Price increases get a bad rap, but brands in the home improvement category have dealt with inflation since the invention of retail.
A 1986 Sears catalog advertised outdoor grills for $66 – about $170 in today’s money. How much confidence would a present-day shopper have in a $170 grill? Probably not much, since the most basic models now start in the $300s.
How did that happen? Why didn’t consumer outrage hold prices steady throughout the years? Because shoppers agree that today’s grills are better. They're bigger. They're hotter. They're stainless. They're gorgeous.
Recent supply chain issues and shortages have caused a shakeup in the way that people shop and evaluate merchandise. Brand loyalty looks different. In the post-pandemic retail environment, an unprecedented 35% of people have tried a new brand and plan to keep using it. Our current economic situation presents challenges, but also opportunities for brands to re-evaluate pricing strategies.
Brands sold at Lowe’s, Home Depot and other retail chains succeed when they can justify a pricing strategy that increases consumer spend. When consumers are willing to pay more, the relative value of that product and the ones around it go up – a win for both the brand and the merchant.
Understanding how consumers respond to price in the context of the other products in your category can help you take your retail price point up without hurting your profitability. Fortunately, some time-tested economic techniques provide a good starting place.
The reference price effect is simply what the customer expects to pay for an item. In some categories, they may have a lot of recent purchases and know exactly what they'd expect to pay. In other cases, advertising and promotions help them to understand what a price point should be. In most cases, however – especially in home improvement – we find that consumers don’t have any firm expectations around cost until they get in the aisle. For this reason, home improvement brands have the unique opportunity to set a reference price right there in the bay.
A corollary to the reference price effect is price anchoring. Price anchoring is a strategy that you can use to set the correct reference price points for your product and your brand in order to have success at retail.
Imagine you are observing consumers shopping for hammers in Lowe’s or Home Depot. The first thing that a DIYer might do as they approach the bay is scan all the price points to see where they might want to fall in the continuum.
They'll quickly notice that the very bottom shelf has prices $10 and under. As their gaze moves upwards, they will see middle price point units until they reach a $50 premium branded hammer near the top of the bay.
A DIYer who just needs to get the job done today might be looking for a hammer that they'll use for an hour and then throw in the shed. Because this use doesn’t justify a top-of-the-line purchase, they will begin their consideration with the least expensive SKUs.
But here’s where it gets interesting: humans innately avoid extremes, so even in the case of expendables, shoppers tend to avoid the very bottom of the price floor. Instead, they use it as an anchor point to guide them up a level or two to a product they perceive as a bit higher quality.
Alternatively, if the consumer is a serious DIYer or a Pro, they will gravitate toward the most expensive model and use it as a price anchor for determining how far they want to step down. They will look at prices underneath the most premium model and think critically about what features they value most and which they can do without to get a better deal for a lower cost.
More categories are price elastic than you may think. From pliers to hammers to titanium outdoor grills with a 50-burger capacity, consumers tend to take their cues from the retailer about what they consider a fair price.
It’s true, however, that elasticity varies from one category and industry to the next, so it's really important to understand the role it plays in your specific lineup. If you can demonstrate to your merchant that your category is price elastic, you identify an opportunity to raise price anchors for your mutual benefit.
Accurately predicting how your end user will respond to price increases requires a mixture of qualitative and quantitative data. To determine where you can put that highest-end price point, you need to research both your consumers and your competitors.
Observe consumer shopping behavior on a store walk.
Heat mapping, trade-off analyses and focus groups are all established methods for quantifying shopper behavior, but you can collect useful data just by observing consumers and talking to them. Store walks are a powerful tool for capturing the decision-making process of real end users in real-time.
What are the minimum features they look for as they shop your category? What could motivate them to consider moving up a level or two? Spend some time in Home Depot or Lowe’s, and take note of which products consumers are taking off the shelves, how they evaluate them, and what makes it into the cart and what gets replaced. Your findings may confirm or dispute what you assumed to be true about your brand’s buyer personas and what they prioritize when choosing between two or more products.
While it doesn’t provide you with the why behind purchases, POS data can provide an excellent overview of which price points consumers ultimately agree to. They offer quantitative data on frequency and price expectations, as well as an opportunity to make comparisons between retail locations.
The facts of your POS data can give you a well-informed jumping-off point for directing your qualitative research.
Another useful price indexing technique is the Van Westendorp. A Van Westendorp Price Sensitivity Meter introduces consumers to your product and then asks them to respond to a set of proposed price points. Respondents will indicate at what point the price becomes so expensive that they wouldn’t consider purchasing, and at what point the price is so low that they question its quality.
Most importantly, a Van Westendorp will reveal an optimal pricing range – the point at which consumers consider the product expensive but still worth the price. You can plot and cross-reference this data in a number of different ways to determine an ideal pricing strategy for your entire lineup.
Share this data with your retailer – brands that demonstrate elasticity in context can generate business and drive up the average sales price for their entire merchandise category.
When you identify opportunities to increase prices at retail, look for ways to add value through other marketing touchpoints.
Can you use your packaging to give your product a more premium feel? Highlight the features of your product that are most important to your end user, and you can raise consumers’ evaluation of your merchandise in step with your new pricing strategy.
Take for example products that are made in the USA. A majority of consumers say they're willing to pay more for an American-made product. It's a symbol of quality – and it’s something that can command a premium price point. If your product is locally made, sustainably sourced or supports a cause, leverage those attributes in your messaging.
For brands at retail, price receptivity research starts with consumer research. Before you can effectively respond to your price indexing data, you must have a complete understanding of what your end users value, what problems they are trying to solve and where they are willing to make trade-offs.
Strategic messaging can add intrinsic value to your products that elevates end users’ ideal price point, to the mutual benefit of you and your vendor. Show off your in-depth understanding of how the end user shops and buys a category, and you will win the loyalty of your retailer.
Want to learn more about price receptivity indexing and how it can help you succeed at retail? Get help with consumer research tailored to your business’s needs.