How I Learned To Love Hi-Lo Pricing (And Get Better Circular Ads)
By Steve Marzio
Looking for ways to carry some more weight into your negotiations with your retail “partner” when it comes to securing more, bigger, better circular ad space during the biggest weeks of the year? Here’s a bit of advice…go Hi – Lo!
WHAT A GREAT DEAL!
We are all suckers for a deal. Let’s look at the parties involved. For the consumer, the “win” is obvious. How good do you feel when you buy your product that was only price reduced for that one week? Good for you for rushing out and grabbing that seemingly short-lived offer on something that you had to buy anyway (you know like that second GPS unit for your golf cart). For the retailer, “the deal” is deemed successful because the ad with the temporary, expiring deal generated a needed immediate lift to sluggish everyday sales. For the sales rep, “the deal” helps her hit her quota for the quarter….so she too is happy. Now for the marketer. Herein lies the issue. “The deal” is often an uncomfortable walk of shame that they had to price their beloved product so low…if even for just one week. (Often this is when the sales reps phone rings whereby the ivory tower marketer says “Well of course it sold well, it’s easy to give it away!”) However, it is the marketer’s fault to begin with, let’s explore.
5 HI-LO PRICING TACTICS TO TAKE TO HEART
As I wrote in an earlier article, “THE DREADED P” the price lever can often be an embarrassing one for any Top 20 educated MBA marketer. However, the problem isn’t in figuring out what the “right” price should be on a product, the problem is that marketers don’t embrace enough retail realities when devising their pricing strategy. In fact, too often, pricing strategy is often left to just pricing and no strategy. In other words, discounting levels, frequency and timing of promotions are more of an afterthought, a bad afterthought when it comes to your product’s selling price.
Put simply, everyone loves “the deal.” So utilize this consumer and retail psychology to your advantage. Marketers, hear me now, “Embrace HI-LO!”. I mean really embrace HI-LO from the beginning and you will sleep better at night, have better pro-formas and most importantly, retailers will love you (and so will your sales team if you care). Let’s take a look at 5 examples on how to embrace HI-LO and to develop a successful pricing strategy in selling a $99 product:
- Launch high with instant rebate (sleeves out of your vest): Instead of launching your $99 widget at $99, (which you know is the right price from your 2 focus groups when you ate too many M&Ms behind the tinted glass)….launch it at $129 and give a $30 instant launch rebate. Do this especially when you are launching at a singular or smaller set of retailers to start. Consumers do not have any reference point on your new product at launch. Maybe some competitive products are similar, but with every new product, comes a new set of price tags and opportunity to create deals. Even though you know the right price is probably $99, there is no time like at launch for you to reap some extra dough. Who knows, maybe your excel sheets and those folks in the focus groups who wanted to spend an afternoon answering questions for $30 were wrong? Maybe you end up selling more at $129 than you thought you could. This is called “free money.” Go celebrate and buy your own M&Ms!
- Price drop to original planned level (back to the future): When you make your eventual price move to $99 this could be your one chance at an ad WITHOUT a deal. Enjoy it, try to bank some more “free money.” Saying “PRICE DROP” in an ad can often be as effective as saying save $30 off this week. If you think you need more, read on to #3.
- Price drop plus discount (price drop on steroids): If sales start out too sluggish and you need to make back some ground, do the famous DOUBLE DEAL. Make the price move and put a discount on top of that. Ask for more circ ad space for this because if consumers like a deal (price drop), they will love the DOUBLE DEAL (price drop + discount). Was $129, Now $99-$20=$79! This is a mirage of a $50 deal! Add in a cover spot location then go get some popcorn and sit back and watch for some monster unit sales numbers come through on the EDI feed. Remember, you were going to launch at $99 with a discount anyway so you are still no worse off under this scenario. And now you have something loud to talk about in ad!
- Vary Level of Instant Savings Based On Opportunity (keep your powder dry): Vary your savings offer for different times of the year or different circular ad treatments. If the retailer will give you a cover spot, offer to take off $30 vs. just $10 for a small block on page 9. Save your bigger discounts for when retailers are craving for extra special offers. The problem many marketers make is they take off the maximum amount they are willing to live with, then 2 weeks later the retailer is soliciting offers for a huge Memorial Day ad with blockbuster deals. You get locked out because you offer them the same offer as the week before and the week after. You need to CREATE your own sense of good/better/best deal scenarios by varying your offer and the timing of which you offer them.
- Never Ending Closeout (like the McRib, it keeps coming back): Finally, nothing screams a deal like a “CLOSEOUT.” Here’s an idea towards the end of life…run 3 or 4 closeout ads! Why limit it to just one? On my drive to Florida every year, I pass 8 or 9 T-Shirt/Souvenir shops that have been running “GOING OUT OF BUSINESS” sales for the last 5 years! Somehow these guys get it. (no offense to you going-out-of-business souvenir shop owners out there).
All of these tactics should be used to accomplish your various sales AND earnings goals for your product. Even the EDLP king, Walmart, is open to creative ways to show their loyal, and massive consumer base a “deal.” You just might have to disguise it more (hint #1: “ROLLBACK”, hint #2 “in/out special edition”.
KEY BENEFIT IS FLEXIBILITY:
Ours is a dynamic marketplace with many new variables getting thrown in daily. Setting and tweaking HI-LO promotions are levers to keep the ever unbalanced supply and demand forces just that much closer to each other. Short on supply due to welcomed overdemand, a manufacturing shortfall or late additional retailer coming on board? Just ratchet HI-LO back. Your boss just come storming into your office and demand more growth and lower invetories on your P&L? Then crank it up! EDLP is starting to sound a bit boring now isn’t it?
So over coffee this Sunday, take a look at all those circulars, from green beans to LCD TVs to ergonomically designed pillows. See if you can spot the smart marketers embracing this consumer psychology and harnessing it to their own ends. The more you accept this principle, the more success you will have in your own financials and just as importantly, in your “leverage account” with the retailer.
FURTHER READING / SOURCES:
Rafi Mohammed’s Pricing Blog, “Pricing For Profit” (he provides lots of pricing strategies/ideas from a variety of industries)