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online grocery pricing strategies

Why it’s time to adapt online grocery pricing strategies

How can online grocery pricing impact your eCommerce business? David Bishop from Brick Meets Click shares his insights on why retailers should embrace a new pricing paradigm.

Many grocers, prior to the pandemic, were planning for a future where online plays a larger role in retailing; however, no one was prepared to live it today. While grocers rapidly responded by building surge capacity to better meet the sudden and dramatic increase in this method of shopping, retailers need to do more to address the challenges created by the current situation.

Previously, I shared three sales-building opportunities for grocers to consider that help to attract more customers, reduce lost sales, and grow spending per order. While increasing sales improves the per-order economics, by spreading fixed costs across more volume, it does not overcome issues with the high variable costs related to an online order that is compressing retail margins.

To do this, grocery retailers need to re-examine assumptions about pricing, recognizing that what may have sufficed in the past is not sustainable going forward. So, here are some actions that a conventional grocer needs to consider.

Embrace a new online grocery pricing paradigm

Online and in-store shopping are different so your online grocery pricing strategy should reflect this reality.

Shopping online is based on different motivations. Many customers were initially drawn to delivery and pickup services by the expectation of saving time or minimizing frustration associated with in-store shopping; however, now others shop this way as a means of staying healthy.

Delivery and pickup services satisfy a different trip mission compared to the main driver of in-store traffic. Most in-store transactions are characterized as “quick trips” as they include five items or less; whereas, online predominantly reflect a “stock up” trip with orders averaging 30 or more items.

Online shopping costs more for the retailer to fulfill. While in-store shopping mainly follows a self-serve model, online shifts that burden to the retailer in the form of picking, packing, staging, and getting the order to the customer.

Shopping online comes with added cost considerations for the customer whether it’s between delivery and pickup or related to receiving the order sooner. Ultimately, these options provide the customer choices based on how they personally perceive the trade-off between speed and fees.

In other words, the value proposition for online shopping is more about preference than price. Although price still matters, online grocery pricing decisions need to better align with how customers consider choices. How you frame those trade-offs is where the profit-improving opportunity is hidden.

Leverage an integrated approach

An integrated approach builds on the foundation that retailers have used historically to assess competitive positioning and adapts to the realities of online shopping.

Like the traditional framework, it starts with selecting the market, identifying the primary and secondary competitors, building a basket of frequently purchased products from across the store, and capturing in-store prices and deals. We’ve learned however that the digital landscape may vary from the physical world in terms of who’s a primary competitor and what’s in the basket, but that’s a separate topic.

The adaptation occurs as the process pivots online to capture the digital shelf prices. The value of comparing digital to physical shelf prices is that it reveals what, if any, markup competitors are making to product pricing. While these prices are not what a customer ultimately pays, it does show, based on our work, that this could vary between 0% and 17%, depending on the retailer.

And, the differences are not simply between retailers, but also between competing services that a retailer supports. In one instance, a grocer operated its own service and offered the same price online as in the store while it also supported a third-party delivery service. We documented that if a customer opted to use the third-party service, she would be offered prices that were 7% higher than the retailer’s own service.

Accounting for special online deals can lead to even greater pricing differentials between available services, as our prior work shows. In this situation, the customer was able to take advantage of more deals via the retailer’s service, bumping the price gap from 7% to 12% for the entire basket.

Shopping online comes with additional costs in the form of shopping charges, fees for delivery or pickup, and even tips, which the customer ultimately pays.  An integrated approach captures all these line items to determine the total dollar amount that a customer pays for an order.  Using the same retail example, we found that these additional costs would amount to about $15 when using the first-party service; whereas, conservatively it added up to nearly $16 for the third party and that was based on applying the 5% default time amount.  However, if the tip (~$7.50) was excluded, it appears that third-party service costs less to use from the customer’s perspective and that simply isn’t true.

The integrated approach ultimately documented that a customer, buying the same products from the same store and receiving the order at the same time, would pay over $18, or 12% more in total when using the third-party service as opposed to the retailer’s service on a basket of 30 commonly-purchased products.

Some within retail may indicate one reason for partnering with a third-party delivery provider is the ability to execute delivery within one or two hours. However, we’re observing that some retailers are beginning to offer their own express delivery service given the size of the opportunity gap. Check out our article on the risks and benefits of delivery provider marketplaces to find out more.

Assess what’s a good fit for your business

If you’re a retailer working hard to find ways to improve the profitability of online orders, especially because they now represent a larger share of sales than previously expected, then these insights should reinforce the value of embracing a new online grocery pricing paradigm that leverages an integrated approach that aligns better with the new realities facing retailers.

To find out more on how to build an integrated pricing strategy for grocery delivery and pickup, check out this article: How to Choose the Right Grocery eCommerce Pricing Strategy.

To learn more about Brick Meets Click, contact David at [email protected]

Headshot of David Bishop

David leads Brick Meets Click’s consumer research, retailer benchmarking, and market forecasting programs while also working closely with grocers to improve results flowing from their omnichannel strategies.