Chapter Ten. Price and value

I’ve not gone into theoretical strategy much in this edition; I have in the past but I reckon now that it’s not useful to generalize. There is one area of strategy that is worth talking about though and it’s pricing. It’s worth talking about for a handful of reasons—one primary one is the value of bargains. Bargains are brilliant in almost every store—upmarket boutique or down-and-dirty pound store (I love pound stores, incidentally—Poundland, especially, is a fantastic example of focused and thoughtful retailing).

Everyday low prices (ELP)

Everyday low pricing is an interesting modern pricing technique. It’s also the best example of the failure of slavish dedication to a rigid price proposition. The theory of ELP is that every price in store is as low as possible every day. Furthermore prices will not be slashed during sale periods—indeed there will be no more sales at all, just the lowest prices every day.

U.S.-based Wal-Mart is often credited as the pioneer of ELP. Founder Sam Walton would almost certainly have suggested that all Wal-Mart did was to take discounting and direct-from-manufacturer purchasing further than his competitors.

I worked for Comet when the company first introduced ELP in the late 1980s. A Kingfisher finance team attempted to codify ELP into a philosophy and then to interpret it as a mission applicable to the whole business. Pricing became the absolute focus of what we, as a retailer, did. To make pricing the absolute mission was wrong, and I’ll explain why as we go on.

I am always mistrustful of attempts to shoehorn simple common sense into complex strategy. At Comet we interpreted ELP as meaning all prices would be monitored against those of major competitors, then adjusted to match or beat these price points. In addition, each key product category would feature at least one product priced lower than any entry price-point offered by our competitors. The product would then remain at that category-killing low price everyday. So, for example, we offered a 14″ portable color TV (remember those!) at $99 when the previous entry price-point for this product was $109. All our competitors were at the $109 price, so we were a good chunk cheaper. For how long do you suppose that competitive advantage lasted? A year? A season? Well, Dixons, Currys, and Argos cut their price point to match ours within days. All that happened was the whole sector now made $10 less profit for every one of those 14″ televisions sold. That’s $10 lost out of gross margin, don’t forget.

Because we at Comet were committed to our misinterpretation of ELP it made it very hard to respond in-turn to our competitors” actions. If we dropped our own price further, it would have damaged the credibility of our ELP proposition, suggesting that our previous price was not the lowest everyday price after all. If we remained at $99, just like everyone else, we had no competitive advantage since pricing had become our only competitive lever. Building the mission around ELP provided no competitive advantage at all. Comet’s current CEO, Hugh Harvey, has spent the last handful of years trying to move Comet off price-focus and on to a proposition based around service—I hope he manages it but with Best Buy breathing down Comet’s neck in the UK ...

When rivals” store environments, prices and product ranges are so similar there is a terrible fear that a customer will simply walk from store to store and buy on price alone. Comet, as do many others, believe that convincing the customer that their prices are always reliably low will ensure the customer only comes to them. I’m not sure that’s very realistic given the amounts being spent on a single electrical product. Would you only check one store when spending $800 on a TV? No, nor would I. ELP, as practiced by many, is fatally flawed.

Merchant dealing

I put the challenge of the $99/$109 14″ TV to a number of Britain’s best retailers. They decided quickly that it would have been much more effective to have taken that TV and to have slashed a genuine deep cut off the price, say to $89, and then to have run that as a limited stock promotion. We would have negotiated a larger order with our original equipment manufacturer (OEM) and taken a bigger discount. That stock would make up the limited promotion. The promotion would then have been presented honestly to customers: “Here’s a fantastic deal we’ve negotiated specially for you—once it’s gone, it’s gone.” Indeed, in the second half of the last decade, this is exactly how Asda and Tesco have been beating the electrical retailers at their own game.

Yes, the competition would still match our price but by then we would have enjoyed at least two weekends of price leadership in this category. Also, competitors would be forced to cut their margins from existing stock bought at their usual cost price, so their profit per unit would actually be less than ours.

This bargain $89 TV would feature heavily in local press and radio adising. Customers flicking through the local paper would see a bold, bright, honest ad. Many customers would bring forward an intended purchase as a result: “Let’s get one now and put it away for Tommy’s Christmas gift” and “You’ve been on about a TV for the kitchen, shall we get one while this cheap deal is on?” And a significant number of customers would switch to Comet for this purchase because:

1. We made it easy for them.

2. We gave them a good reason to act now instead of tomorrow.

I strongly believe that real competitive advantage comes from maintaining honest everyday prices mixed with bargains. Quite simply: not ripping off the customer, and retaining the ability to offer great, customer-delighting, promotions. It is this approach, call it a philosophy if you want, that will enable your store to convince customers that you are honest people to do business with and that you are capable of exceeding their expectations on price.

Making bargains the star

Back in 2007, I got this nice note from Irish book retailer Lyn Denny: “I’m the owner of a small independent bookshop in Ireland. We’ve been open a year and things are going great. I bought your book in September and haven’t looked back. We immediately introduced a bargains table and it has been the fastest-selling area of my store ever since. We are delighted with it and so are our customers.” Apart from me showing off a bit, why this is worth talking about is that Lyn’s store isn’t some downmarket discount shop: Bookstór (www.bookstor.ie) is a quality independent in a country that values literature highly. People love bargains and they work in almost any store. Oh, and Lyn’s store is still with us—look at their website and you’ll get clues why: The store is buzzing with energy, it’s not just books on shelves. There are story events, loads of communication with customers, passionate and inspirational recommendation, and loads of character on show.

Even in a chain-store branch where you don’t get to dictate prices you can still make bargains the star. There are always awesome offers in the price lists—these might be end-of-line items or even regular stock. Try pulling lots of the end-of-line product into your store from other stores around the company and then putting them out there in front of customers. Don’t forget clearance and manager’s specials too as bargains.

Make up some simple flyers featuring these star bargains. Hand these out on the car park and around town. If you have budget, get them delivered with the local free papers too. Have your team point out the specials to every customer who comes through the door: “Just in case you’re in the market for X later, I wanted to tell you we have got them priced at Y for a week or until the stock runs out.” That’s not pushy; it is friendly no-pressure selling.

Enthuse the whole team at your daily team meetings. Tell them about the day’s top three bargains. Consider running a little incentive on those lines: A bottle of champagne goes to the person who sells the most over the weekend. A bottle of bubbly is just enough to help the team to take notice; it’s a welcome treat for most, but it’s not so much that salespeople will mis-sell just to get it. Put flyers on doors and on the counter top. Set up an A-frame outside if you can. Sometimes the council take offense at the presence of these A-frames, but you won’t know until they send you a nice letter and ask you to take it down, so go ahead and see what happens!

Pulling together the bargains is hard work. You must be inventive, on top of your inventory, and ready to act fast. The work is worth it: You will drive customers into your store and the combination of honest pricing and real bargains will boost your reputation and your sales. Bargains give you competitive advantage.

Cost and value aren’t the same thing

Lots of retailers are able to create a premium positioning and charge a bit more for the things they sell. That’s obvious, but I wanted to take a closer look at some specific examples and get to grips with how those retailers are able to make customers feel comfortable paying a premium.

Oi! That’s my planet too—the costs of consumption

While we’re on the subject of pricing, this is a good place to talk about the flip-side of the price-driven consumption frenzy. I’m one of those people who grew up in the 1970s and 80s in a world that believed consumption at any rate could be sustained forever—too young to be bothered by the early 70s oil shocks and too old to really “get it” when, late in the 90s, environmental concerns began to break mainstream ground. Ten years later and even people like me have been forced to confront the reality that the blue and green ball upon which we stand isn’t going to last if we keep kicking the crap out of it. Parallel to that we’ve begun to better understand the long-life health benefits of eating better and walking about a bit more.

As retailers we are in the vanguard of consumption and we have some serious thinking to do. Here and now I need to say that I am an unashamed liberal-capitalist and I believe strongly that the creation of wealth is a force for common good in the world. I’m also very supportive of the idea of globalization: one planet, one nation—and why not.

So how does that square with the need for sustainability? Being one of the world’s biggest sources of employment is a pretty good start—everyone is entitled to opportunity, dignity, and the chance to earn a decent wage. Retail provides that, and here’s where we start to get to important stuff—time and time again it is proved that those retailers who treat their staff with respect and who provide support and opportunities for self-fulfilment are the ones that customers prefer to shop with. On the customer side, growing awareness of the need for sustainable living is leading a quiet revolution, with our customers taking more and more of their money to those retailers whose practices have the least negative impact on the planet.

We’re really good, as an industry, at moving minds and influencing consumer behavior—I believe the most forward-thinking retailers have an opportunity here to move customers even faster toward truly sustainable consumption. Why wait for consumer trends and government regulation to push us? Let’s drive that change ourselves—not just because doing so, on a human level, is a feelgood thing, but also because we can drive our business’s success by doing so.

Broadly, there are two routes open to retailers driving toward a sustainable position:

1. Commit the entire format to a sustainable position (Whole Foods Market, Lush, Abel & Cole).

2. Operate a traditional business but introduce a significant commitment to sustainable practices (Marks & Spencer, Waitrose, American Apparel).

Making these moves is a good community choice and a great human one too. Of course, the usual caveats apply: Choose your position carefully, communicate it well, and above all be authentic—if you say you have a commitment to X then you must genuinely believe that commitment to be right or you run the risk of being “found out.”