By Mary Ann Gitonga & Lachlan C
Pricing is one of the ways in which a company gains its value back from the customers. Pricing is influenced by a company’s costs, its competitors and what the company perceives the customers will be willing to pay for the product. Pricing is one of the 4 P’s in marketing that can easily be changed (along with Product, Promotion & Placement). As I am sure you have seen, milk prices at one of the supermarket giants (Woolworths, Coles & Aldi) can vary in price several times within a month.
Pricing can be divided into three main categories: Low, Middle & High.
How do we determine costs are covered?
Are low prices a constant strategic choice? Or fluctuating low prices – in order to cover prices
- Cost plus pricing
- Mark up above average cost
- Supermarkets use this technique to maintain competitive advantage. Keeping a small margin and as long as they break even, the supermarkets don’t mind. To be even more competitive they rely on reducing costs where possible.
- Loss Leaders
- Sell below cost to bring in customers to buy other products
- Supermarkets have used techniques such as selling bread and milk at ridiculously low prices (possibly at a loss), and have uber confidence in their product placement and specials to get customers to buy more products than they initially intended.
- Market Penetration
- Low price to attract volume
- This has been seen recently with the introduction of Coke’s new product Coke Life. They have hijacked the hype of this new product and reduce the price to get as many people interested in purchasing this product, so that they may continue to buy the product in the future.
- Specials are often used to get rid of stock that is soon to expire. Woolworths even use the stickers Reduced to Clear to gain the last profits from the product before they expire.
- Nearly Predatory
- Price low enough to discourage competitors
- Supermarkets are often being blamed for the closure of local businesses such as butchers and green grocers. The ACCC aims to take action against businesses that use predatory pricing, but admits it is hard to prove a business is involved in predatory pricing due to it appearing pro-competitive initially and there is often no clear evidence. – https://www.accc.gov.au/business/anti-competitive-behaviour/predatory-pricing
- Willingness to pay
- Pricing right below what a customer is willing to pay
- This could be done to such products that are imported and have a special significance to a certain group of people. For example a South African may want to purchase Biltong Slices, and can only get it from a select few stores.
- Market scheming
- Pricing high to have most margin (often on the back of new product)
- This technique could be used when offering a new product, such as the recent Woolworths campaign placing Channel 10’s ‘Recipe to Riches’ winners product on their shelves.
- Prestige/Status pricing
- Pricing high for image appeal
- At Christmas, Coles had rights to sell a Christmas Pudding created by Heston Blumenthal. The high price of this product reflected the prestige of a Celebrity Chef such as Heston.
- High prices due to real quality difference
- Boutique products such as Maggie Beer’s Burnt Fig, Honeycomb & Caramel Ice Cream would be priced higher than say a Woolworths Select Honey, Caramel & Macadamia Ice Cream, due to the difference in Quality that is perceived by the name Maggie Beer.
- Competitors dictate how much middle pricing occurs. Woolworths would identify how its competitors price their products, in the aim to provide a lower price. Woolworth’s competitors would also do the same in return. Therefore, the high prices are often unmanageable due to their desire to maintain competitiveness against the others.
When looking at price positioning the stand out company in this three-way battle is clearly Aldi. That being said Coles and Woolworths have provided that opportunity through the historical attitude of being able to shrug of competitors employing temporary price wars or buying out the competition It is an all to often sight to see two Woolworths in close proximity to each other.
As Nirmalya Kumar from the Harvard business review articulates poignantly, the strength of Aldi’s price positioning comes from it’s lean and agile business model which focuses on selling more of select segment of products at a consistent and competitive price. This enables better utilisations of quantity discounts for products research shows to be of equal quality and in some cases better quality.
The other big differentiation between Aldi and its competitors is they have consistent or linear pricing model, whereas Coles and Woolworths go on local pricing. This makes a substantial difference in the segment they target as it provides fiscal consistency, which is a wonderful Segway into the other aspect in which Aldi does extremely well, consumer psychological & economic behaviour.
Aldi’s Core Values
It is well established that humans are creatures of habit, who are by default reluctant to change or at a minimum are resistant to it until it becomes their new norm. This mesh of economic strategy that Aldi use;
- Lean Supply Chain
- Larger volume of fewer items
- Efficient checkouts
- National consistent pricing
Coupled with the psychological strategy;
- Recency Illusion
Make a fantastic mix and a more holistic approach to the way the positing differentiates their products and pricing. A solid example of this is for the price conscious consumer, if they can budget for the same products being the same price regardless of store then confidence can be gained in expenditure.
If the consumer is the water running down a waterfall and the supermarkets are the rocks directing the flow of that water what happens when flow of water subsides or changes direction? Think of the rocks as the investment put into pricing/marketing and the exposure that leaves when the products quality are the same.
“Competition is the keen cutting edge of business, always shaving away at costs” – Henry Ford
Broadbridge, A., 2005. Retailing and producer-retailer relationships in food chains. [Bradford, England]: Emerald.
Harvard Business Review, 2006. Strategies to Fight Low-Cost Rivals. [online] Available at: <https://hbr.org/2006/12/strategies-to-fight-low-cost-rivals> [Accessed 6 May 2015].
Iacobucci, D., 2013. MM. Mason, Ohio: South-Western.