Is Private Label Pricing the Way to Go?

By: W. Frank Dell II, CMC Private Label sales are growing every year. There are a couple of reasons for this growth. First, Private Label products have a higher gross margin and retailers believe this means tmaking more money. The more important reason for this growth has been the significaimprovement in product quality and packaging.

hey’re nt

Additionally, retailers are starting to understand that Private Label products are unique in that consumers can not buy these products in their competition’s store. This supports retaining customers, which is every retailer’s objective. Historically, Private Label products were imitations of leading national brands. Product quality

claims were that they were equal to the national brand, but this was rarely so. Packaging for Private Label was poor and left much to be desired. Private Label products are priced anywhere from 20 to 70 percent lower than the national brand. Even with larger discounts, Private Label products achieve a higher gross margin percent than the branded competition.

The retail food industry is infatuated with low prices. This is illustrated by the following chart from one of our

studies. This chart is proof positive that Private Label’s low prices do not equate to or increase sales. Neither does it increase market share. In all of these examples the Private Label product has been discounted by more than 50 percent versus the national brand. Yet, these products have not achieved significant market share. This confirms price is not the sole factor consumer use in selecting products.

The world of Private Label has changed greatly in recent years and so should the pricing for these products.

Today, the standard Private Label product must be truly equal to or better than the national brand in quality. Quality is judged by the consumer’s perception of the product’s performance. If the consumer determines the product performs in their household in an equivalent or acceptable fashion the quality is the perceived as equal. The second factor is packaging for Private Label. Products must be competitive and current in design.

In addition to the standard Private Label products, there have been a number of new developments. Gourmet or

unique products have entered the marketplace. These are products for which there is no national brand equivalent. A good example of a retailer offering gourmet or unique Private Label products is Trader Joe’s. In recent years we’ve also seen growth in the super premium segment. These are Private Label products with quality that exceeds the national brands. An illustration of this point is the difference between Ben and Jerry’s ice cream and the leading national brand. Another group of Private Label products achieving growth are organics.

These are products grown without the use of pesticides. In many cases these products are equivalent in quality to

the national brand but, the national brand is not organic. Our last group of Private Label products is the second tier. In many cases these would be the Private Label products of years before and true commodity products. Examples here include flour, sugar and canned vegetables. In summary there are standard, gourmet, super premium, organic and commodity Private Label product groups.

©2002 Professional Pricing Society

The issue is how to price Private Label products? As the world changes daily the retail pricing approach must also change. The retail food industry’s primary pricing philosophy is “versus competition” or “follow the leader”. Each retailer collects competitive prices as their base for establishing retail prices. The dominant pricing philosophies are Velocity and Size. The Velocity philosophy establishes a lower selling price for faster selling items and a higher one for slower selling items. The Size philosophy establishes a lower price per unit for the larger packages. Over-arching these two philosophies is a minimum and maximum gross margin range for the category. Private Label products are typically priced off the leading item. Since these leading items are priced off of competition, philosophy and gross margin range, the effect is Private Label products are reflective and not independently priced. The results are a significant opportunity for retailers.

Comparing competition prices has limited value for pricing Private Label products. Few if any consumers

actually compare Private Label prices among retailers. The reason for this is that it is extremely difficult for consumers to make a product quality comparison. While the product might be exactly the same and produced by the same manufacturer, the consumer is unable to determine this. For this reason they do not bothered to compare Private Label prices. This is the same issue we have observed in mattress retailing. Each retailer has a unique cover and stock number for the same product from the same manufacturer. This makes it extremely difficult for the consumer to perform any direct price comparisons.

The use of a gross margin range typically fails when pricing Private Label products. The concept is one

establishes a low and high limits gross margin percentage for the category. The question is what is wrong with a 55 percent gross margin? The answer is nothing. Establishing a maximum of 35 percent gross margin for the category and thus Private Label products makes no sense and costs the retailer money. Pricing Private Label should primarily be driven by the value proposition. Value = Price / Quality The value proposition is the way consumers make their purchase decision. The better the quality and lower the price results in the greatest value. Since many Private Label purchase decisions are a trade off versus the national brand, the greater value wins out.

The second driver is the market share. The greater the Private Label’s market share, the smaller the discount that is needed versus the leading national brand. Conversely the smaller the market share the greater the discount is needed. Keeping in mind the majority of supermarkets do not have an objective to become totally a Private Label store. A Private Labels share in the 30 to 35 percent range is both desirable and achievable.

For the standard Private Label item a ten to fifteen percent discount off the leading national brand is

recommended. Note if the leading national brand is routinely sold below cost, as a loss leader, this rule may not apply. To discount greater than fifteen percent does not appear to increase sales and clearly does not increase profits. The discount should be adjusted based on the items market share. Gourmet or unique items require a different pricing approach. Being different they cannot be priced off of the leading national brand. More than ever the concept of value pricing comes into play. The old adage of whatever the market will bear applies to these products. The best approach is field research. Ask consumers what value they receive or perceived the product provides can be a base for pricing. Another approach is to perform price sensitive research. Charge a different price in different stores. Then track the unit sales versus store and category sales. The objective of this research is to determine the highest price consumers will pay without discouraging sales. In supermarkets consumers always have product alternatives due to the vast assortment offered. If a product is priced too high, the consumer will purchase something else.

Pricing super premium Private Label products is truly tricky. Since these products are of higher quality than the

leading national brand, they could be priced higher. A more conservative approach is to price super premium products equal to the national brand. This approach increases the perceived value for the consumer. As a general rule, super premium Private Label should be priced equal to or up to ten percent higher than the national brand. This range is greatly dependent on the quality and product’s performance features versus the national brand.

Our last group is second tier Private Label products. These products have not gone away nor should they. The

assortment for these products is based on the store’s image and customer income level. Second tier Private Label products are not generic. There appears to be little or no market for generic products. These are primarily commodity products were differences in product performance are hard for the consumer to discern. Second tier Private Label items typically have the greatest discount versus the national brand. The problem is too large a discount portrays significantly lower quality. When the discount is too great the consumer perceives the product as not being worth their hard earned money. The pricing strategy for these products should be a discount range of fifteen to twenty-five percent versus the leading national brand.