Relative Price

Are you framing value in the most compelling way?

Let us start by giving you 2 situations.  Firstly, you are in a store looking to buy a new DVD.  The DVD costs £15.  You get a text from a friend telling you that a store 5 minutes drive away is selling that DVD for £10.  Would you go to the other store?

Secondly, you are in a store looking to buy a new laptop. The store is selling the one you want for £500.  You get a text from a friend (you’ve got some helpful friends…) telling you that a store 5 minutes drive away is selling that laptop for £495.  Would you go to the other store?

When researchers have tested these scenarios they find that most people would go to the other store for the DVD, but not for the laptop.  Now, traditional economists would say this is crazy.  In both situations the saving is £5.  So, the only rational thing to do is to go to the other store both times or not to go both times.  Why would you make a different choice for the same saving?

In contrast, behavioural economists would say it is perfectly natural and reflects the way that we make choices.  A £5 saving on a £500 purchase doesn’t feel like it’s worth the effort.  Whereas a £5 saving on a £15 purchase feels like a decent saving and worth the effort.

Now, clearly absolute pricing is important.  Start selling a litre of milk for £3 and you won’t have many shoppers buying milk from you.  But relative pricing is also crucial.  It is crucial because we rarely make a purchase decision in isolation.  We tend to make them within the context of the choices around us.  Is £1 for a 500ml bottle of water good value?  It depends whether the bottle of water next to it is 50p or £1.50.

This is what the shopper sees at shelf.  What your product is next to, or is being compared to, has a big influence on value perception.  So if you can influence how shoppers make comparisons, you can influence how they judge value.  And you can do this without changing the actual price of a product.

So, how can you use relative price to your advantage?

Merchandising. In many categories, some simple tweaks to how products are merchandised can frame choices in a much better way. For instance, if you have 3 core price tiers, are you merchandising them in a way that makes the choice clear at shelf?   You are likely to find that many shoppers, who would have bought the cheapest product, might now buy the mid tier product.   You are not changing what you are offering, just how you are offering them.  And 10% more shoppers buying the mid tier product is likely to be worth a lot of money.

Ranging.  In many industries there are products that act as price anchors.  It could be a top of the range car or the wagyu beef on the restaurant menu.  Very few of these are actually sold.  But their presence significantly increases the chances of a shopper buying a higher priced option within the rest of the range – the £20 steak instead of the £15 one.  Limited shelf space in a store means that you can’t have lots of these decoy products.  However, you can have a few.

In our industry, obviously, we introduce new products to sell them.  But what if we introduced a few products to help sell other, existing, products?  Is the best way to make the £6 product look great value, not to discount it to £5, but introduce a product at £8?

Competitive Set.  Most competition in our industry is with direct competitors – other grocery stores, other brands on shelf.  But opportunities for growth can come from competing against a wider competitive set.  Take food service – a Dominos pizza might cost £12-£15, a supermarket pizza £3-£5.  A porridge pot in Starbucks might be £2, but £1 or less in a supermarket.  That is a big value advantage if you can frame the choice in that way.  There is a lot of spend to go after, if we widen the competitive set in our minds and then shoppers’ minds.

So, to repeat – we are not saying absolute price is not important.  It clearly is.  But we are saying that, in the context of how shoppers make choices, relative price is key.  And relative price can be influenced without changing actual price.  Small changes to how price and value are framed can lead to big differences.  Which could be pretty powerful in a low growth environment.

Get your super premium NPD ready.  It might not sell, but your other stuff will.

Feel free to forward.  Have a great weekend and speak to you next week.

© 2020 by Insight Traction