Entry, core, premium: what each price is for

The situation

Why does a shop that makes most of its money on expensive garments keep a cheap one? This lesson answers that with a number rather than an opinion. Every price in a range is doing a job. The cheapest one is usually not there to earn at all. It supports a claim in the advertising, or it stops a rival looking better on the shelf edge. The way to price that job is to ask who would have bought the dearer thing instead.

Vellacott's autumn tailoring range has five prices in it: GBP 99.00, GBP 95.00, GBP 195.00, GBP 295.00 and GBP 425.00.

Nobody chose those five numbers in one sitting. The core jacket has been GBP 195.00 for three seasons. The overcoat moved up from GBP 395.00 two years ago. The entry suit at GBP 99.00 has been GBP 99.00 for as long as anyone in the office can remember. When Marisa Wardlow asked in the range review why it was still there, the answer she got was "it always has been".

That is not an answer. This lesson is the arithmetic that produces one.

The range as a structure

There are two ways to read that table, and they disagree.

By units, the entry suit is the third biggest thing Vellacott sells: 15.6% of the range. By money it is 6.3%, the second smallest contributor, and it has the worst margin rate in the range by more than twenty-two percentage points.

One overcoat earns 7.05 times what one entry suit earns. Vellacott sells 240 overcoats and 2,400 entry suits, and the overcoat line still earns seven tenths of what the entry line earns in a season. A conversation that starts from unit share is a different conversation from one that starts from cash.

The ladder of ticket prices is worth a look before the argument starts. GBP 99.00 to GBP 195.00 is a step of 1.97 times. GBP 195.00 to GBP 295.00 is 1.51 times. GBP 295.00 to GBP 425.00 is 1.44 times. The gap at the bottom is by far the largest in the range, and there is nothing at all between the cheapest suit in the shop and a jacket that costs twice as much on its own.

The obvious decision, and why it is not safe to take

Put the entry suit on trial on its own numbers and it loses. Worst margin rate, smallest cash contribution per unit, and it is the line that lesson 1 showed can least afford to be discounted: a twenty per cent event needs 110.0% more entry suits, where the core jacket needs only 48.9% more.

So: cut the entry suit. Except that cutting it does not delete 2,400 customers. Some of them will buy something else, and until you know how many, you know nothing.

What the entry line actually costs

Frame it the way lesson 1 framed a discount: as a break-even, and then judge the belief against it.

If Vellacott drops the entry suit it loses GBP 75,600.00 of cash margin. Every customer who buys core separates instead — a jacket at GBP 99.00 of margin and a trouser at GBP 52.77 — brings GBP 151.77. Moving up to a dearer line like that is called trading up.

break-even trade-up = 75,600.00 / 151.77 = about 498 customers
                    = 498 / 2,400 = 20.8% of entry-suit buyers

That is the whole decision in one line. Keep the entry suit if fewer than 20.8% of its buyers would trade up without it. Drop it if more would. Everything else — brand, positioning, what the shop looks like — is an argument about whether that number is above or below 20.8%, and it is a much better argument for having a number in it.

The evidence Vellacott has, and how weak it is

In weeks 6, 7 and 8 an entry-suit delivery slipped and 18 doors had no entry suit on the floor for three weeks. Those doors would normally have sold 47 of them. Over the same three weeks, core separates in those 18 doors ran 16 suits — a jacket and a trouser together — above their own baseline.

Sixteen out of forty-seven is a trade-up rate of 34.0%, which is above the 20.8% break-even. Run it across the season and dropping the entry line would earn 816 extra core suits at GBP 151.77, or GBP 123,844.32, against the GBP 75,600.00 it gives up:

816 x 151.77  =  123,844.32
       less   =   75,600.00
                 -----------
       gain   =   48,244.32

Keeping the entry suit costs Vellacott about GBP 48,244 a season.

Now the part that matters more than the number. That is 47 garments, in 18 doors that nobody picked at random, over three weeks that nobody chose, in a period when the missing stock may also have sent customers to a competitor rather than up the range. It is not an experiment. It is an accident that somebody watched.

So what is the entry price for?

Vellacott's autumn campaign runs on one line: Tailoring from GBP 99. It is on the windows of 96 shops, on the home page, and in every piece of paid advertising the season buys. The claim needs a real two-piece suit, at GBP 99.00, in stock, in the doors — which is precisely the line the arithmetic above says is costing about GBP 48,244 a season.

That is the honest description of the entry price. It is not a product decision that happens to sell badly. It is the price of an advertising claim, and the claim's price is now known.

Which makes it a decision somebody can actually take. GBP 48,244 for a season of "from GBP 99" may be excellent value. The entry line costs about GBP 1,856 a week across a twenty-six week season, where the Tailoring Event cost about GBP 5,018 a week across five. It may also be terrible value, if the same money spent on holding more stock of the core jacket would do more. Vellacott can now argue about that. What it could not do before was argue about it in pounds.

Two things a pricing course must not pretend to know

The GBP 99.00 itself. Vellacott's entry suit is ticketed at GBP 99.00 rather than GBP 100.00. There is a very large industry literature on that habit, a great deal of confident writing, and no agreement about what the last digit of a price does to demand. This course asserts none of it, and you should be suspicious of any course that does.

What is not in doubt is the arithmetic of the habit, and it is worth having in front of you before the debate starts. GBP 1.00 off the ticket is GBP 0.83 off the net selling price and GBP 0.83 off the cash margin, because the cost does not move. Across 2,400 entry suits that is GBP 2,000.00 a season. That is the bill for the habit. Whether the habit earns it back is a question about your own customer. Your own sales data may be able to answer it; a general claim never can.

How customers respond to a price change. Everything in lesson 1 tells you what a price change must achieve. Nothing in it tells you what a price change will achieve. The honest position is that Vellacott does not know how its own customers respond, cannot look it up, and would need a real test across matched doors to find out. Break-even arithmetic is valuable exactly because it does not need that estimate. It turns "should we discount?" into "do we believe volume will rise by more than 48.9%?", which is a question a buyer can have an informed opinion about.

Changing a price is an operation, not a decision

Two practical limits decide how often a set of prices can move.

It costs money to move. Reticketing the tailoring range down and back up again for the Tailoring Event cost GBP 1,700.00 in labour across 96 doors — roughly GBP 340.00 a line, before anybody prints a new window. A price structure that is revised every few weeks spends real money on its own revisions.

A "was" price is regulated. Where a retailer announces a reduction, what the previous price may be said to have been is set by law rather than by marketing, and the rules differ by market. In the European Union the reference price in such an announcement is defined by Directive 98/6/EC, as amended. The practical consequence is that a price cannot be raised in order to be reduced, and that a line which spends most of its life on promotion loses the right to describe itself as reduced at all.

Act as a retail merchandiser reviewing the set of prices in one range for one season. I will give you every line with its ticket price, landed cost, planned or actual units, and anything I know about what each line is for. Treat my numbers as given data. Do the following. First, build the table: net selling price, cash margin per unit, margin rate, season cash margin, and each line's share of the range's cash margin and of its units. Show where unit share and margin share disagree. Second, set out the ladder of ticket prices as the multiple between one price point and the next, and name the largest gap. Third, for a discount depth I will give you, add the extra volume each line needs, and tell me which lines a range-wide discount is unaffordable on. Fourth, take the cheapest line and work out the break-even trade-up rate: the share of its buyers who would have to move to the next line up for dropping it to leave me no worse off. State that as a percentage and as a number of customers. Fifth, ask me what evidence I have about the real trade-up rate. If the only evidence is a story somebody told me, or an accidental stockout, say so plainly and treat the result as a direction rather than a measurement. Sixth, propose a one-line written job for each price point, and name any line you cannot give a job to. Do not recommend dropping or keeping anything until step four has a number in it.

What you have at the end of this course

Three tools, and they are the same tool pointed in three directions.

1. Before a price cut — the required uplift, f ÷ (m − f). One division, done before the meeting, and it is almost always larger than the room expects.
2. After a promotion — a window long enough to hold the payback, a baseline written down in advance, and the sentence that names how wrong the baseline would have to be to change the verdict.
3. Across a range — a job for every price point, and the cost of that job in money. The entry price is usually the one doing something other than earning. The reason to price the job it does is not to abolish it. It is so that keeping it becomes a decision somebody made.