Building An Effective Pricing Strategy

Building An Effective Pricing Strategy

Building An Effective Pricing Strategy

When it comes to pricing strategies, merchandisers often opt for a fixed markup. That price is commonly fixed 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 to them is aiming for their 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. 

Consumers today purchase based on emotion, rather than an actual need – it’s the reason behind brand values becoming increasingly important. Today, it’s more critical than ever to deliver pricing that is driven by customers’ perceived value. 

To establish an effective pricing strategy, merchandisers need to perform a pricing review based on the ‘good-better-best’ pricing structure. The structure consists of 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, you need both internal and external sources. The internal source would be the data on your brand’s pricing structure, while external sources are your competitor’s pricing structure. It is important to note here that the performance of your competitors’ pricing strategy needs to be taken into account as well. 

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

Below are the key steps:

Step 1: Get an Overview of Your Competitor’s Pricing Strategy

First, identify the median price and the price spread of your competitors. This helps you in understanding their brand positioning – and how theirs compares 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.

Step 2: Review Competitor’s Price Breakdown by Category

Next, break down the price range into different brackets and analyse the sell-outs. 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 and up to $30. Here, you can easily dive into the assortment within each of the brackets to identify the ‘good-better-best’ pricing strategy.

Pricing strategy - good-better-best strategy
The ‘good-better-best’ pricing strategy.

Good

Zara ( ≤ US $ 20)

H&M ( ≤ US $ 10)

The ‘good’ price range consists of solid-coloured basic products, such as t-shirts, camisoles, tank tops and bodysuits. At Zara, similar basic products can be priced up to US $20, unlike H&M, which capped it at $10.

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

Creating a ‘good-better-best’ pricing analysis, you’d 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 Zara’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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