Private Brands Must Be Liberated From Old Pricing Rules
Just for fun, go to this Wikipedia page which purports to list some of the many human biases that make life so difficult to predict. Cognitive biases, statistical biases, confirmation bias, and more.
The catalog has become important to leaders in the retail pricing community who realize the rewards of empirical-based actions where bias is thwarted, as opposed to rules-based pricing where only bias in the rules are applied and rewards are missed. It’s the difference between a hunch and science. In other words, it’s the difference between what we guess to be true and what in fact is true, according to your consumer’s preferences.
What’s the cure? AI-powered pricing, as I have conveyed over the past few months. But when it comes to the topic of private brands – which began as an idea to offer shoppers alternative “nearly as good” substitutes for national brands, rules of predetermined price gaps to leading brands or margin rules have traditionally dictated the prices of private brands.
However, today, these private brands can deliver superior quality and true differentiation. But not all private brand products are the same when it comes to consumer bias. And this presents an important scenario where the retailer would be wise to apply science.
“With a great deal of time and luck, retailers are maybe capable of predicting this sort of margin-changing behavior unassisted. But an automated, optimized pricing system would have caught the bias earlier by lifting the guardrails on pricing private brands and enabling them to compete in real market conditions.”
Let’s say a doctor advises a patient to take a multivitamin. She sees two brands that are available at her local retailer. One is a national brand, another is a generic, which sells for far less. Would you be surprised if she decides to purchase the more expensive product with a nationally known brand? Yes, the private brand in this instance is cheaper and, in most cases, identical to the national brand in efficacy and ingredients. When quality matters, cheaper is not what the consumer wants.
Let’s call this phenomenon the “quality bias,” which ought to be listed in the Wikipedia catalog of human bias. With a great deal of time and luck, retailers are maybe capable of predicting this sort of margin-changing behavior unassisted. But an automated, optimized pricing system would have caught the bias earlier by lifting the guardrails on pricing private brands and enabling them to compete in real market conditions.
There are scores of items where AI-powered pricing recommendations will challenge human- biased rules. Pet food is another great example. The trend in the U.S. is that consumers seek quality pet food that is healthier and more personalized than pet food from the past. Why? The role of the pet has risen in society to approach that of a member of the family.
Let’s look at this from another perspective. What we have been saying is that when it comes to certain items, a brand can trump price. In other words, just as there is a “quality bias” affecting consumer behavior, a proxy for that quality is the brand. No one doubts that Clorox is a good bleach, that Scott makes great toilet tissue, that One-A-Day is a reliable multivitamin. The companies behind these products have spent fortunes over the years to attain this very valuable thing called “brand equity.”
There are chains with private labels that are tiered according to brand equity, with the result that certain private label products can sell for more than nationally branded products. A good strategy for these retailers: lift the guardrails so the AI-powered pricing engine can do its work and position private label to meet customer’s expectations and bias. Higher margins, increased volume and revenue can be follow.
By allowing private brands to find their correct altitude, retailers today can trade on the evergreen principle that the market should determine the price. Pricing has never been monolithic, and tying it down with rules runs the risk of pricing blind in a market where the big players are using demand science. But this is where smaller retailers can feel more hopeful.
With the recent democratization of consumer demand science, private brands are poised to become star sellers in our increasingly volatile economy. Investing wisely in your pricing strategy could keep you at the front of the pack as the rest of the market sorts itself out.
Kevin Sterneckert is the chief strategy officer of DemandTec, a pioneer in retail price and promotion optimization technology. He has more than 35 years of industry experience in retail technology, including extensive hands-on pricing and merchandising experience. Sterneckert is a recognized expert in helping industry leaders and software companies understand the possibilities of artificial intelligence, Internet of Things, Big Data, and technologies of the future that are creating excellence in the supply chain. He also served as research VP and lead analyst for the consumer value chain for Gartner Research.
