OPINION: The price isn’t the only answer

What to make of all these price-match guarantees in the supermarkets? A profit guarantee for the shops offering them, suggests the Economist.

In a column last month it suggested that price guarantees were a way of stopping a price war rather than participating in one. This is because when a newcomer offers lower prices, it is trying to win your customers. If you promise your customers that you will match these prices then they will stay with you. The newcomer then has to give the price cuts to its existing customers without winning new ones and loses money.

In real life it is not as simple as that. However, the Economist says that most consumers believe that price-matching signals genuinely lower prices. The consumer is wrong as it is more expensive supermarkets that are offering to match each other’s prices. The lower prices are at Aldi and Lidl.

The response of wholesalers and consumer packaged goods suppliers is to price-mark product for independent shops to signal value. There are two lessons from the Economist’s study that local shopkeepers should consider.

The first is that to make money on discounting, you need to win new shoppers and to retain them. The second is that shoppers are going to believe what you promise rather than work out where the best deals are.

There is a well know equation: value = product divided by price. That is, what you get out of the product, divided by the price that you pay for it.

On this basis a bar of chocolate price-marked at £1 is easy to compare with a countline bar priced at 80p.

However, long term value is also determined by the quality of your sales and service divided by the cost of doing business with you. Why do people switch what they buy? On average 15% switch because of price, 15% because of product quality and 70% because of service.

Local shops are doing well because the cost of popping into a local shop is less than the cost of planning a trip to a supermarket, driving there and dealing with the queues. Ten years ago supermarkets offered a better selection of products than local shops. This is no longer the case. Ten years ago supermarkets offered better prices. This is no longer the case.

However, the big grocers are now opening local shops next to yours. There is also the threat of digital sales, and shoppers using their smartphones to click and collect.

The cost of doing business with you may be greater than visiting Tesco Express or ordering from Ocado. So you need to make sure that your sales and service are that little bit better than the alternatives.

There are lots of strategies that you can consider. But don’t fool yourself that price is the answer. Price only works if you have great discipline, low costs and narrow ranges.

For most local shops the best strategy is to do things that multiples cannot do in terms of connecting with the local community, stocking niche products that people ask for, and making your shop a fun place to visit.

This requires discipline too, but it is a different kind. Instead of offering one type of soap, you may have to stock three and train your staff to help the shopper looking for the fourth type why the three you have are a perfect match to their needs.