Despite the downturn in many economies over the last several years, prices of luxury fashion products have grown at more than twice the rate of general inflation. According to the U.S. Bureau of Labor Statistics, the cost of luxury goods has risen 60% in a decade.
Most fashion brands have long moved away from cost-plus pricing to adopt a value-based pricing approach, or price setting based on the perceived value to customers. They use competitor benchmarks, customer insights and their market experience to determine prices.
At all levels of the fashion industry this pricing methodology is especially important because customers have accepted the status quo that prices far exceed production costs. For fashion brands, the art of finding the profit-maximizing price point lies in quantifying the value to customers regardless of costs.
Qualifying Value to Customers Regardless of Costs
Imagine a designer jacket that appears on the catwalk during London Fashion Week priced at £1000. Let’s assume the company makes 20% net profit, or £200 after all costs, including manufacturing, sales, and distribution. Any increase to this price that does not impact the volume falls directly to the bottom line profit. A small increase in price, let’s say only a 2% difference to £1020, will increase the company’s profits by 10%.
Small improvements in price can make a big difference to profit. Regardless of the industry, companies should be looking to improve their pricing processes because it can enable them to capture more revenue.
The challenge of making pricing improvements is being able to effectively quantify customer value. Both luxury and high-street fashion brands find this difficult because they typically lack adequate investment in quantified pricing research to inform their strategies.
Applying Quantified Customer Research
Imagine a similar jacket to the catwalk brand – aesthetically the same – featured in a high-street storefront on Oxford Street for a tenth of the price. Let’s say £100. The psychological benchmark of the catwalk jacket could be a powerful factor in high-street customers’ purchasing decisions. By using advanced pricing research techniques, such as discrete choice questioning and conjoint analysis, companies gain a more holistic understanding of their customers. From this research data, key value drivers, segmented willingness to pay and the price volume relationship can be evaluated to determine optimal prices.
Value-based price opimisation is as much of a profit growth opportunity for high-street brands as it is for luxury brands. With a greater understanding of their customers and the impact pricing decisions have on volume, most fashion companies are capable of finding the 2% difference through improved pricing.
Companies Leading the Way
The companies leading the way in terms of B2C pricing strategies are regularly doing extensive pricing research to inform their price setting. The growing availability of quality data on customer purchasing behavior enables pricing analytics to inform sound pricing strategies.
This type of research can also measure how other factors influence sales, such as guarantees, payment terms, delivery performance and additional services. With this insight they are often able to set better prices and capture extra revenue with no loss in volume.
Investment in pricing research allows businesses in all industries to dramatically improve their understanding of what drives customers’ buying decisions.
Pricing Solutions has worked with leading fashion brands such as Burberry and Levi’s to help them find pricing improvements. We have helped these companies resolve business dilemmas by means of a robust pricing portfolio, and using advanced tools and analytics as well as customer insight research. If you are looking to improve your organisation’s pricing processes, please do get in touch.
Article written by Corinne Goldberg, Pricing Analyst, Pricing Solutions UK. Corinne is headquartered in Pricing Solutions’ London office. Pricing Solutions is an international pricing strategy consultancy dedicated to helping clients achieve world class pricing competency.