The way in which Britain’s supermarkets have responded to the recessionary customer is an object lesson in the strategic use of “value ladders”.
With the downturn in spending and astonishing growth posted by discounters last year, UK supermarkets have had to react. The results of their actions are now visible, and the winners have all done it through developing their value ladders. Tesco, who haven’t, have paid the price, losing share to their rivals. The five fundamental ways to improve your value ladder are simple and obvious, but you’d be amazed how many retailers, including Britain’s biggest, can make a mess of them.
What is a value ladder?
Tesco were the first big UK player to heavily invest in a 3-tier value ladder, augmenting their “me-too” core range of products with a lower quality “Value” range, and later, a higher quality “Finest” range. They called this strategy “good – better – best”. ASDA quickly followed, and their success encouraged other retailers including Sainsbury’s and, more recently, Co-op and Waitrose, to adopt a similar architecture.
Why does it work?
When a variety of customers look at the price for a single product, some will find it too expensive, whilst others would have paid more. By pricing in the middle of the acceptable range, some sales will be lost as more price-conscious customers decline to buy, and some profit will be lost as other customers would have paid more. Market traders around the world solve this with high initial prices and a willingness to haggle.
Historically, retail chains could reduce the impact by having differently priced stores, depending on the demographic of their customers. But the complexity of a large portfolio, and the increase in national price comparisons, has driven most retailers to standardise prices, reducing their ability to price for these different customer groups (although Metro stores still average around 4% higher than supermarkets for most retailers, with airport stores even higher).
The value-ladder architecture allows retailers to offer essentially the same products at multiple price points in the same store. It offers a cheaper alternative for value-seekers whilst encouraging those less price-sensitive to enjoy more benefits for a higher price. The real trick, however, is in deciding, and communicating the right product benefits and price points, to migrate customers into the most profitable products, without losing them to competitors at any point on the ladder.
Five fundamentals of effective value ladders
1. Establish your position
In competitive markets, key lines must be priced in relation to competitors. For entry-level products, differentiation is low, and value comparison is simply price comparison. Despite different store environments, Sainsbury, ASDA and Tesco all maintain identical prices for most key lines in their respective entry ranges. Moving up the ladder, different additional benefits justify different pricing levels. The more attuned the benefits are to the elements customers most value, the more scope there is to hold onto customers at prices that are premium to the market. To be successful in this strategy it is vital to understand what your different customers value most highly and to differentiate your offer accordingly.
2. Make your “good” genuinely good
When launching a value range, retailers worry most about trading down core customers. This results in products being deliberately designed to “look value”. Recent supermarket entrants have started to curb this fear – Sainsbury’s Basics range, for instance, includes Fairtrade bananas and FSC certified paper products.
However the pioneers, ASDA and particularly Tesco, have been badly exposed by retailers like Aldi coming in with good quality, attractively packaged products at entry-level prices. Sainsbury’s “Switch and Save” response actively encouraged trade-down within the store. It has retained customers and delivered a 60% growth in its “Basics” range. Tesco have responded with an off-strategy introduction of "discounter-style" ranges. It's possible this will reduce defection, and may even trade some customers out of value ranges, but so far it's too early to tell.
Fact: some customers will trade down, but it’s better they do it with you, than with someone else. If too many trade down, it’s not because the entry level is “too good”, it’s because the trade-up is no longer compelling. Points 3 to 5 help bridge that gap.
3. Close the price gap downwards
Market-based pricing focuses on KVIs (Known Value Items) and can create price disparities between the KVIs and the rest of the category, leading to large volumes being concentrated in low-margin products. This can be exacerbated where cost increases get passed on through remaining lines to protect these key price points. Closing the gap through discounts and deals on higher value products will encourage trade-up and improve cash margin. Wetherspoons for instance have long included premium lagers in their pricing deals to maintain trade-up. Waitrose have more recently introduced deals on core-ranges to extend their share of basket and to offset the trade-down potential of its successful new “Essentials” ranges. ASDA have protected the volumes of “Extra Special” ranges by putting them on deal for the first time in 2009. In contrast, Tesco have been experimenting with closing the gap from below – increasing the prices of individual products in their value ranges, with very mixed results.
4. Accentuate the benefit
The increasing trade-down temptation means that up-sell needs to work harder than ever before. If the only message is price, customers will never understand why 28-day matured is so much better, and why Egyptian cotton is cheap at twice the price. But even great communication has limits. Added-value products that can’t key into well-understood phrases, consumer hot buttons, or a strong premium brand are even more vulnerable. Having a stable of branded premium exclusives is a trade-up strategy that has worked well for retailers such as Boots the Chemist for many years, and Waitrose’s recent deal with Dutchy Originals is a great example of a premium introduction that ticks all of the boxes.
5. Encourage the comparison
In technology, comparison is everything. Increments in processing power, memory and screen size are clear signposts to enable customers to buy-in at the level they choose. By altering the price relationships between models, it also allows retailers to channel customers to the products they would prefer to sell, as the value comparison is relatively easy for customers to make. At the opposite end of the spectrum many pub operators don’t even provide a basic price comparison at the bar, and therefore have little influence over customer behaviour. Customers default to a habitual brand in ignorance of the different value alternatives available. It’s a different situation in the off-trade, where the same shoppers will select the best deal from a portfolio of preferred brands. By providing ways for customers to easily compare price and benefit of products, not only will your customers feel more empowered, you will also gain a much finer ability to directly influence choice and optimise the sales mix.
