WASHINGTON — Consumers have become so conditioned to waiting for sales promotions that regular retail pricing has lost its credibility.
As shoppers get more demanding and more savvy about value, retailers need to restore faith in their prices.
That’s the word from Walter J. Salmon, a Harvard retailing professor, who spoke at the International Mass Retail Association convention here in May.
“Competition remains tough because of limited population growth,” Salmon said. “There has been a decline in retail sales compared to income — in the past 25 years, consumers’ disposable income grew by 325 percent, while retail sales grew by 250 percent. There is also an abundance of retail space. Finally, retailers who have survived the difficult times are better managed than their predecessors.”
Salmon said consumers also are extraordinarily demanding in their quest for value. Value means more than price; it means satisfactory assortment, convenience and service — or a “fair price strategy” — as well as low prices.
“Everyday-fair-price (EDFP) or everyday-low-price (EDLP) is the way to deliver low prices,” he said. “Most customers prefer fair to low. It’s more convenient and coincides with diverse and busy lifestyles. EDFP applies to fashion merchandise, certainly.
“It may also apply to nonfashion merchandise for retailers who want to reflect limited special purchases and manufacturer allowances in advertising,” he added.
Salmon said the idea is to share reduced costs with consumers through lower prices and, in return, gain more volume and higher market share.
“Success comes when the consumer is willing to patronize your store without waiting for a sale,” he said.
This pricing philosophy does not appeal to “cherry-picker” consumers, who are disloyal and who most often shop around for sales instead of regularly buying at a particular store, Salmon said. This consumer’s purchases are generally less profitable for the retailer.
“When you are making the transition to this pricing philosophy, cherry pickers might depart before you establish credibility with the larger consumer segment that’s driven by price and convenience,” Salmon said.
He added, however, that it is cheaper to keep a customer for a lifetime than to have a rotating group of cherry pickers.
He outlined advantages of an EDFP/EDLP strategy:
- It makes better use of store and warehouse capacity.
- It improves sales predictability, resulting in fewer stockouts, faster inventory turn and fewer residuals and markdowns.
- It contributes to lower vendor prices, thanks to a more even sales pace.
- It reduces labor costs and improves service because stores need fewer overtime workers with fewer promotional sales events.
- It reduces long-term advertising costs.
“Retailers who don’t practice this pricing strategy are at a disadvantage, and the transition is not easy,” Salmon said.
He pointed out some transition issues:
- Costs must be under control, because it’s difficult to provide low or fair prices when costs are high.
- Employees need to be retrained.
- Advertising strategy and in-store displays need to be reformulated.
In making the transition, he said, “Cold-turkey switchover across the entire company at once is quite dangerous, recommended only for those with strong hearts and balance sheets.”
Alternatives to an all-at-once strategy include successively converting particular regions or geographic divisions, and improving execution as the rollout proceeds. Or, the most popular way is to convert to EDFP/EDLP over a significant amount of time by increasing the number of fast-moving, long-life-cycle items that are EDFP/EDLP priced.
“Feature these items in store display, and you can then reduce promotional events over time,” Salmon said. “But you can only proclaim conversion when it becomes your dominant form of doing business. That is, when you sell most of your merchandise at full price, not sale price.”
EDLP/EDFP is essential, but it is only one part of the equation for retailers to be competitive in the years ahead, he added.
“Retailers also must be competitive in target marketing, assortments, convenience and service,” he said.
Salmon said one key is trimming assortments to eliminate duplication, which adds immensely to operating, inventory and space costs. It leads to a larger store than the consumer needs, difficulties in finding suitable sites and bloated real-estate costs. Reduced inventory also lessens the clout of vendors.
To reduce assortments effectively, retailers must consider:
- Item movement by store.
- Differences among brands in functional attributes and quality.
- Perceived differences among brands.
- Whether all sizes, colors and varieties are required.
Ideally, assortment reduction decisions should be made by store, with different distribution arrangements for items required in only a few stores.
Just as consumers’ interest in assortments is in transition, so is their interest in service. Service requirements vary by merchandise category and expectations of the target market.
For many categories of merchandise, good service consists of adequate signage, informative labeling and arranging stocks so consumers can easily identify their choices, such as in size or color.
For other areas, adequate information can be conveyed by traditional and interactive video.
Personal service should be reserved for cosmetics, products that require fit and customization, or big-ticket, infrequently purchased or technologically complex items.
“Service should be delivered by able, motivated and empowered salespeople,” Salmon said. “Good service represents a huge opportunity to turn shoppers into buyers.”