What Shoppers Don’t Know About Price Authority

“I know what I know; the problem is that I don’t know what I don’t know.”

In business, and in life, awareness of what you don’t know can be critical to success. And of course, the opposite is true. Being confident you know something, when the opposite is true, is a path to disaster.

As retailers, we spend a lot of time dealing with the unknown. We don’t know what competitors will advertise or what the federal government will do with SNAP. We don’t know what is going to happen with the labor market and fuel or commodity prices.

So we do the best we can to make good judgments. And most of the time, previous behavior is a good predictor of future outcomes. 

Shoppers are like this with pricing. They know what they know: $0.89 for a two-liter bottle of Coca-Cola is a good price. However, most people have a limited number of items they can keep in their head. While they may know what a good price is on bread, milk and high frequency repeat purchase items like salty snacks, they often have no idea what a good price is on other items.

It turns out the list is less than 100 SKUs. Think about that. Of the 30,000-plus items stocked, shoppers can reliably identify how much a handful of these should cost. I call it the “Price is Right” phenomena. Just like in the TV game show, most consumers cannot make smart judgments about how much something should cost. 

That means establishing strong price identity without having to discount the entire store. And if these key items are priced at or below market every day, price leadership can grow.

Of course, we know that is difficult. The trade funds and manufacturer discounts that let us hit those low-price points for seasonal events run out fast. And if we price to market these commodity items every day, we may end up below cost on so many high-volume items that we could find margins slipping for the entire store. 

This is especially true in markets when going head-to-head against both traditional discounters such as Walmart and Euro retailers like Aldi. 

And now comes inflation.

As prices rise, shoppers begin to lose their ability to judge a good price. And the longer inflation goes on, the more price sensitive they become and less confident how to evaluate price. Which means shoppers become more distressed. 

This is how wacky price mechanics happen in inflationary periods. Many used cars are currently priced higher than new ones. But it is also the time when retailers can improve their price image with shoppers—or destroy it. 

One of the key tactics successful retailers used to improve price image in previous inflationary periods is messaging (when the math is hard, default to marketing). Right now, it is important to tell shoppers how to keep prices low; tell them what a good price actually is; and remind them.

Some other tactics:

• Use data to be aware of what the top 100 price-sensitive items are. A wholesaler can help or a partner like the Independent Grocers Alliance can share data on price elasticity. I’ll be hosting a webinar in June with Nielsen on this topic, so subscribe to The IGA Minute for registration information.
• Use bundles and BOGOs to make bold statements. Shoppers don’t often do the math they should, which means “buy one get one free” is a short cut for confusion.
• Tell shoppers what you are doing. Do it boldly, on the entrance, in aisle, online. “IGA buys local, which keeps fuel costs lower, so you save” is a great example.
• Talk about price loudly. Increasing the font size on endcap signage, making feature items bigger in ads, using new colors for sale item pricing, etc. all communicate to shoppers. 
• Use “we won’t be undersold” messaging on critical price items. Sure, it hurts, but holding prices flat or lowering price in inflationary periods on even 30 of the top 100 price-sensitive SKUs can go a long way.
• Push private label products forward. More endcaps, more dump bins. Consider doing sampling and trial offers. Private label is one of the most powerful price tools as an independent. Set a goal of increasing private label percentage by at least 50 basis points.

When shoppers don’t know how to evaluate prices, they become distressed—no one wants to feel stupid. The overall goal is to have them think of retail stores as partners on value. Do that well, and come off of inflation with stronger price authority and improved brand loyalty. 

This column was first published in The Shelby Report on May 9, 2022. You can read the original version here.