Saturday, June 13, 2009

How consumers think about retail pricing

In the retail context, communication of prices or offers is a fine mix of science and art. It is more of science because one needs to truly understand the consumer’s mind set. Understand is an understatement. It requires that the retailer get under the skin of the consumer and communicate, almost telepathically!

A simple way of communicating prices or offers is by stating the MRP and offer price, for the relevant pack size. However, the consumer does not always think in such a simplistic linear manner.
The consumer’s mind anchors the prices of a few products which are referred to as KVI’s (Known Value Items). The perception of value basis pricing is defined by the price communicated for such KVIs. Prices perceived to be lower than the benchmark price of a KVI leads one to believe that the store offers great prices and hence lots of savings. This is a classic example of the halo effect theory.
KVI’s as a concept is more relevant in a non-MRP scenario as there are no published prices on any product. However, in the Indian context this is very relevant for groceries, fruits and vegetables. Additionally, even with a MRP, the offer price or “Our Price” as many retailers say, is a powerful perception driver. Non Stick Tava at Rs. 149/-, when seen by a customer who is used to a price point of Rs. 250/- becomes a strong influence with regards to the pricing of that store.
Next is the pack size. Most of us are not mathematical wizards and prefer to be presented with numbers which don’t require my mind to do calculations and then be able to benchmark with my KVI.
Groceries, Fruits and Vegetables are usually benchmarked in per kilo basis, in our minds. Even though we might purchase lesser or more and never in exact multiples of a kilo, our minds pegs the per kilo price and we prefer to use that as a comparison.

I came across this offer communication recently and would like to take this as an example to drive home the point. If I were planning this communication, the following would be changed.

  1. Price would be per kilo. The pack size price can be mentioned if required. But the per kilo price is more important.
  2. Savings can still be basis the pack size, but should be mentioned clearly that this is for a 20 kg bag.
  3. In groceries, fruits and vegetables the consumer does not think of MRP. The prices are dynamic and basis the market price. So, it might be a good idea to mention market price, then MRP (Only if required) and lastly Our price. If the pricing has been managed well, there should be a difference between market price and MRP itself, further reinforcing the price-value image.
  4. Lastly, the savings if mentioned as a difference between Market Price and Our price would be even more powerful, if point 3 has been done.
Retail might appear simple and easy to do. It actually is. However, it requires a lot of common sense and a deep, instinctive understanding of the way consumers think.


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