When price sensitive customers walk out of your stores, does it make sense to keep them at all costs? Specifically can you keep them by driving down prices? Can price cuts bring back customers who walked out to cheaper alternatives? It is tempting for businesses to run price promotions and reduce prices on key items (loss leader)
In the recent Goldman retail conference, CEO of grocery chain SuperValue, had this to say:
More items really cheap don’t bring in more people
While promotions and loss leader pricing do bring in customers, it is almost impossible to keep those customer. If customers are willing to walk out of their customer stores to take advantage of your promotion, what will keep them coming back the next time? Anecdotally, we all know people who do their weekly grocery shopping in three or four stores, just to take advantage of low prices of specific items. Mr.Craig Herkert, CEO of SuperValu, said “price promotions only destroyed our gross margins”. In other words, loss leaders stop being loss leaders and price promotions become just a profit loss.
If there is no unique value you add to your customers or can continue to offer low prices (as Wal Mart does) is it profitable to do price promotions?
Here is the customer profitability vs. loyalty matrix I did some time back:
If your customers are in the lower left quadrant, does it make sense to give them more benefits in the form of lower prices? Your action should be to increase prices for these segments and apply your limited resources on the top right quadrant.
Do you know who your high margin and high loyalty customers are?