Pricing policy: what is at stake for brands in mass retail

Faced with persistent economic tensions, French consumers seem to be increasingly sensitive to the prices of consumer goods. Price policy therefore plays a central role in the marketing strategy of manufacturers who sell their products in supermarkets and hypermarkets.

For your brand, defining selling prices has thus become a major challenge. We have therefore decided to dedicate this article to it.

On the agenda: the fundamentals of pricing policy and the different strategies recommended by marketing. We will then develop the specific characteristics of the retail sector, in which you will find keys to defining the right pricing policy, both for your customers and your distributor partners.

What is pricing policy?

Pricing policy, also known as "pricing," encompasses all decisions made to determine the price of a product.

Several factors allow companies to establish their rates:

• Competitive positioning consists of defining one's place in a market, taking existing players into account. Positioning can be high-end, mid-range, or entry-level;

• Brand image consists of influencing clients' perception of the company's products: luxury, high technology, quality, etc.;

• The profitability that a brand aims for will guide its choice toward an appropriate strategy. This can favor a low margin with a high volume of sales or vice versa. Other approaches will be discussed later in this article;

• Relations with distributors must be healthy and based on achieving respective objectives;

• Adaptation to market trends and competitor actions is necessary to stay in line with demand;

• Customer loyalty involves evaluating the impact of loyalty programs or promotions;

• Perceived value assesses the perception of product quality and its correlation with the price charged;

• Psychological pricing aims to attract a maximum number of customers based on an emotional (and not rational) principle. In mass retail, we generally find fractional prices, i.e., in the format: $9.95 or $9.99. These prices give the customer the impression of buying at $9 rather than $10.

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The different pricing policies

Price is part of the 4Ps. As such, it is an essential part of the marketing mix.

Furthermore, although nothing prevents you from developing other models, marketing theory offers 5 pricing policies that have proven their worth. 

1) Premium strategy

The premium pricing strategy involves charging higher prices than competitors to target a customer segment with high purchasing power. The extra cost is justified by the high-end positioning of the product. By adopting this policy, you will create a sense of exclusivity, and the price level will naturally filter out consumers who can afford to pay a high price.

This strategy generally translates into lower sales volumes but higher margins. It is therefore necessary to have a high-quality product with specific features, such as advanced technology. Additionally, you must already benefit from a prestigious brand image for the premium price to be justified.

Examples of brands using premium pricing policy: Porsche, Louis Vuitton. 

2) Skimming strategy

The skimming strategy involves charging higher prices than the competition to target a customer segment with high purchasing power. This technique resembles the premium strategy but is used more specifically during the launch of new products from which a surprise effect is expected. Thus, the success of the iPhone (1) relies - in part - on the pricing strategy designed to convey the image of a technological breakthrough. Your target is the share of consumers who are willing to pay more to be among the first to use an innovative new product.

This approach translates into lower sales volumes but with a higher margin, and enhances the quality of your brand image.

It is still essential that this choice of a high price be justified by the obvious quality of your product or by a technological progress that differentiates you from your competitors.

After the initial launch phase, a progressive price reduction becomes necessary to broaden your target, especially when you release new products.‍

Examples of brands using the skimming strategy: Bio Natessance, Apple, Nespresso.

3) Penetration strategy

The penetration strategy aims to set lower prices than competitors during a product launch to attract a new customer base and thus gain market share quickly.

Low prices will satisfy customers, which will generate positive word-of-mouth and increase sales and brand awareness. Be careful, this technique can also trigger a price war with your competitors, who will be tempted to react by lowering their prices in turn. Your already reduced profitability can be significantly impacted.

‍Furthermore, keep in mind that once the launch is over, the price will be increased. This price increase could be difficult for your customers to accept.

The penetration policy is used in highly competitive markets, where you can obtain a significant sales volume and thus substantial market share, but it implies lower margins on the other hand.

Examples of brands using the penetration strategy: Io liquid detergent, Free.

4) Alignment strategy

The alignment strategy consists of charging similar prices to those of your competitors. Generally, this pricing technique applies to food products. It is therefore very often found in supermarkets.

This system allows you to maintain your competitiveness against your competitors, and the psychological price is already determined by the existence of analogous products. In this strategy, the manufacturer aims to capture a share of the market without taking too high a margin, taking advantage of the maturity of an already established market.

Examples of brands using the alignment strategy: Danone, Président.

5) Differentiated Strategy

The differentiated pricing strategy consists of adapting the prices of the same product to different clienteles or distribution methods involved. The selling price of the same product can therefore vary according to the context of distribution, although its production cost remains unchanged.

Here, you will rely on different factors:

• The geographic sector: where is your customer located? This can play a role in their purchasing power, the availability/rarity of the product in the area, or its transport cost. A Parisian will have on average higher purchasing power than an inhabitant of Corrèze. A local Corsican product will be cheaper in that region than in Alsace; 

• The distribution channel: in what type of points of sale is the product sold? The price of a product will be different depending on whether it is sold in a factory outlet or in a grocery store;

• The period: in this context, the price will vary depending on the time of purchase. This specific strategy is called yield management. During holiday periods, the demand for chocolate skyrockets, and this phenomenon pushes some brands to increase their rates until consumption returns to its "average" level;

• Setting up promotions: by collaborating with your distributor, you will be able to set up a promotional campaign to launch a new product range, relying on good communication;

• Bundle buying: you will be able to sell off your stock faster, which will lead to more sales with a smaller margin: in supermarkets, this is the famous bundle system with a second article at 50% of the initial price;

• Payment terms: you can offer discounts for cash payment, for example. This practice is quite rare in large retail networks.

Examples of brands using the differentiated pricing strategy: Nestlé, Coca Cola, Unilever.

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Specifics of pricing policy for brands in mass retail

For a brand present in mass retail, pricing policy presents challenges that go beyond simple product price setting. It encompasses brand perception, its competitive positioning, and, ultimately, its ability to maintain its place on supermarket shelves.

But why is the retail universe so sensitive to the notion of price?‍

To begin with, manufacturers face competitive pressure due to the profusion of similar products on supermarket shelves, which often deters them from increasing prices, for fear of losing market share to substitute products. Brands thus engage in a real price war, and this is further amplified by the margins made by distributors. To try to turn the balance of power in their favor and be sure to be among the cheapest, some brands no longer hesitate to print their price directly on the packaging to make the retail chains bend. Danone uses this practice a lot.

In addition, mass retail is characterized by the high frequency of promotions. You must therefore be proactive in participating in these initiatives to stimulate your sales and not suffer the aggressive strategies of your competitors without reacting.

Finally, price negotiations are generally subject to a balance of power in favor of distributors. A phenomenon that intensifies in times of inflation. This can be seen in this first quarter of 2024 with the introduction of the Bruno Le Maire law which shortened negotiation deadlines, thereby increasing pressure on manufacturers.

‍Despite these constraints, it is crucial to consider distributors as partners and not adversaries. Winning brands focus on trade marketing to optimize promotional campaigns and, in general, work out an optimal pricing policy.

However, finding the right pitch and convincing your distributors is generally done by presenting figures-based analyses. For example, knowing the price elasticity of your products allows you to negotiate on the basis of tangible elements. Keep in mind that you and your distributors have the same goal: maximizing profits.

‍Data is therefore the sinews of war to succeed in your negotiations with buying groups. Thus, to develop an effective pricing strategy, it is imperative to send your category managers into stores. They can then carry out price audits in a methodical manner. First, those of your brand: are your products displayed at the right price? Are the price tags visible? This allows for an understanding of the drop or rise in sales. For example, your product is selling less at the moment in a retail chain. The category manager visits stores and realizes that the price is displayed on average 10% more expensive than it should be. This could be an explanation.

Then comes the competitor price audit: this practice allows you to identify the pricing strategies used by your competitors and to find the best possible positioning. These findings often lead brands to rework prices with their distributors.

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Thus it has become inevitable to equip your category managers with a mobile CRM tailored for retail to guarantee exhaustive and relevant shelf surveys. The analysis of field data will indeed allow you to adjust the assortment that seems most strategic during annual negotiations.

Summary of different pricing strategies

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Thus, pricing policy in mass retail addresses many challenges for manufacturers. It determines how your brand will be perceived, its position relative to the competition, and its long-term viability in the market. Choosing the right pricing strategy will prove essential to maximizing revenues, retaining your customer base, and maintaining sustainable profitability.