SMOKE AND MIRRORS

The strategies that retailers use to design and implement pricing strategies has always fascinated me. Likewise I am also interested in how shoppers perceive and react to prices within the store and on online retail sites.

The last decade in particular has witnessed an inexorable rise in the number of special deals, price promotions and offers as retailers respond to an increasingly challenging business environment. Many of them see price as a visible and direct way in which to attract shoppers and the reality is that upwards of forty per cent of all items currently on display in a supermarket form the basis of some sort of price-related deal or promotion. The exceptions are the discount retailers (who it can be argued offer low prices anyway) who have about ten per cent of their merchandise on a price offer.

Despite all of the sophistication that we associate with retailing, special deals, sales and price discounting feature prominently. The traditional January sales period has been extended to many months of the year. Concepts such as “Black Friday” have further driven the concept of discounts and special deals to such an extent that shoppers now expect special deals and offers. Some would argue that this has raised questions about what is the real price of a product anymore. The price label attached to the item in many cases does not reflect the reality of what people might actually pay for it.

Price comparison sites have also empowered shoppers to the extent that they are far more familiar with competitive offerings and that this leaves them is a stronger negotiation position when it comes to purchasing a product.

However I would also argue that there are many shoppers (and I include myself in this) who are either too lazy or time-poor to properly check out competitive prices and in essence do their homework before making a purchase.

Conversely there is still evidence that retailers engage in a “smoke and mirrors” exercise with a bewildering array of deals and price promotions that only serve to confuse and potentially mislead shoppers.

In 2015 the Competition and Markets Authority (CMA) in the UK carried out a three month investigation of retail pricing practices following on from a complaint made by Which, the consumer magazine about retailers misleading shoppers.

Of the 150,000 products investigated they found that 800 items were subject to potentially misleading pricing. This approximates to 0.05 per cent in total. They also found that generally food retailers were serious about attempting to implement fair and transparent pricing policies and strategies.

What are we to take from this survey?

Firstly we can take some comfort from the fact that in general, retailers are not setting out to systematically mislead us and take advantage of shoppers.

Secondly there is evidence that in some cases retailers can be accused of sharp practice in this area. This often can be seen in the areas of “multi-buy” offers, “was/now” prices and shrinking package sizes.

Let’s consider these issues in more detail.

Multi-buy deals refer to situations where the retailer offers the shopper a price deal for buying a number of the same items. But all may not be what it seems. Take this example.

A Nestle Munch Bunch Yoghourt is priced a £1.

The Multi-buy offer is “2 for £2. This latter offer looks “the real deal”. However less astute shoppers may have failed to pick up on the individual price for the particular item in question. Put simply, there is no special offer or bargain here.

The “was/now” deal on the face of it can look appealing and signal that there is potentially an attractive saving on offer if the shopper moves on it.

The problem occurs however with the issue of what was the original price. If the promotion states that the price was £10 and is now £6, a shopper can reasonably expect that this represents a significant saving. However in reality the original price may never have been offered at £10 or if it was it may have appeared on the shelves for a little as one day. The original price may have been closer to £7 or £6.50.

Legislation is weak in this area. Guidelines exist but are not enforceable and legally it can be a minefield in a court of law to prove that deliberate deception has taken place. Generally the quoted “was” price should reflect the price of an item at which it is usually sold at.

In May 2016, Asda, one of the “Big Four” retailers was found guilty of misleading advertising over a particular price promotion that it ran. This involved a multi-buy offer of three boxes of Choco Squares for £3: where a single box was advertised as selling at £1.38. In fact the actual price of one box was 97p. This was deemed to be misleading by the Advertising Standards Authority (ASA). Their statement concluded that “we considered the promotion was likely to encourage consumers to purchase multiple packs of Choco Squares when previously they might have purchased only one, based on the ad’s suggestion that a genuine saving was available.”

Clearly the tendency of retailers to use such tactics increases with the pressures to discount and reduce prices.

Even in the fashion retail sector it is estimated that the percentage of markdown (reduced prices) stock in UK footwear, clothing and accessories increased from forty-six per cent in 2015 to forty-eight per cent in 2016. Clearly January represents the peak period for markdowns (55%) but the practice is omnipresent all-year round.

We are all familiar with the need for price transparency. The opportunity to “play smoke and mirrors” in the field of retail pricing is one that is difficult to ignore. It is also very tempting for retailers.

One retail expert has put forward the view that we need a new executive position at board level in the retail sector: namely that of a Chief Pricing Officer. The argument in favour of this is based on the belief that traditionally pricing decisions reside with a combination of marketing, finance and sales. Thus it can be argued that “everyone and no-one” is responsible – leading to inaccurate or confusing decisions.

The article argues that three elements need to be in place before it could work in practice.

  1. The individual would need to work closely but independently of the departments that have traditionally made the decisions. This would reduce the dangers of vested interests swaying any potential decision.
  2. It would also need commitment from the CEO and the CFO (Chief Finance Officer) of the retailer concerned.
  3. There is also a need to invest in the pricing capabilities of the retailer. (Browne, 30 July 2015. “Comment: It’s time for Chief Pricing Officers to join retail boards”. Retail Week).

This view might be interpreted as being idealistic and fanciful. However it has the merit of recognising the need to “professionalise” the role and task of pricing decision-making” in retailing. In my view this would mirror what has happened to the profession of procurement. This function has progressed over the past couple of decades from being a clerical function to one which is seen as a strategic element of long-term planning and development in the organisation.

It might appear as though I have drifted “off-topic” with this injection of the concept of a Chief Pricing Officer. However the challenges associated with setting and implementing retail pricing strategies continue to mount. The advent of electronic shelf labels also as some significance as well. However that is for another day (and blog).

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