Sandeep Heda: How Retailers Can Improve Shoppers' Price Perception

Read the transcript below.

SANDEEP HEDA: We've seen price wars break out all across retail. And really it's happened for three key reasons. First, there's increased price transparency. Second, we've seen much more consumer choice and lower switching costs between different options. And then finally, we've seen a number of discount and "low-frill" options come into the market.

And so, as a result of that, we've seen price wars escalate across many different competitors and many different subsectors. A lot of times these price wars happen without a fundamental question being answered, which is we're investing a lot in price, sometimes up to billions of dollars, but are consumers giving credit to companies who actually make these big price investments?

Through a lot of Bain's research directly with consumers, we actually find that there are winners and losers in terms of the battle for price perception. What we've seen is that some companies get a lot more credit for their pricing than what you would actually see on the shelf. And, sometimes, other companies don't get the credit for the dollars they've invested. In certain subsectors of retail, this can be a gap of 5% to 10% of price percentages in the market.

And so, you may ask yourself, well, what drives that? What can companies do to actually improve their price perception? We've seen four key areas that retailers can push on to better improve their price perception. First and fofremost is that prices shouldn't be democratic. There are areas where you can take price up and price down based on which items in the assortment will make a bigger difference to consumer perception.

Second is just giving consumers a great deal, whether that's using promotions, coupons, loyalty programs, etcetera to have a little bit more amplitude to the shelf pricing. Third, getting away from the actual price, is how do you communicate pricing? So how do you think about signage? How do you think about marketing and advertising? And what are you telling your customers about your price versus your competitors?

And then finally, looking at things that, frankly, aren't related to price at all, but the rest of the value proposition. So simple things like, what products are you carrying? Are you carrying premium products or low-end products? What's the look and feel of your store? Is it lower-end or higher-end? And what level of service are you giving in addition to your prices? All of those can have a big influence in terms of your price perception.

We've seen a number of companies that go for premium products, premium experience, and then try to match their lowest-price competitor in the market. Well, they never get credit for that price perception even though they've invested a lot of money in it. So what can you do as a retailer? A couple of things.

First of all, the big thing is to understand where do you even stand today versus your competitors on price perception in addition to position. So are you a winner or are you a loser versus your competitors? Second, thinking through what do customers in your industry value. The levers I laid out earlier, whether it be on your price position, whether it be on your promotions, whether it be on your in-store experience, the importance of those and how much they influence customers varies market to market.

So, understanding from your customers and in your store experience, how much each of those matter, so that you can tailor each of those to your overall strategy and what price perception you're going after. Taking those holistic steps, in addition to your pricing strategy, is what we found to be a winning solution for building a great price perception.

Read the Bain Brief: How Grocers Can Improve Shoppers' Price Perception