In part one of this blog series, Kristin Demel, retail strategy director at Callahan, discusses how to talk about price with your retailer. The brand and the retailer have different metrics to consider, leading to differing viewpoints on price to the consumer. In this Q&A blog, Kristin will answer who establishes price, why brands and retailers have different opinions, and why brands should talk to retailers about price.
Let’s start with some basics. Who establishes “price”
Retailers decide the price the consumer will pay for a product at their store.
Brands and manufacturers own the cost the retailer pays for the inventory, but brands do not have control over the price that their product will be sold for to the end consumer.
Why would brands and retailers have a different opinion on price to the consumer?
While both brands and retailers are trying to sell as many units as possible, they have slightly different financial metrics to consider, which can lead to a different opinion on price to the consumer.
In addition to selling product, retailers also need to make margin…which you likely know if you have ever worked with a retailer. What you might not know is how much margin a retailer needs to generate off a product differs by channel, retailer, product group, and will vary even within the product group. Typically, a buyer is balancing various margin rates within their assortment to deliver the margin plan that they owe the company. Achieving that plan is usually tied to their performance evaluation, making that metric very critical.
Brands care about receipt units and not retailer margin. Brands want as many units to go through the system as possible, because that’s what generates their revenue. While there is a common goal of selling as many units to consumers as possible, differing metric priorities can create tension.
If brands aren’t responsible for deciding the price consumers will pay for their product, why should brands even talk to retailers about price?
In addition to purchase orders, brands also care about brand equity. Brand equity is what makes the brand important to consumers, which makes the brand important to retailers. As a brand is forming their identity and positioning, value and price are an important part of that identity. A brand could be a value brand, premium brand, luxury brand, etc. Price plays a key role in communicating brand positioning to the consumer. This creates scenarios where brands and retailers need to talk about the price, since ultimately the retailer decides the price the customer will pay.
How do retailers evaluate price?
Retailers have various approaches to establishing price. Some retailers just focus on hitting a mark-up target, while other retailers vary mark-ups by product based upon the product’s role in the store: traffic driver vs. attachment item. Typically, traffic drivers such as food, electronic or powered items have lower margins whereas attachment items like apparel, jewelry, seasonal, and impulse have high margins. However, there are a lot of products in the middle, and the line dividing traffic drivers and attachment items gets blurry, and can vary by retailer and channel.
To help with pricing decisions, retailers are also constantly doing competitive shopping and price match evaluation. Most major retailers have a pricing team to collect the data points, evaluate the market and establish price. Data collected will include exact match items as well as “like” items to create a representative set of the retailer’s assortment. Where this gets more complicated is that retailers have a price positioning strategy as well that determines how the retailer competes on price by category.