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Positioning a Pricing strategy in the Hierarchy of Service, Convenience
and New Product Development
Prepared by Jolyon Roe, Consultant, ACNielsen Consulting Group

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This paper discusses the importance of price in relation to other marketing levers under the control of the marketer. This paper develops the arguments for appropriate strategies depending on the nature and role of the sector or market.

The Success of EDLP

First, however, it is worth recapping briefly on my paper of last March, entitled EDLP or Promotions (Free Kamcity download CLICK HERE).  I discussed the reasons why EDLP had been such a success and the appropriateness of such a strategy to fixed consumption markets rather than expandable categories.  The latter generally being better suited to promotional activity that increases consumption while non-expandable categories such as sectors within yellow fats, healthcare and household are usually more suitable for EDLP. 

However, the retail market place is dynamic and the reasons evident at the time for Asda’s initial success are not the same as those for their continued success. At the time Asda was growing its consumer base attracting consumers who were strongly motivated by offers. This apparent contradiction can be explained by the view that EDLP was simply a wrapper for what the consumers believed to be a promotional platform. That situation has now changed. Asda growth is consistent with their stated intention of generating greater loyalty through offering good value.  They have achieved this by winning consumer confidence; consumers who recognise that they are not necessarily getting the best deal on every product, but overall they know that they are getting a good deal. It is not suitable for all categories and sectors and there is therefore a sense of winners and losers within a retail strategy based solely on EDLP.

However successful EDLP is as a strategy for the retailer it has important implications for manufacturers and consumers. EDLP also means every day low cost. This squeezes manufacturer margins and in the extreme can force a manufacturer to curtail investment in other areas eg: investing in the production process, brand building activities and innovation that ultimately could enhance the consumer offering.

Whilst prices have been falling, demand for groceries has not responded.   The Office of National Statistics tell us that we are spending less as a proportion of our disposable income on food today than at anytime in the last 12 years and that we are buying fewer items too.  It goes to show that lower prices are not stimulating demand – and that perhaps we should be looking at other factors to increase food spend and size of baskets. 

Increasingly price is becoming the principal arbiter of choice. As differences between products are becoming marginalized it is increasingly difficult to command a premium, whether it is between Own Label brands or manufacturer brands. The acid test is that a difference has to be significant enough to carry a premium price.  Similarly, the retail environments within the top 5 are very similar.  We take for granted baby changing facilities, parking, helpful staff, a filling station and a reasonable range of products.  So where does that leave retailers and manufacturers in understanding their customers and what they consider important?

Food Focus – Different behaviours from Different Consumer Groups

To help answer that question, I want to introduce to you a representative* group of people who have very different attitudes to cooking and eating.  These people use food in different ways and have different characteristics.   We call them the Food*Focus Family. 

At ACNielsen we have identified seven Food Focus groups from our Homescan Consumer Panel.  They are:

“No Bother Fodder” – people who dislike cooking and seek convenience.  Salvation is found through their microwave until such time as a food pill becomes available.

“Chore Cooks” –  this group also dislikes cooking and is not particularly health conscious but avoids “convenience” foods that may be considered as unhealthy.  They want easy solutions such as pour-over sauces.

“Frenzied Families” – this group has an unhealthy diet driven by constant snacking.  They cope by buying convenience food that is delivered via the microwave.

“Three-square mealers” – this is a traditional group (meat and three vege) with little interest in foreign food.  They are regimented and health conscious.

“Gourmet Go-Getters” – This group of people love food and cooking.  They enjoy entertaining, foreign food and experimenting. You can imagine them as Jamie Oliver fans.

“Nut Roast Nutritionalists” – For this group, health is important and they are concerned about food safety, manifested by a largely meat-free preference.  They go for organic products.

“Eager Organics” – This group is more organic than the Nut Roast’ers, with an equally strong concern about food safety but this time it is mitigated through organic meat and vegetables.  Like the Gourmet Go-Getters, they also enjoy entertaining and cooking.

Through a series of questions, we asked these groups what areas were important to them when choosing their Grocery store. For ease I have considered the various store attributes within 3 broad groupings:

1. Service and convenience  - the hygiene factors within retailing including parking, location staff helpfulness and tidiness.
2. Price – all factors that bring prices down including low prices and promotions.
3. Quality & Range – including Quality of fresh, quality of Own Label, comprehensive range.

* The seven Food Focus groups are representative of all GB Households

Price is important, but not the be-all and end-all

We should not be surprised to learn that price, was ranked as most important by 58% of households. It is the single most important factor but not the key determinant for all consumers.  Within the groups that ranked price as most important there is an interesting split. No Bother Fodder and Frenzied Families preferred promotions to deliver their price offering, whereas Gourmet Go-Getters and Chore Cooks preferred EDLP to deliver their pricing value – this can be explained through the degree of discretion within each of these groups. Frenzied Families and No Bother Fodder groups are not interested in food and are receptive to incentives to purchase delivered via promotions as it saves them having to think and plan a meal. Gourmet go Getters and Chore cooks are likely to have already considered their purchasing and therefore would prefer to have the food they intend to purchase at the best possible price. 

For service and convenience, the split is more even with 40% of our population – Chore Cooks, No Bother Fodders and Nut Roasters – citing it as important. Convenience was the key driver here with each of these groups desiring location more than service.  Not surprising as these groups have generally a low interest in food and shopping, therefore the nearest place would always win over helpfulness of staff and tidiness of the store.

Range and Quality is ranked as most important by a minority of households - Eager Organics and Nut Roasters.   This is no surprise either, since they have specific requirements in terms of high quality organic food and because organic food is not widely available, it is a key determinant in where they are likely to shop.

Ranking the Retailers According to Consumer Attitudes – Perception is Reality

So pricing is ranked the number one priority; service and convenience number two; and range and quality number three.  But within each of these, there are areas where particular focus within the store will attract a particular group, the most obvious of which is Organics, but it might equally be a good quality Own Label offering valued above all else by Frenzied Families.

Different households value different criteria and it is interesting to see how consumers rank different store chains in terms of pricing, services and convenience, and quality and range.   By indexing the importance of each criterion by retailer against the population as a whole we can see how consumers would rank price next to service and range for each of the retail chains.

When it comes to service and convenience, Safeway and Somerfield are ranked most highly; Safeway for its service and Somerfield on account of its high street and convenient locations.   For factors that drive pricing, Asda and Morrisons are perceived as providing the best prices: in both cases this is driven exclusively through pricing as opposed to promotions.  Safeway scores very highly on promotions but poorly on Value For Money and low prices.  On the contrary J Sainsbury and Waitrose are chosen on account of the quality of their offering.   Tesco, being the largest and most pluralist of the retailers, steers a careful path between all these factors servicing each in equal measure.

Retailers are perceived differently by consumers for the different focus they bring to retailing, and already we understand that consumers look for different things from different retailers driven by their own attitudes and behaviours.

What do our Food Focus Groups Purchase?

So, we understand how important price is to the consumer and now the retailer. I want to now consider what our Food groups actually purchase. Within any category there are different sectors that perform different roles, In this respect I want to consider innovation  - arguably at the other end of the spectrum to price.  Innovation and new product development creates a point of difference, justifies a premium and delivers greater profits. 

Innovation is part of our Quality and Range arena, and its benefits are best illustrated using a couple of examples.  Looking at the lavatory care market, for example, we can split this into mainstream and premium sectors.  Mainstream is the majority of the market consisting of bleach, gels, sprays, powder and blocks.  The premium sector is defined as liquid rim cleaners, foams, mousses and tablets.  Primarily, the difference between them is that the premium sector has added value products.

I have looked at all the skus in the market over the last 3 years and considered the value to both the premium and mainstream sector of new products that have been successfully launched and remained in the market during that time. 

There were 83 products launched in the last 3 years of which 37 were launched into the premium sector and accounted for 80% of the value of the premium sector.  There were 46 new products launched into the mainstream sector, which accounted for only 22% of the mainstream sector value.   So, foams and mousses add value through convenience and performance; they also add value to the manufacturer and retailer through a premium price. 

The same is true for pet food where the premium sector consists primarily of single serve sachets and cans, whereas the mainstream is large cans. Preserves and bread are more similar to many mature markets with modest levels of innovation and modest levels of growth.

New Product Development Drives Growth

I will admit that pet food and lavatory markets are exceptional in terms of the level of innovation in the last three years, but it is true of more common examples, too, that innovation keeps a market healthy.  It inspires choice and, importantly for the manufacturer, it delivers a point of difference and builds value into a category. Without innovation, all that is left is price. 

Keeping with the lavatory care example, the premium sector has grown by 68% in the last three years, while the mainstream sector has shrunk by 2%.   Even preserves, for which the premium sector is generally measured by the amount of fruit in the jar, the premium sector has risen by 7% whereas the mainstream sector has dropped by 3%.  Innovation helps to drive the value of sectors with some categories having seen extraordinary growth in recent years.  It goes to show that pricing is less important in premium sectors, where innovation is able to deliver added value to the category.

Consumer Priorities in the Premium and Mainstream Markets

But how do our groups of consumers rank the importance of price in the premium and mainstream sectors?

Taking pet food and bread as examples, I have indexed the importance of our different criteria for purchasers of the different sectors against the population as a whole. Service and convenience rank low for mainstream product buyers, while pricing is the key factor, particularly for cat food.  It seems logical, therefore, that brand focus for mainstream products should be on developing an effective pricing and promotional strategy to offer strong value for money. Taking the premium products in these categories, however, we get a different story. 

Whilst the principal of a different strategy for mainstream and premium sectors may come as no surprise, it is perhaps worth considering the amount of resource directed at innovating in the mainstream sector where it is much more difficult to gain a satisfactory return. For the mainstream sector, a better return can be gained from understanding and managing a pricing and promotional budget. 

The key is to understand regular pricing elasticity and promotional pricing elasticity.  Different markets respond differently to changes in regular price and promotional price.  Items such as brandy and cooking sauce, for example, respond relatively well to a change in ongoing price rather than lots of promotions.  On the other hand, some lagers and soft drinks respond to temporary price reductions.   For mainstream sectors and the majority of households that put price first, understanding the dynamics of the category is key in deciding to pursue an EDLP or promotional strategy.

In Summary

Within the retail sector, it is value for money that is unquestionably the single most important driver for consumers.  Quality and range together, however, are equally important, because they are motivating and influencing 40% of households as to where they shop. 

From the suppliers’ point of view, price is also the most important factor, although as I have demonstrated, it is also important that they differentiate strategy for premium, mainstream and economy products, and invest for the future.  Retailers, as well, have a role to play in this process and it is the responsibility of both parties to make sure that adequate provision is made to stimulate value growth through added value products.  

There is no doubt that a hierarchy exists.  The effort that is directed at providing the best value for money is not misplaced.  However, it is not the only consideration, since there is proof that there are opportunities to meet the needs of other groups of consumers who value other criteria.

In these circumstances, suppliers can help retailers in their quest to satisfy the need for value but, at the same time, generate greater profit through developing premium offerings.

A final thought  - a child that is raised in a bi-lingual family enjoys the benefit of conversing in several languages. As a consumer if we are only talked to in the language of price that will be the only language we will ever be able to understand.

For further information contact Kim Dunkason, ACNielsen (www.acnielsen.co.uk) on Tel. 01865 732275.
Email: kim.dunkason@acnielsen.co.uk

Date article published: 20/12/2002