Protecting the Price Ladder

What was your first car?

A 5 year old Nissan Micra? An 8 year old Ford Fiesta? A 10 year old Mini Metro?

Most of you will have started on a low rung of the ladder. From there the goal was to slowly move up the ladder – a rung or two at a time, until you make it to the car of your dreams. Perhaps a BMW? Maybe a Mercedes? Possibly a Porsche?

Either way, there was a clear ladder. A BMW was higher up the ladder than a Ford. The curtains would definitely twitch if your next door neighbour came home with a brand new BMW. Not so much if they came home with a new Ford Orion.

The car you drove said a lot about how you were doing (financially) in life. It was a very visible signal.

But, it’s much less of a signal now.

Companies like BMW and Mercedes have created mid market versions. The majority of cars are leasehold. You only need to be able to afford the monthly payments, you don’t need the cash to buy it outright. Now, if your next door neighbour comes home with a brand new BMW the curtains wouldn’t move.

Something that used to be very clear – the hierarchy in cars – is now very blurry.

Why are we talking about this? A similar thing has been happening in the FMCG industry. There used to be a “Good, Better, Best” mantra, led by retailers.  It was how they thought about ranging. Pricing. Merchandising. Own Label development.

It was a time when Tesco Finest and Sainsbury’s Taste the Difference were huge brands that signalled quality for shoppers. It was a time when big name brands did the same. Heinz signalled quality in ketchup. Cadbury’s did in Chocolate. Kellogg’s did in cereal. Shoppers were given a clear choice. Pay more for (actual and/or perceived) quality or pay less for slightly lower quality.

However, these choices have become less clear over time. Promotions have blurred things – you often don’t have to pay more for a better product. Tertiary brands (e.g. Discounters, Tesco Farm brands) have blurred things. The proliferation of range and benefits in many categories has blurred things.

Once tiering becomes blurred, the easiest choice for a shopper to make is to buy whichever product is cheapest or on deal. In a market where growth is hard to come by, this is a real problem.

So, how can you make tiering clear for shoppers?

Drive range & merchandising clarity. Go into a big supermarket and the choice in many categories is not easy. For instance, think about laundry detergents. There are multiple brands – Persil, Ariel, Surf, Daz, Method, Own Label. There are multiple formats – Powders, Tablets, Liquids, Capsules, Liquitabs, Gels, Gems (well done if you know what these are). There is Bio and Non Bio. There are lots of different pack sizes. You’d have to spend an hour at the fixture to make a fully considered choice about what to buy.

How to make things clear? Merchandising – have a primary organising principle, then a secondary organising principle. So, your primary organising principle might be ‘brand’. Then your secondary organising principle might be ‘format’. So shoppers have to look for 2 things (1) brand (2) format. This allows them to quickly narrow down choices. Range – really look at the range objectively. Which products are giving shoppers genuine choice, which are blurring the choice? Keep the former. Lose the latter. Which products are bringing genuinely new benefits to the category, which are bringing the same benefits? Keep the former. Lose the latter.

Drive (& protect) price clarity. A clear price hierarchy needs to follow two key principles. Firstly, base prices need to follow the tiering hierarchy. A ‘better’ product should be a higher price than a ‘good’ product. A ‘best’ product should be a higher price than a ‘better’ one. Sounds obvious, often it doesn’t happen.

Secondly, average price paid should follow the tiering hierarchy. Average price reflects promotions. So, Product A might have a base price of ￡2. But it promotes heavily, so its average price is ￡1.40. This average price may then be lower than the average price of products in the next tier down. This disrupts the real pricing hierarchy in the category. It means that a lot of shoppers can trade up to a better product without actually trading up.

Drive quality differences. The old “Good, Better, Best” hierarchy was based on quality differences. The clue was in the names. Good was good. Better was better. Best was the best. Shoppers knew this and made choices based on it. They worked out when it was worth paying more and when it wasn’t.

For shoppers to pay more, differences in product quality or performance need to be meaningful – something that shoppers care about. They also need to be noticeable – something that is clear when you are using the product. Too many new products come to market with benefits that the brand or R&D team care about, but most shoppers don’t. Too many new products score better in technical testing, but most shoppers can’t see a difference when they are using them.

When tiering is blurred, more shoppers buy on price. More of them trade down.

When tiering is clear more shoppers buy on quality. More of them trade up. They pay more for a better product.

Like they did in the days when driving a BMW meant something.

On a separate note, our latest article for The Grocer magazine: “How is Lidl maintaining its winning streak and what can we learn?” was published in The Grocer this week. You can also view it on our website…https://insight-traction.com/learning-from-lidl-2/