The pandemic’s impact on the economy and supply chain means that consumers are more willing to try new brands in order to get what they need, or save a few dollars. Now is a great time for retailers to enhance their private label pricing strategy with best practices, or to start looking at new private label opportunities.
There are various reasons why an organization might choose to introduce a private label brand.
Perhaps the most obvious is to increase margins. Although they are often sold at lower price points, private label products have a much lower cost to the retailer than buying a national brand.
A retailer could also be looking to fill a lower price point gap in the market, or achieve differentiation or exclusivity with their own label.
Another reason a retailer might develop a private label brand is to gain more negotiating leverage with national vendors. When you have your own competing product, national vendors will have to bring more to the table to obtain premium placement or promotions.
Once you know the goal, you need to properly build the brand gap architecture, with the strategic purpose in mind. Your pricing should create a brand perception that aligns with that purpose, and it needs to be consistent across all buyers and locations.
Your private label can’t be priced higher than the national brands for one product, and lower for another. Maintaining a consistent brand gap across all products is important to the private label’s success.
To start building the brand gap architecture, consider what’s already out there in the market. Where does your product fit into the ecosystem? Setting prices is about more than just looking at your costs. You need to listen to your consumers, and factor in elasticity signals and consumer demand behavior.
Think about who your private label brand is really competing with. Are you pricing against your competitor’s own private label brand, or the national brand next to your product on the shelf? Perhaps it is both.
To find out, you need to look at your customers’ cross-shopping behavior. For products with high price sensitivity and substitutability with your competitor’s private label product, there’s a good chance that’s who you are going to be pricing against. But if you look at a membership retail club, the likelihood of customers shopping at the competitive membership club is small. In that case, the national brands on your own shelf are more likely to be your pricing competition. Of course, there are many other factors that influence consumer shopping behavior, which is why it’s important to look into the data on how your customers shop.
AI and data analytics take all of the guesswork out of the above private label pricing strategy best practices. Using analytics is a savvier way to assess consumer behavior and how pricing can influence it, as well as track and respond well to your competitors’ price changes.
Data can also tell you what the right brand gap really is for your products based on your business objectives. Instead of relying on traditional merchant methods, analytics can ascertain the optimal brand gap structures with more consistency and accuracy. For example, a merchant may look at cost and determine the private label product should be 10% lower than the national brand, but demand analytics leverages all of your data to calculate that 8.5% is the true optimal brand gap.
Not to mention, with AI pricing tools, retailers are better prepared to detect changes in the market, and evolve their pricing and private label indexes as consumer demand evolves. The bottom line is, analytics powers retailers to price more effectively and efficiently.
There are two sides to a promotional strategy with private label brands. One, is that you are likely to receive less vendor funds. Because the product is already offered to you at a lower cost than the national brands, the vendor probably will not supply you with any funds for promotions.
However, the upside of this is that you will have more promotional control over your private label brand. With vendor funds, the vendors hold all the power. But on your own, you get to decide how to run the promotions and focus on what will be most effective for your brand and your business goals.
Plus, it is simpler to get clear promotional performance results and analytics without vendor funds muddying the data. You can more easily see what promotions are truly profitable and asses the true profitability of each promotion.
The other aspect of private label promotions, as we mentioned before, is that with your own private label brand, you have more leverage over national vendors. By promoting your private label, you can shift more consumers to your margin favorable and exclusive products. Vendors know they will have to sweeten the deal if they want to be promoted over your own brand.
Markdowns present an extra challenge to retailers when it comes to private label products. With a national brand, sometimes the vendor will help cover some of the loss on unsold product, or help remove a product to make room for a new one. But with private label, you are more or less on you own. Which is just another reason to invest in an advanced markdown solution. AI can help you better manage your markdown plans, optimizing for consumer demand and improving sell-through.
The upside is that, similar to private label promotions, retailers have more control over private label markdowns. It is up to the retailer, and not the national brand vendor, when to exit a product. While a national brand could be yanked at any time, with a private label you get to let your business objectives drive more strategic decision making around markdown plans.
Revionics has the tools retailers need to not only build the right private label pricing strategy upfront, but also to adapt and improve as the market and consumer demand change. Our pricing experts, analytics and solutions can help you more effectively and efficiently dive into your data to identify consumer trends, optimal brand gaps and more.