Impacts of promotion in pricing.

A brand’s promotional policy is an integral part of its price image. However, bringing pricing and promotion together is not an easy task. Beyond the promotional policy of its own brand, competitors’ promotions raise many questions.

How do I get the information? Should I react to my competitors’ moves? Should I align my price? How do I measure my price image? Do I have the right tools to measure and make these decisions?

In this article, we will discuss the impact of competitors’ promotional actions on a retailer’s pricing policy.

The multiplication of promotions in supermarkets in 2022

Since the beginning of the year, we have been experiencing the highest inflation in decades: +4.8% over one year in April in France (unseen since 1985), +7.3% in Germany, +8.4% in Spain. This period of inﬂation comes just after the health crisis which had already left its mark on the large-scale distribution sector. The pre-crisis level of shop traffic has still not been recovered. In the midst of inﬂation, promotion is a weapon of choice: it helps to limit inﬂation in the eyes of the consumer and increase in-store traﬁc, while complying with the regulation and internal rules (e.g. the Egalim law in France on below-cost selling).

In this context, managing a pricing strategy that takes into account the competition may lead to unseen side effects. Hasty decisions may be taken in reaction to competing promotional events without considering the consequences.

Promotion includes all the mechanisms that offer an advantage to the consumer:

A discount linked to a loyalty card
Fund receipts
Deferred discounts
Barred prices

The crossed-out price is a direct price discount, the other promotions mentioned are usually conﬁgured in the checkout management software. This has a direct impact on competitor price data collected: the way the promotional price is displayed on the various communication media will have an impact on competitor price reports. A simple price cut may be easily picked up by price crawlers or panelists, whereas a more complex promotion will not be easily identified. This data will not be accessible/usable by all.

An evolving legislation…

It should be noted that the laws governing promotion are not the same depending on the type of promotional mechanism used. The display of a reference price implies compliance with the legal provisions. On the other hand, a % discount on a product range without prior display of the reference price leaves the retailer freer to determine its starting price, which has not been communicated. Moreover, regulations framing promotion practices differ from a country to another. In France for instance, the Egalim law provides a stronger framework for food promotions than in other retail sectors: a promotion or price reduction on a food product must never exceed 34% discount and the SRP is increased by 10%.

The advertiser must be able to prove the reality of the reference price from which the price reduction is advertised. This price reduction must not be unfair to the consumer. Following a European provision, from 28.05.2022 we will return to a stricter framework which was already applied before 2015 providing for:

Any announcement of a price reduction shall indicate the previous price applied by the trader for a specified period before the price reduction is applied.
The previous price means the lowest price applied by the trader during a period of not less than thirty days before the application of the price reduction.

https://ec.europa.eu/info/law/law-topic/consumer-protection-law/unfair-commercial-practices-law/price-indication-directive_en

Pricing will be directly impacted by this provision, and this issue is often mentioned by the retail professionals we meet. Teams will need to integrate this new time constraint into their tools in a reliable and time-efficient manner. Mercio’s native functionality makes it possible to meet these challenges in a simple and transparent way.

Mercio allows you to conﬁgure your reference prices in advance. Blocking prices before and during your promotional operations is guaranteed to ensure compliance with the law. Marketing data, including information about upcoming promotions, is fed into the system on a continuous basis.

La promotion in the competition and the response to it

To determine whether a retailer should match a promotional price or not, you need to :

Understand where this is relevant given its offer, its market.
Determine the purpose of this alignment.
Whether this can be achieved with alignment and whether the company has the means to do so.

One answer will not be applicable to all sectors and each market specificity must be analyzed.

The weight of price in the purchase decision:

Beyond the chosen promotional mechanism, the promotional price will be interesting or not to activate depending on the importance of each lever triggering a purchase. The price is one lever among others. Consumers are also sensitive to other criteria when making their choice (e.g. origin, quality, availability, service linked to the purchase, etc.). In this context, will a promotional price have the desired impact? Will alignment with a competitor’s promotional price have enough visibility to have a positive impact on economic indicators? Depending on the proﬁles of the consumers and the retailer, the answer will be different.

In the food sector, consumer awareness is evolving and taking into account wider issues when making purchases. The consumer trend to eat more food from sustainable/reasoned agriculture and with less environmental impact on the planet translates into « eating less but better ». This trend reﬂects a profound change in consumption patterns. Today’s consumers are willing to eat less meat but better quality and therefore more expensive. Price is sometimes a secondary criterion of choice. This can be determined by analyzing customers’ profiles. Differentiating your pricing strategy according to the main consumer profiles in each shop is a challenge for a successful pricing strategy. Dynamic shop and product segmentation allows you to adapt your pricing more accurately, simulate impacts and adjust your strategies on the fly.

With Mercio’s dynamic classification module, enrich your product data with marketing insights that only your staff know about, and translate customer perception into pricing strategies.

What is my goal?

More generally in FMCG, if a competitor applies a promotional price and this is communicated, either the customer is aware of the promotion and goes to that particular store, or they are not aware of this promotion (or are not interested) and will go to their usual store. If a food retailer matches the promotional price of a competitor, what will be the impact? There are several aspects to consider:

This will not trigger an increase in traﬁc if this new promotional price is not communicated in a massive way. So no acquisition of new customers. There may be sales elasticity on the product but this will be the result of cannibalisation on other products. It will be necessary to analyze the margin/product mix to measure the impact.
This may help to improve the brand’s price image for its existing customers.
It will be consistent to align It may be relevant to match a competitor’s promotions if the brand strategy of the retailer is based on aggressive price positioning and is known to customers.

By nature, customers of certain brands such as discounters will place price as a determining factor in their choice, but this is linked to the nature of the brand which will always offer the best price in the mind of the consumer. A promotional price alignment is then in line with its brand strategy.

Finally, when a retailer is subject to another retailer’s promotional price, is alignment a relevant response or should we not rather take the time to set up a real promotional operation, communicated and measured? Isn’t it already too late to align, once the promotion has been applied by the competitor? Are the results of a promotional price generated by the simple fact of lowering the price or is it the result of price + communication + supplier negotiations?

In home furnishings, decoration and furniture, the market lends itself much more to alignment with promotion in the sense that for high-value products, prices are mostly compared in the immediate pre-purchase period. Price remains an important selection criterion more particularly for consumers in low and mid-range retailers.

The French company Bonial, dedicated to retailer’s drive-to-store call-to-actions, presents a study with a focus on French consumers demonstrating that the promotional price will be an asset for retailers. If I match, as a retailer, my competitor’s promotional price, I’m back in the consumer scoop:

64% of French people focus on the price and 48% on the promotion when they consider buying a decoration or furnishing product
74% of French people prefer to go to a physical store to buy
83% look for several pieces of information before buying furniture, decoration and bazaar products.

Source LSA, Bonial study 2021

For all products that are not well-known national brands – as in the furniture market – the retailer’s range strategy is one of the keys to analyzing the need to align or not. If the retailer works on differentiation to limit comparison (with a pricing strategy based on product value), promotional alignment may not be seen as a purchase opportunity. t is true that a sales lift can be applied, but this will be limited. Instead of aligning the promotion, the recommendation will be to keep this promotional investment on an operation that responds to the retailer’s customer target and that will be large enough to meet the objectives. On the other hand, if the retailer has the agility and economic means to counter-attack its competitor’s promotional price by aligning with a product that meets the same need, accompanied by a newsletter/advertising/social network communication campaign, this will serve its long-term brand image objective.

Mercio’s dynamic classification module allows the precise conﬁguration of matching links. These links ensure a relevant comparison, consistent with the retailer’s brand strategy. Mercio users can then track the price positioning of their competitors on products that meet the same customer needs.

Not all the stores in a chain are physically facing the same competing stores, and reacting to a competing promotion without communicating nationally only makes sense if the stores are in the same geographical area. In the context of a pricing strategy differentiated by store, promotional alignment can be activated in ﬁnesse only on store in direct competition.

The geopricing developed by Mercio will allow you to adapt with precision your response to your competitors’ actions. The dynamic segmentation of your shops combined with speciﬁc pricing strategy rules in relation to the rest of your stock will allow targeted and measured actions.ng spécifiques par rapport au reste de votre parc permettra des actions ciblées et mesurées.

The effects of the competitor’s crossed-out price on my shelf prices

In the context of a pricing strategy based on competition, if I do not match the promotional price: is my competitor’s reference price the most relevant price for my pricing strategy?

The prices of certain products vary regularly, this may be a strategic choice of the retailer whose clients are used to promotions. The childcare market is a good example of this: the consumer of childcare products is a consumer with a limited time horizon. He has a need for equipment over a relatively short period of time and only consults prices over a limited period. They are therefore not aware of the price increases and decreases that the brands may make. In order to attract future parents, the brands repeatedly apply promotional prices. This is the ﬁnal price that is most ‘bought’. This also happens in other products and other markets, for example selling a product at 24.99€ and crossing it out at 19.99€ every 20 days can be a strategy. In this case, the reading of the promotional prices and the back of the shelf is blurred. The display of a crossed-out price arouses interest in the consumer, but during the period of high prices (when the reference price is applied), the loss of consumer confidence can be value-destroying for the retailer (brand image, drop in sales etc.). However, this point is difficult to measure.

When pricing is based solely on competition without any safeguards, not aligning with a promotional price also means that the alignment will be with a reference price that can be taken off the market (see the pricing examples on the first page of this document, the TV promotional price 899€ reference price 1699€) . If the reference price is inflated by the competitor to be able to apply a crossed-out price afterwards, how to manage this alignment?

It is important to be aware of this point, and to be able to conﬁgure the pricing rules to take into account the desired competitive data on a precise perimeter. Integrating relevant alerts and analysis guidelines will allow you to readjust your pricing strategy and make the choice of the promotional price at the back of the shelf in full awareness.e réajuster sa stratégie pricing et de faire le choix du prix promo au fond de rayon en toute conscience.

Retailers can use the promotional prices of their physical competitors to determine their bottom shelf price with targeted and adapted rules. This avoids being left behind in the market when faced with competitors who have a high reference price before making a Strike-through price. In this case the alignment is not highlighted in shop, the price remains a well-positioned shelf price without a crossed-out price, which helps to reinforce the brand’s price image with customers who are loyals and attentive to price comparisons.

The Mercio software allows you to choose the store/product segmentation of your choice and whether or not to take into account the promotional prices of your competitors, but also to simulate these settings in order to compare them and make the best decision for your store.

How do I measure my price image?

The price index is the main indicator for understanding its pricing policy in relation to the competition. It is based on an analysis of the prices of the competition, and allows each retailer to verify its position in the market. There are many ways to calculate price indices. The objectives of price indices differ according to the range strategies. Because of the often inadequate tools, retailer price indices are generally managed on a global basis, but it is interesting to be able to analyze them at the most granular level in order to adapt a pricing system that combines price image and profitability. Two indicators can therefore be used: a price index that takes into account promotional prices and all marketing erosion, and a shelf price index. The analysis of the difference between the promotional index and the competitor’s shelf product price index will make it possible to measure the competitor’s promotional pressure and thus to become aware of the value of the competitor’s shelf product prices. The pricing strategy you adopt will then be a proactive one and you will no longer suffer the hidden effects of your competitors’ promotions.

The analysis tools provided by the Mercio software are easily configurable by the user, each retailer taking a different analytical view of its pricing policy. The analysis axes that respond to the issues that concern you today are certainly there!

Conclusion:

Promotional alignment should either be part of a well-deﬁned overall strategy of the retailer or it should prevent competitors’ reference prices from inappropriately inﬂuencing shelf product prices. Whatever the brand’s strategic choice, anticipating this decision will allow the implementation of measured action plans and avoid spreading forces too thinly.

In pricing you cannot always fight all the battles. Adapting the right pricing policy to promotions in a targeted way is a key to success and necessarily implies:

Being able to segment its range in conjunction with its category management.
Choosing to match competitors’ promotional prices on certain criteria.
Enabling the rapid and efficient updating of this segmentation to respond to market trends.
Having the agility to simulate different scenarios.
Supporting decision-making through relevant and customized dashboards according to objectives.

These are the solutions that Mercio’s price optimisation solution offers for the implementation of an effective action plan.