Industry
Retail
Omnichannel Experience & Intelligent – The Future of Retail
Solution
Consulting
TCS Consulting Services to Achieve Success in the Business 4.0 Era
Highlights
- As the cost of living rises, retailers and consumers in the UK continue to feel the pinch.
- To retain their customer base, retailers are increasingly using promotional and loyalty driven pricing.
- Using artificial intelligence (AI) tools and streamlining promotions is crucial for clear price messages at the shelf edge, especially with shifting customer loyalties and the growing influence of discounters.
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A competitive UK market
In recent years, UK shoppers have felt the pain of an increasing cost of living.
Rising inflation in the UK can be attributed to the effect of global supply chain disruptions, causing food prices to be 25% higher in January 2024 than January 2022. We have seen retailers respond quickly, keen to stem the flow of customers to the increasingly popular discounters, such as a German supermarket chain, that achieved double digit market share for the first time in April 2023.
Retailers have taken a broad approach with initiatives, for instance, one supermarket has offered reduced food prices in its cafes, helping families save. Most retailers have introduced staff pay rises to support their teams. However, it is the price cuts, price freezes, price matching, price investments, and loyalty pricing that have really drawn our attention. The Competition and Markets Authority (CMA) has announced plans to review the loyalty scheme pricing, starting in January 2024 , with a particular focus on how it affects consumers and competition in the grocery sector.
Loyalty pricing is still relatively new in the UK, as an addition to already established loyalty programs. We see examples globally, but to a lesser extent.
In the UK, customers are happy to exchange their data for discounted prices. What isn’t clear yet is how many loyalty cards shoppers are prepared to have for different retailers in order to secure the optimal price. With all this focus on price, are retailers actually making it easier for customers to find the best price in store?
Price laddering is key
Price laddering is offering different products at different prices so each time customers pay a bit more, they get more value.
Customers usually see this value delivered in one of two ways in stores.
Laddering for quality: Customers can select more premium products for a higher price. For example, the retailer’s own brand of orange squash would be the cheapest, the brand leader may be the mid-price option, and the premium brand would be the most expensive. This tiering for quality is well established and understood.
Laddering for size: Prices usually also ladder by size variant of the same product. Customers are trained to expect bigger pack sizes to represent better value for money. For instance, a pack of 12 toilet rolls may be cheaper, per toilet roll, than a pack of four toilet rolls.
Pricing mechanics
Customers are also used to shopping promotions, which are often referred to as pricing mechanics.
Whether it is the standard buy one get one free (BOGOF) deal or a discount on buying two products together, promotions are a familiar part of the customer shopping experience.
In recent years, we have seen discounter specific activity in a couple of leading retailers that want to take on the discounters directly on comparable products.
These mechanics create some disruption at the shelf edge for customers through the signage, shelf edge stripping, or shelf talkers used to promote them.
Shelf edge labels show the price of a product in a relevant unit so customers can easily compare, for instance, price per sheet for toilet rolls or price per 100 milliliters for orange squash. If an individual product has a promotional price, such as 10% off, the unit price is reduced accordingly on the shelf edge label. However, when products are in bundled deals, such as a BOGOF, it isn’t as easy for customers to work out the price as the shelf edge label isn’t amended. They need to be adept at mental arithmetic or have phone calculators handy if they are looking for a deal or watching the pennies.
But recently, with the inflationary impact on food and the rise of the discounter, retailers have been fighting hard to deliver an even stronger price message with a particular increase in loyalty pricing.
A leading global retailer headquartered in the UK was the first out of the blocks with loyalty card pricing, driving even deeper penetration from customers in pursuit of the best prices available. The other retailers weren’t far behind with some offering personalized prices for digitally registered members and others offering member prices. It is great for customers to know their loyalty to one retailer was being rewarded and even better for retailers who could gather useful data on how often their customers shopped, the size of their basket, and what products they were buying. In an era of increasing personalization, coupled with the ability to utilize the scale and power of AI to model and predict the impact of price changes, this information is valuable to support retailers in tailoring offers even further, providing customers with a truly unique experience.
How much does it cost?
This pricing proliferation, with so many different mechanics, comes with a few challenges.
When customers go into a discounter store, it’s pretty simple to see the cost of a product. The downside is that they probably only have one choice with no quality tiering.
But in the stores of the larger retailers, when they stand at the shelf edge and are faced with multiple pricing mechanics, it is difficult for them to work out the best price. Customers are faced with a plethora of options, such as regular promotions, discounter price matching, price locks or freezes, multibuy deals, big pack better price deals, meal deals, price bundles, price reductions, and loyalty pricing. The shelves are very busy with point of sale (POS), showing all the different offers and prices.
This can pose a challenge for the truly price sensitive customers looking for the cheapest price.
If we take a staple like baked beans, we see one leading retailer has eight size variants of the same product. Four of those currently have an offer on them, with two different mechanics. They all come with different logos, point of sale, and color ways.
Another leading retailer also has six size variants of the same beans. Again, three of these have some sort of offer associated with them using three different mechanics.
When customers stand in front of the fixture in the store, it can be quite bewildering to work out the best price. It is also difficult to compare prices with those of competitors, so perhaps the supermarkets have a strategy here after all.
The ultimate price
Pricing mechanics may drive volume when customers buy into the proposition, but at what operational cost?
Without widespread electronic shelf edge labels, every price change and every promotional piece of the point of sale (POS) requires a person to put it on the shelf, in the right place. When retailers are doing that across thousands of products in hundreds of stores, the costs mount up quickly. It is these costs that retailers are keen to reduce, ensuring they can focus their spend on driving value for customers.
Over the last 10 years, there has been lots of talk about electronic shelf edge labels, and we aren’t too far away from seeing far broader adoption of them. Outside the UK, retailers are making more progress, but the capital hurdles seem to be slowing the UK down. The impact on price agility and the reduction in operational costs could be significant.
Keep pricing simple
With the breadth of choice in supermarkets, some retailers are managing master ranges of over 35,000 products.
Maintaining detailed control over these products, as they move prices to reflect market changes or apply promotions, is challenging for retailers. Leveraging AI-based assortment planning tools can help them control this pricing, ensuring the ladder remains intact. It also adds value with transparent price recommendations, which support improved price perception and full price sell through and drives sales volumes.
If loyalty pricing is here to stay, streamlining promotions to drive a clear price message at the shelf edge is key. Understanding which promotions cut through for which customers is critical. Retailers must leverage data to increasingly tailor and personalize the message.
But right now, the sea of prices at the shelf edge makes it hard to find the right price. Customers are holding loyalty cards for multiple retailers, and the market share of discounters is increasing. Therefore it is crucial for retailers to make pricing messages simple in a sensitive market.
