As Professional Pricers, we often hear from individuals within companies the so- often quoted tune from the movie, Chicken Little, that “The Sky is falling!”, to the effect that all consumers are flocking to our southern neighbour with its lower price tags.
Well here are our thoughts on the recent decline in the U.S. dollar and its impact on ‘Fast Moving Consumer Goods’ – FMCG products. Don’t compromise your brand equity in favor of self-destructive short-term bad discounting habits. We must first ask ourselves whether the current unrest and turmoil with Canadian Retailing & Manufacturing is psychological more than anything else. In other words, are people truly taking a wait-and-see approach in an effort to seek deals and concessions from vendors or are merely evincing the breaking of a psychological barrier-the achieving of Canadian-U.S. dollar equity? Are Canadians simply feeling the time has come to take back the incremental disparity that existed for the past century?
Independent of the cause and therefore of the longevity of that response, companies are now using or wrestling with the use discounting to spur or at least maintain, demand during times of uncertainty and turbulence. The end result is lower profits for everyone as customers learn the game and negotiate even harder on prices.
How do you counter that tendency?
First, recognize that you may offer value that’s unique. For example, you may provide consumer products not available in the US or on which direct comparisons may be difficult. This would be the case if you produce fashion-based items. Focus on intangibles such as style, quality, and perhaps, even use your brand if you believe that there’s inherent value. If service is important, focus on proximity and the ability of the buyer to get service quickly.
It’s also important to realize that not all customer segments are equally price sensitive. If you’ve got products that particular customers purchase based on criteria other than price, focus your marketing, sales, and advertising efforts on those customer groups. It’s important to realize, however, that even less price-sensitive customers will switch if the perceived value of a lower price outweighs the value of other considerations. For example, Lexus customers likely value their time highly, but, a $15,000 differential makes it worthwhile to spend the extra time to shop for a vehicle south of the border.
Along the same lines, but considering smaller item purchases, the “investments” in time that a customer would need to make in cross-border shopping for an item such as artificial logs are likely not worth the price differential. In this particular case, the purchase may be made in conjunction with a raid on a store such as Costco, where other items would also be purchased during the same expedition. However, there are other products, especially those of a perishable nature, where such purchases are not possible. So, for sellers of such products, there’s no need to panic!
Remember, price Sensitive customers are consumers that are ‘Rented’ for a period of time until the next vendor comes along with a lower price. These customers which typically represent 30% of a given customer segment should not dictate pricing for those ‘value’, ‘loyal’ or convenience seeking customer segments that tend to be more price inelastic and trade-off value for price.
Think about the implications of lower prices to spur or retain demand. You set a new benchmark for consumers to negotiate in the future and further, make it more difficult to bring new higher price discipline back into the market once the market stabilizes.
The rule of thumb for good pricing practices is to align price with what customer’s value. Any efforts to deviate away from disciplined value-based pricing principles will invariably erode profitability and sales.
It’s time to fight back and sell value, whether through products or service. Differentiate yourself from all competitors. Avoid price transparency by bundling and/or unbundling or offering uniquely different or varied product offerings.
Leave price to those vendors that place little or no value on long-term profitability and sales and customers that place little or no value on your value proposition.