerk reaction during an economic downturn is to aggressively bring prices down to attract cash-strapped customers. However, the sudden drop in prices affects consumer perception, leading to reservations about product quality and long-term value. Adding to the situation, blanket price slashes seriously hurt profit margins.
How can brands justify setting premium prices for products without discouraging customers? By ensuring that products fulfil their value expectations at every price point. To achieve this, brands must dig deep to understand demand and uncover the market’s perceived value for every product. With a strong grip on consumer expectations, brands can price accurately and encourage customer loyalty through value.
Establish a Tiered Pricing Model
As consumers seek quality and value, it is paramount that products launched meet these needs. The tiered pricing model, also known as the good-better-best pricing ladder is ideal to effectively reflect customers’ perceived value. With this strategy, products are priced based on their level of additional attributes. Core basic products fall into the lowest tier, while more elaborate and intricate styles go up a tier with every additional attribute.
To avoid overpricing or underpricing, brands should dive into their competitors’ tiered pricing strategies to benchmark against. Analysing competitor brands’ pricing by category, subcategory and attributes is the best way to accurately grasp the market’s perceived value for every product. These granular insights will be instrumental for better assortment and prices to reflect consumer demand.
Analyse Pricing Model at a Granular Level
To understand the current demand for jeans, we will be comparing three key brands in the US and identify the optimal price for different jean styles and the fashionability attributes that the market expects for ‘good’, ‘better’ and ‘best’ pricing tiers.
At a glance, the first thing to note is the difference in median prices among the three brands. The high median price for jeans did not deter Pull & Bear, racking up strong sell-out across all the pricing tiers. Meanwhile, H&M failed to achieve high sell-out rates for its core price brackets despite pricing 19% lower than the average median price. Stradivarius achieved high sell-out for its ‘better’ and ‘best’ tiers but its ‘good’ products did not trade as well.
Pull & Bear is the clear winner out of the three with a firm grasp on consumer demand. The brand also provides distinctive value at every pricing tier. However, we discovered a white spot in the brand’s ‘better’ pricing tier at USD 20-30, which H&M and Stradivarius covered extensively.
There are two faults to H&M’s strategy: a lack of variety and the poor distinction between the three pricing tiers.
The Importance of Clear Distinction Between Pricing Tiers
Pull & Bear and Stradivarius offers a variety of jeans, from essential skinny to baggy mom jeans and the wide-leg cut. The shift towards comfort and casualisation in fashion gave rise to more relaxed denim styles than the skinny fit. By producing mostly basic styles, H&M simply did not meet the current consumer demand for roomier jeans.
Pull & Bear and Stradivarius provided distinctive value increments at every price range. Customers can acquire more elaborate details as they go up the price tiers.
Skinny jeans will always be an essential product but H&M poor performance with mostly basic skinny jeans shows that diversifying the assortment with styles that meet current demand will drive sales more effectively.
H&M’s products in the ‘good’ and ‘better’ tiers were almost indistinguishable, such as ‘skinny regular ankle jeans’ and ‘girlfriend regular ankle jeans’. Consumers might consider these products too similar and as belonging in the same pricing tiers. This indicates that the brand has overpriced their products, which damages consumer confidence and leads to low conversions.
Deliver Value at Every Price Point
Reviewing competitors’ activities at a granular level and with a demand-led perspective helps brands validate tiered pricing strategies and accurate forecast trade performance.
At a time when consumers hold quality in high esteem, clearly delivering value at every price point is crucial to driving conversions. As we’ve seen in this analysis, a lower median price is not always effective at attracting customers if the products do not meet their needs. At the same time, brands can rest assured that increasing prices can translate to sales as long as each product tallies with consumers’ value expectations.
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