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Say Good-Bye to Cost-Plus Pricing

Wednesday, May 30, 2018 - 07:00
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It must feel emotionally draining for an auto parts store when their shoppers can buy the same ignition coil retailed at $79.99 for $33 less by a competitor. From Scott Drozd’s perspective on hot selling items, this CEO of FCP Euro believes dynamic pricing is playing a normalized role in swaying shopper perceptions in a land grab for market dominance and profits.

Is cost-up pricing headed to the junk yard, or are there other clever strategies to tap into to boost profits? Many omnichannel and online retailers are already benefiting from a garden variety of analytics to engage their customers while driving an efficient product assortment. Their trust in algorithms should not psychologically constrain traditional minded parts companies from lagging behind the growing tech-savvy shopper base. By looking past setting prices off invoices, managers can gain a firmer grip over pricing that will make sense for their own market strategy.

Dynamic pricing can be highly potent when staying attune to shopper sensitivities. Daily if not hourly, Amazon can change offers for often researched, high demand items, confirmed Drodz. To fatten margins, nimble online companies will source the identical part from multiple suppliers. To keep their online shoppers returning, retailers will game how varying price points triggers demand by injecting variables by competitive moves, seasonal changes, inventory levels and the like. But, cautioned Drodz, dynamic pricing has its limits. Cost-plus pricing can work in a static marketplace where few suppliers are selling the same item. To deter product cannibalization, he has seen some manufacturers impose floor pricing where retailers must sell something above minimum point.

I recently spoke to a president of a Parts Plus multi-store chain who tensed up over the topic of dynamic pricing. In a frustrated gesture, he threw up his arms on using data and technology, adding that the computer system restricts him from establishing an advanced pricing strategy. But, an ad-hoc process promises limited gains. Discounting a part that someone would have gladly bought at full price not only erodes profitability, it also degrades a differentiated image. Selling two customers the same product or service at totally different amounts projects mixed messages for what the retailer stands for in their eyes.

Between these dueling price models, one insight is evident: professional installers and the do-it-yourselfer are influenced by value. That’s why parts stores must distinguish themselves, why pricing is intertwined with shopper insights, and why technology can reflect market needs. Realistically some solutions are attainable while others may require more effort.

Consider the easy remedies. Internal alignment that involves marketing, category management/buyers, pricing, distribution, and a trusted vendor partner is the first step to prioritizing goals around what customers want, and what they are willing to pay for. Everyone realizes that shoppers value product availability, website content-rich product information, frictionless payment, and speedy delivery.

To fill the value gap, collection and data synthesis about competitors will enable more informed decision making about their vulnerabilities. Annual reports on public companies reveal invaluable acumen on their game plans. Whether O’Reilly, Rock Auto, or a NAPA competes with your business, customers will always have a perception of your assortments, prices and services.

Correlate cost savings with price. According to consultants at Pricing Solutions, a business can reap up to a 12.5-percent improvement in profitability by identifying price conscious customers. Separate them from the value-minded profitable types who enjoy the add-on benefits, such as unlimited delivery, sales and technical support, payment terms and warranty. 

Pricing Solutions suggests implementing a small fee for emergency orders that fall outside the parameters of routine free deliveries. Identify excessive returns that exceeds 10 percent of all orders by imposing a pick-up fee. This disincentive will encourage more precise ordering while maintaining the same volume. What gets measured, gets managed by seeing what helps the bottom line.

As for the hard part, emulating, but not mimicking an Amazonesque or a big box retailer is where a collective effort will prevail. Granted, nobody expects an AutoZone or a Sylvania Lighting to unveil proprietary price recipes in a group setting. But for advancing this industry, the Auto Care Association can step in by introducing applied best practices to the fore. One report written by McKinsey, a think-tank, lists five modules of dynamic pricing where a product assortment can capture sales and margin growth ranging from 5 percent to 10 percent. For the benefit of late adopters or businesses with knowledge voids, Auto Care should focus on the following:

  1. Key Value Items (KVIs)―How to price fast movers and high visibility items that affect shopper price perceptions.
  2. Competitive-ResponseHow to make informed price changes.
  3. Price ElasticityHow to calculate an item’s price change direct effect on demand.
  4. The Long-TailHow to set pricing through product matching on new or mature items.
  5. Omni ChannelHow to coordinate offline and online channels.

A granular approach, not an executive high-level summary will suffice. All five of these modules matter because the repair shops and the DIY shoppers’ purchase journey are vastly more sophisticated than in 2008 when smart phones first hit the marketplace. Armed with handheld mobile devices nowadays, shoppers are demanding higher levels of customer satisfaction. Millennials, noted Drodz, are the most skilled price navigators by speed and efficiency. Vetting competent price consultants like Clear Demand or Revionics to engage the auto care industry will surely narrow the knowledge divide. Big data mastery will require these consultants to provide customized solutions for those businesses who want to clear this high hurdle.

For sure, pricing policy is the most impactful influencer in presenting an efficient product assortment. But imagine a dense barrier if shopper insights were ignored. So far, the Auto Care Association has made progress by keeping this awareness alive by choosing the proper tools and relevant speakers. As new technologies evolve, so will the need to maintain a heightened understanding of how it works to efficiently attract customers and carry out the value they crave, which is why offering applied best practices is a grand slam. 

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