Building An Effective Pricing Strategy

Building An Effective Pricing Strategy

Building An Effective Pricing Strategy

When it comes to setting the pricing strategy, merchandisers often opt for a fixed markup.

The selling price is commonly set with a predetermined multiplier value based on the cost of goods – a simple and straightforward calculation as most merchandisers don’t have access to in-depth insights or other variables to inform pricing. More important is aiming for the desired profit margin. 

But as more competition enters the space, fixed markups lose competitiveness. This means a product is either underpriced or overpriced, as the pricing does not accurately reflect market demands. 

In other words, unoptimised pricing hurts profit margins. 

Today, brand values are becoming increasingly important. It’s more critical than ever to deliver pricing that is driven by customers’ perceived value. 

To establish an effective pricing strategy, merchandisers can adopt the ‘good-better-best’ pricing approach. With this method, pricing is based on the perceived or estimated value of an item. By balancing the margins of the items according to perceived values, you can ensure profitability is evenly distributed across.

This strategy is mapped against the three different tiers of fashionability:

  • Core
  • Fashion
  • High fashion

Core items, like a t-shirt or plain cami tops, have prices that are reflective of their perceived value. The higher the fashionability attribute of an item, the higher the perceived price value it has.

To implement the ‘good-better-best’ pricing structure, here’s how. 

Step 1: Establishing your own good-better-best tiers mapped against fashionability

Having your own good-better-best pricing overview helps to compare against the relevant competitors’ to validate consumer perceived value and to maintain competitiveness. 

With this, your pricing strategy will not only be reflective of current demands, but also optimised to generate higher margins. 

To create a good-better-best tier, first, identify the median price and the price spread. 

Step 2: Get an overview of your competitors’ pricing strategy

Next, do the same for your competitors. This helps you in understanding their brand positioning – and how theirs compare to yours.

Pricing strategy - Full price summary
Zara and H&M’s full price assortment

Here, you can see Zara and H&M’s full price assortment from January to May of 2020. Zara’s assortment was priced at US $42.35 – $15 higher than H&M’s. With the filter of ‘Full Price’ only, it provides a more comprehensive view of your competitors’ pricing strategy. 

Step 3: Review competitor’s price breakdown by category

Next, dive into a category first, and understand the price distribution for that selected category, before analysing sell-out by price range. In doing so you have a better grasp of the fashionability within each bracket, as well as what consumers are willing to pay for at full price. 

For this example, we’ve selected the category Tops. The median price for Zara was US $21.65, and $16.16 for H&M. 

The majority of Zara’s tops were priced between US $10 to $40, while at H&M, this ranged from under US $10 (starting at $2.99) and up to $30. By establishing its fashionability, you can easily dive into the assortment within each of the brackets. 

Step 3: Review Competitor’s Price Breakdown by Category

Next, dive into a category first, and understand the price distribution for that selected category, before analysing sell-out by price range. In doing so you have a better grasp of the fashionability within each bracket, as well as what consumers are willing to pay for at full price. 

For this example, we’ve selected the category Tops. The median price for Zara was US $21.65, and $16.16 for H&M. 

The majority of Zara’s tops were priced between US $10 to $40, while at H&M, this ranged from under US $10 (starting at $2.99) and up to $30. By establishing its fashionability, you can easily dive into the assortment within each of the brackets. 

The ‘good-better-best’ pricing strategy.

Good

Zara ( ≤ US $ 20)

H&M ( ≤ US $ 10)

The ‘good’ price range for both brands consists of solid-coloured basic products, such as t-shirts, camisoles, tank tops and bodysuits. At Zara, similar basic products were priced up to US $19.90, unlike H&M with a maximum price at $9.99.

Better

Zara (US $ 20 – US $40)

H&M (US $10 – US $40)

T-shirts were still present under the ‘better’ price range but with more prints and patterns. A higher number of fashion elements can be seen, such as puff sleeves, embroidery details and better fabrications such as satin or crepe. This falls under fashion items, with H&M offering at a lower entry price compared to Zara.

Best

Zara (US $ 40 – US $ 50)

H&M (US $ 40 – US $ 50)

Coming to the ‘best’ price range with the highest fashionability attributes, both Zara and H&M have a similar pricing strategy, with louder and bolder fashion elements.

Values Over Margins

With the ‘good-better-best’ approach, you have a clear idea of how customers perceive a product’s value, at the click of a button. 

For Zara and H&M, though the price spread did overlap, it was clear that Zara’s ‘better’ assortment was US $10 higher than H&M, while H&M’s ‘better’ pricing assortment was much wider compared to Zara’s. This means H&M’s strategy was to offer a wider range of fashionable products at an ‘affordable’ price to cater to more customers. 

Understanding how competitors build their ‘good-better-best’ pricing strategy and consequently their sell-out performances allows you to build an effective pricing strategy according to market demands. 

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