Surviving The Retail Pricing Wars: What Can Your Business Do?

There is a war underway in the retail landscape.

The gauntlet was laid down by the big retailers, dragging into the theatre any small to medium business that dared engage. And, try as they might, the script is playing out just the same as it always has.

The small, local business suffers while the big retailers prosper.

This is the pricing wars.

And so, in a scenario that seems destined to repeat itself, what options are there to turn the tides in your favour? How can smaller retailers stand toe-to-toe with giants and play David to their Goliath and keep shoppers walking through their doors?

Read on for the answers.

• Exploring the problem
• Is strategic pricing the solution?
• Building community to bring in buyers
• Surviving the pricing wars

Exploring the problem

In Lightspeed’s Retail Insights Report, we found that over a third of shoppers identified pricing as a deterrent for in-store shopping at 38%. Similarly, 33% of respondents feel that in-store prices might be higher than those online.

This is a significant chink of change to be missing out on.

The problem lies with the big retailer’s ability to absorb the losses associated with competitive pricing and it has created a problem where when one moves, the other twists: a back and forth where only the big boys can truly compete in a league of their own with the ramifications trickling down and harming the little guys, clambering for a foothold, just trying to keep up.

Is strategic pricing the solution?

Thankfully, there are solutions that small and medium-sized businesses can turn to to keep up with the major retailers. These can be categorised into 4 groups:

1. Cost-based
2. Competition-based
3. Value-based
4. Psychological & dynamic-based

Let’s dive into what each of these categories look like in practice.

1. What do the goods cost you: pricing 101

Cost-based pricing is all about playing it safe. It’s predictable if a little dull. Sure, you’ll break even by putting a markup on your goods or dropping prices as demand fades, but you’re missing the real action: reading the room, adapting to the heat of competition, and taking risks that could lead to something far more satisfying.

Cost-plus pricing

Cost-plus pricing is as simple as it gets—it’s bread and butter territory as far as pricing strategies go.

You’re going to be pricing your products based on only 2 factors: cost and markup, the markup being a set percentage based on how much profit you want to bring in from an individual item.

A cost-plus strategy is a safe place for any newcomers to the industry to start because its beauty lies in its simplicity—a solid bedrock to lay down some foundations until you get the hang of things and want to explore a more dynamic pricing strategy.

High-low pricing

High-low strategy implies sequential repricing with high initial prices being lowered as products drop in novelty and demand. As prices are high initially, this strategy could be associated with premium pricing, yet they differ significantly. The first and most important difference here is that high-low pricing has to do little with the competitors. In contrast, retailers using a high-low approach should be aware of seasonal trends. 

A high-low pricing strategy will be familiar to anybody with an interest in the apparel and footwear industries and that’s because it’s based on seasonality.

The way this strategy works is that a product is priced high when it enters the market when demand is at its peak. As the demand drops (usually towards the end of the season, just before a line is to be released), so too does the price, giving more opportunity to make way for the new arrivals.

Did you know? 56% of shoppers say that the ability to see products in real life (including samples/trials) is very important or critical when shopping in physical stores.

The risk here lies within balancing your stock. Too much and you’ll be left with potentially unsellable, out of season stock. Too little and you’ll have nothing to sell until the new arrivals roll in.

But once you’ve got that balance nailed, a high-low pricing strategy can be both rewarding and sustainable.

2. Checking out what the competition is charging

Competition-based pricing is all about using prices to make your business stand out above the competition. You can either match their prices, undercut them or go premium to show you’re stocking something special. It’s all about reading the room, knowing the players, and figuring out how to make sure your offering stands out in the chaos to pull in the crowd.

Competition-based pricing

Competition-based pricing is all about looking at what your competitors are doing and then setting your prices to compete with theirs. Unfortunately, I’m afraid that this is where the genesis of the pricing wars can be traced to, the big hitters undercutting each other and absorbing losses that would sink smaller businesses. The sad reality is that many sink regardless, victims of the big retailer’s low price-based pull, starving them of business until the doors close for good.

But, don’t let this deter you, should you feel like it’s an avenue you’d like to explore.

There are, however, a few things to keep in mind.

You can’t price every item in your inventory with this strategy. This would take incredible amounts of data on your competitors and create more detrimental pricing wars. This strategy should be one facet of a greater collection of strategies.

A good example would be to offer a price match guarantee against items offered by direct competitors (within reason), giving you the edge over your competitors, no matter how slim it might be.

Penetration pricing

Penetration pricing is all about getting the consumer’s attention with low prices, the idea being that your absurdly low prices draw in more customers, giving you an opening in the market in which to insert your business.

This is a good strategy if you’re new to the game and want to quickly build up a customer base and occupy a segment of the market share. It is not a good strategy for the long term, however.

This is because it’s outrageously unsustainable, the profits so small for each unit sold that it takes an abundance of sales to make it worth your while.

Instead, start with your initial prices, and increase them in small increments over time until your prices hit levels that are considered normal for the market. 

3. Pricing based on value

Value-based pricing is like knowing exactly what your customers want and charging them for the privilege. Whether you’re setting a price based on what they’re willing to pay or bundling things together to sweeten the deal, it’s all about aligning your pricing with what matters to them and making the most out of their demand.

Value-based pricing

Value-based pricing is a little tricky as it is grounded in knowing something that is, mostly, unknowable. With value-based pricing, your prices are set based on what a customer is willing to pay—what is this product worth to them? The obvious rub here is that every customer is different so that price is different for every individual.

One way to calculate a value-based price is to determine its true economic value (TEV). For example, a new car is valued at $40,000. The next model up is the same base car, but it has alloy wheels which are valued at $5,000. The TEV is the sum of these 2 figures: $45,000.

Bundle Pricing

Bundle pricing is pretty self-explanatory: you sell multiple products in a single set at a lower price than if you sold them separately.

This pricing strategy is really good for selling any products that have a low demand. Simply bundle them with a more popular (and preferably complimentary) product for less than they would cost separately.

It’s also good for squeezing some extra spend per customer.

A good example of this is at the cinema concession stand. Ignoring the borderline criminal prices of cinema snacks in general, bundling together drinks and popcorn gives the cinema a huge opportunity to sway their customers to spend more on both than if there was no bundle deal and they were charged the full price of both the popcorn and the drink.

4. Using psychology to influence buyers

Psychological pricing is all about playing mind games—like pricing a product at $9.99 instead of $10. Then there’s dynamic pricing, where you’re constantly adjusting the price depending on the mood of the market, reacting in real-time to shifting demand and market trends and using every bit of data to stay ahead of the game and get the maximum possible spend from your customers.

Psychological pricing

Psychological pricing is all about using the customer’s mind to influence itself into spending money on your products.

Essentially, if you can use your prices to influence someone’s subconscious mind, you could have a successful pricing strategy on your hands.

And here’s the thing, we’ve all seen this strategy in action and, most likely, succumbed to its charms.

The classic example is the “$9.99” rule. This is where a product is valued at a flat $10, but seeing $10 on the price tag would subconsciously push it into a higher price bracket. Pricing it 1c cheaper makes it seem a lot less which, in turn, boosts the likelihood of a sale.

Another example would be to position an expensive item right next to something even more expensive, making the first item seem like a bargain.

Premium pricing

Premium pricing is the Yin to penetration pricing’s Yang.

The key with premium pricing lies within its name, pricing products high to position them as being a premium product as well as providing a premium service and they occupy a very interesting space in the pricing psyche.

Consumers who purchase premium products usually do so to reinforce their own social status. Think high-end fashion or luxury brands. They’re within the buying grasp of the few, who do so to draw the envy of the many.

“From the outside, we try to make people understand that what we’re trying to provide to people is a ridiculously high standard, whether it’s in product or services.”

Luke Colaianni, Operations Manager, Altea

The tradeoff here is that products that would be successful under a premium pricing strategy don’t come cheap. The initial outlay can run quite costly.

It’s a strategy that, on paper, seems destined to fail. However, due to our innate desire to ‘keep up with the Joneses’, it’s a strategy that will probably outlive us all.

Building community to bring in buyers

There are other, non price-related factors at play when deciding where to shop. An interesting area is the idea of locality, the feeling of community that a local shop can cultivate for everyone’s benefit. The locals get to help out one of their own, and stocking locally sourced goods builds up local producers.

“We are sourcing produce from other small businesses so that we can showcase their products. Essentially, Nevertire is in the centre of New South Wales. So it’s like we’re the central hub where we can bring all these people and their produce together.” 

Kat Montgomery, Founder and Owner, The Rural Trader

And the stats back this up with 25% of shoppers seeking a personalised and attentive shopping experience that goes beyond generic interactions. Similarly, 25% are attracted by the draw of unique, locally sourced items. And 24% of consumers value a business that aligns with their beliefs and actively contributes to the community.

Surviving the pricing wars

The retail pricing wars may seem daunting, with big players constantly undercutting each other and leaving smaller businesses struggling to keep up. But survival is possible, even as giants battle it out. 

By adopting a strategic pricing approach, such as cost-based methods for stability, competition-based techniques to stand out, or value-driven tactics that focus on customer demand, smaller businesses can carve out their own space. The key is to remain adaptable, leverage your strengths, and remember that, despite the noise from large retailers, there’s still room for unique, local offerings to thrive.