Pricing: Defining the Right Strategy
During the economic downturn, companies competed for market share and volume, which meant frequent price promotions and markdowns. While many markets have since recovered from the recession, corporations still find themselves stuck in a cycle of recession-driven discounting. Robert Browne, Partner, Strategy Group at KPMG in the UK, says that companies need to now rethink their pricing strategy. The high-low model – marking products up, only to discount them later – not only lowers margins, but damages and devalues brands over time. “It isn’t a strategy that helps improve the perceived worth of the product in the eyes of consumers,” Browne says.
Constant discounting essentially telegraphs to consumers that products aren’t worth the regular price – the sale price is the true price – and he warns that the model can reset prices to a lower level permanently. “For a number of products, customers will now buy only if certain promotions are on.”
More and more brands are using data to set prices on an increasingly dynamic basis, where prices can change by month, week or day, depending on supply, demand and a multitude of other variables factored in by the algorithm. It is a model that has driven the success of online giant Amazon and is now being replicated by similar retailers across the globe such as Jumia, the largest e-commerce provider in Africa. Jumia, which was set up by AIG and is funded by Millicom, MTN and Rocket Internet, has seen double-digit growth month-over month since its 2012 inception. As well as serving its home market, Jumia also sells general merchandise in Kenya, Morocco, Ivory Coast, Egypt, Ghana, Cameroon and Uganda. “It is the Amazon way of doing business,” says Nicolas Martin, Chief Executive Officer of Jumia. “You develop a pricing algorithm so sophisticated that no one can emulate it. This enables you to always have the most relevant price, and to optimize your price and margin based on the price and availability of competitors’ products.” The old pricing model, says Martin, lacks the flexibility needed to balance inventory and the inherent depreciation of products. He notes, for instance, the price of a new computer drops about six weeks after going on sale. “No matter what you do, the only way to succeed in online retail is to have the right product, at the right price, delivered conveniently,” he says. “Nothing else matters. If you are not relevant in terms of price, you have no business.” In markets such as Africa, consumers can be very wary of online payments. Martin says earning consumer trust is an important way for brands to ensure they don’t compete purely on price. It explains why Jumia offers pay-on-delivery (through a fleet comprising mostly motorbikes, which make it easier for drivers to navigate congested roads) and free returns on most product categories.
“Trust has limited impact when it comes to actual price, but it does as part of a consumer’s consideration list: ‘If I don’t trust you, I don’t care about your assortment or your prices’,” notes Martin. “Trust also allows you to charge more for services.” For example, a company’s shipping fees can be higher than the average if people trust and enjoy the quality of the service.