Pricing strategy: how to determine the right price in these times?

It’s no secret that the price of living has gone up tremendously in recent months. Due to the rising prices of fossil fuels and raw materials, general inflation in Europe will remain high for longer. The resulting impact on companies and their products is considerable.

In April 2022, the Eurozone had an inflation rate of 7.5%, whilst U.K. inflation spiked to a 30-year-high of 7%. And it doesn’t go unnoticed. We see it in the supermarkets and other shops, but also on a more structural basis in the monthly energy bill. There is increasing pressure from the economy, and it is expected that prices in Europe will play an even bigger role in the coming period. President Klaas Knot of De Nederlandsche Bank estimates that the period of increased inflation will last for more than a year. The need to think about pricing strategies is urgent. And that goes beyond just raising prices.

“A good pricing strategy does not only consider a financial-economic point of view.”

traditional calculation

For years, manufacturers have set their prices based on production and psychological pricing. Soon, this was seen from bottom-up reasoning: the cost price goes up, so the selling price must go up. But with recent developments, everyone is looking at their prices. The entire market will reassess itself in the coming months. The cost of raw materials is just rising too fast. Therefore, 2022 should be used to think about pricing strategies for existing and new products and look at scenarios of how shoppers react in this changing context.

“Within e-commerce platforms, there are plenty of alternatives for shoppers to make cheaper purchases.”

MORE SHOPPER CHOICE THROUGH GREATER TRANSPARENCY

First, it is important to look for optimal pricing to keep consumer demand up. Shoppers are finding cheaper alternatives more and more easily. And recent developments only encourage this. The range of private label products is growing steadily and has a market share of 30% in European Food Retail. And even within e-commerce platforms, there are enough alternative options for shoppers to make cheaper purchases. This means that companies must not only look from a financial-economic point of view but also at what is acceptable to the consumer and competitive with the market.

“A product has a different value offered in a petrol station or to-go location.”

contextual pricing

Next to consumer demand and competition, the price per channel (and moment) must be considered. This is known as contextual pricing. For certain product categories, it is important not to implement one uniform price, but to look for a pricing strategy that fits the context in which consumers buy the product. From this angle, too, marketers can achieve profit optimisation. A product has a different value depending on the contextual position in the shop or offered in a hard discount channel or a value channel, such as a petrol station or to-go location. These different situations require different forms of pricing. People’s motivation to buy something is context-driven. You look at prices differently on a day out than when you shop for your daily groceries.

Manufacturers can’t set the price of their products in those channels, but they can function as a strategic sparring partner for retailers. That is also a type of price strategy that goes beyond simply negotiating the purchase price. As a manufacturer, it allows you to take a more consumer-based view.

“With the highest inflation in 30 years, the importance of a good pricing strategy has never been greater.”

the right pricing strategy

The changing economy, consumer demand, competition, and the context in which products are purchased play a key role in determining the pricing strategy. As a marketer, it is important to present this pricing strategy to the consumer through good contextual pricing research. DVJ not only has a strong portfolio of price and price perception research but can also consider the context and the channel. The approach is applied in the phase in which the marketer is in the process. After all, innovations are different from existing propositions. Our price and perception studies are based on academic insights and use validated techniques to help marketers determine the right pricing strategies.

With inflation at its highest in 30 years, the importance of an informed pricing strategy has never been greater. As well as the importance for companies to anticipate beyond a general price increase.