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It's Not All About Lower Prices

As New Zealand waits for the formation of our next MMP government we can reflect on what this shows us about the way that we as a population make complex decisions. Single issues that seem like obvious and compelling non-negotiables for some people can be dismissed as unimportant by others.

Cognitive bias

We all have difficulty seeing past our strongly held beliefs, to the point where we create new facts to support what we believe to be true. This phenomenon is called “cognitive bias” which occurs when we fill in the gaps in our knowledge with convenient (but unfounded) explanations.

Just like the political polling (which accurately predicted our recent election results), gathering and analyzing data is a more reliable way to predict outcomes than relying on our pre-determined beliefs.

Lower prices

One of the prevalent beliefs throughout retail is that lowering prices always leads to higher sales. This belief has arisen because of the highly visible and frequently studied Fast-Moving Consumer Goods (FMCG) sector which describes commoditized products selling through supermarkets. Many of these products are frequent purchases which require little or no effort from the customer to choose.

FMCG suppliers and retailers know that any number of very small details can dramatically influence sales volumes. Such things as packaging design, shelf position, number of facings, shelf ticketing and retail price can be the difference between success or failure of a product.

Known Value Items

Many commodity products have become Known Value Items (KVIs). Because their retail price is remembered, price plays a more significant role in a consumer’s point-of-purchase decision-making.

Outside of the food, liquor and grocery industries, there are very few high-frequency purchases, and neither are there so many KVIs.

Our analysis of specialty retail sectors such as gifts, books, toys, pharmacy and fashion, has shown that there are few products which exhibit an inelastic retail price in these stores. Most specialty store retail prices are elastic – similar sales volumes are observed at a wide range of prices.

But “my store is different”

Analysis of retail sales data from hundreds of specialty stores throughout New Zealand also shows that the popularity and sales of products only vary slightly between urban and rural areas, or between higher and lower income areas.

Even when we report this fact to retailers, and use it to reinforce the value and validity of our nationwide benchmarking reports, there is a commonly held false belief that “my store is different”.

It would be more accurate to say “each individual customer is different” but collectively they behave in similar and predictable ways.

There is a complex matrix of factors which influence retail sales volumes, and price is just one of these factors.

In specialty retailing the goal is to provide an improved customer experience and to aim to provide goods with a degree of exclusivity by matching a solution to each customers’ need, making price less important.

NZ is not Australia

The NZ pharmacy sector is bracing itself for the arrival of the Chemist Warehouse chain, a successful discounter from Australia. Pharmacy product suppliers have expressed their view that this will cause significant disruption to the existing pharmacy model here. But this belief wrongly assumes that retail price is the major influencing factor for pharmacy shoppers in New Zealand.

Some large Unichem and Life Pharmacy stores near the new Chemist Warehouse sites will be forced to lower some product prices on commodity products (e.g. Paracetamol and Fish Oil). NZ pharmacy customers can already shop somewhere cheaper (e.g. supermarkets or online) for most pharmacy retail products, so another competitor is not a radical change.

Most owner-operated pharmacies won’t be affected by the new arrival. Because they are offering personalized, local, professional advice on “slow-moving-consumer-goods” their customers are not going to be persuaded to travel to the discount pharmacy to save a few dollars.

Not a silver bullet

Just like in our recent general election – the NZ shopping public will not be convinced by a single issue. Outside of FMCG, lower prices are not a silver bullet that will drive sales growth and business success.

While we all like to get a bargain, even the Warehouse with its massive campaign budget is finding it increasingly hard to convince the majority of New Zealanders to vote with their feet on the single issue of low prices.


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