The necessity of differential pricing

Ali Athar | 14.09.2017

While retailers are still not talking it up, many have been testing the waters since I last highlighted the importance of differential pricing.

It is becoming increasingly difficult to justify identical pricing all over the country when differing labour costs, rent, rates and living standards mean that wealth is dispersed. Income disparities which exist in our society are likely to increase not decrease, so national brands in the UK will need to echo pricing methods of other countries.

All retailers in Spain, Portugal, France and Brazil, many of whom we work with, operate publicly declared differential pricing. It is a way of life.

German supermarket chains Aldi and Lidl, who enforce differential pricing, are putting pressure on major British grocers, who are like rabbits stuck in headlights. Now that Britain is leaving the EU, we will have to see an increase of differential pricing if we’re to keep up.

As it stands, many retailers are actively doing differential markdowns across their store base and doing differentiated promotions by store, or segment. That is essentially differential pricing by another name.

If you look at the experience of countries practising this technique, it is clear they are all working to pricing by price zones. They use one zone as standard and differentiate relative to it. The differentials are not large but significant enough to have an impact.

As the prices reflect differences in standards of living, it sends a better message politically and it is easier to answer: if somebody in London wants to drive to the Midlands to do their shopping, they are of course always welcome to do so.

Differentiating pricing would also encourage movement of people across regions. People would have the choice of living in an area in keeping with their cost of living expectations, especially based on their choice of grocers.

In all of the countries where retailers are practising this, there are cost of living league tables by region, and that is a healthy practice.

Many retailers in the UK ask us how these countries deal with the online retailing. The answer is that IP addresses and cookies can track a user’s location, which allows the websites to reflect the prices and promotions in that region.

Does it mean that retailers will be operating to lower net margins in the future? We do not believe that necessarily follows: promotions and markdown budgets today are already reflecting the paucity of differential pricing.

Retailers don’t like differential pricing – just like they do not like variability in intake margin – as it creates greater uncertainty and makes it harder to predict cash margin. In most cases, the systems infrastructure of many retailers is not capable of supporting differential pricing.

Of course, nobody looks at Ryanair or EasyJet, and says “Isn’t that a hard business to manage!”. For those two companies, differential pricing is the new normal. Petrol companies are others that have never worried about their image. It is certainly not stopping them from increasing their cash margins every year: in fact, quite the contrary.

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