With the holiday season upon us, retail CEOs know that this month will make or break their year. As many retailers and brands launch new products, two factors will determine success or failure: is it the right product, and is it priced right? These days, pricing is the hottest topic in retail, and it is also the most complex.
Over my next few posts, I will share insights and comments from discussions with several CEOs with diverse opinions on pricing in the retail industry.
Markdowns, discounts and promotional strategies abound, creating a dangerous pattern deemed a “race to the bottom.” Retail blogger Robin Lewis put it best when he said, “It behooves brands and retailers to beware what they ask for by diminishing the value proposition to…buy me, I’m cheap.” When the “value” of a product shifts from brand recognition, differentiated features and in-store experience to merely “price,” you have entered that race to the bottom.
Regarding price, consider that while Americans bought 19.4 billion garments last year, a 5.3 percent decrease from 2010, the total apparel sales dollars rose almost 5 percent to $283.7 billion, according to the trade group American Apparel & Footwear Association. This means price increases, along with some shift in product mix to higher-priced garments, accounted for all of the growth in the apparel industry in 2011. This should set off alarm bells in the heads of most apparel retailers and brands.
Why? First, with stagnant or declining unit sales, if retailers are not pricing products to capture full consumer value, comp sales will almost certainly decline. Unfortunately, this is already happening for many retailers. Second, for those who have managed to increased comps by pushing price increases, how do they know they have captured all of the consumer value? How much is being left on the table?
So how do retailers and brands approach pricing today? There are several different models, including “take it or leave it” pricing (e.g. Apple, Under Armour), the “manufacturer’s suggested retail pricing” that no one actually pays (e.g. automobiles) and value- or volume-based pricing (e.g. Costco).
In the fashion industry, pricing models are just as mixed:
- “Fixed Price” on unique products with long lifecycles (e.g. Uniqlo)
- Percentage off “retail price” plus additional discounts, promotions and markdowns (e.g. Kohl’s).
- “Everyday Low Price” (e.g. JC Penney)
- Set entry price with quick markdowns when inventory doesn’t move. This model is often used by fast fashion retailers with short product lifecycles (e.g. Wet Seal)
- “High/Low” pricing, where products are in a near constant state of change… up, down, up, down.
Now layer on e-commerce, with mobile technology enabling real-time price comparisons, and the exercise of pricing becomes even more complicated.
It is no wonder the consumer is confused on what is and what is not a good value anymore. JC Penney, for example, is clearly struggling as it attempts to change the customer’s mindset. One customer recently stated on the retailer’s Facebook page: “This is not a change at all, there has never been a day in all of my shopping at JC Penney where ANYTHING has been full price.” Another customer stated, “I really, really miss my coupons.”
In this three-part series, I will explore how pricing is managed in three different retail entities – first Specialty & Vertically Integrated Retailers, then Department Stores, and finally individual Brands (the manufacturers). I will look at what’s working and what’s not, and I’ll discuss the results of some of my conversations with CEOs in each category.
