Pricing’s Potential Roles for Improving Online Grocery Performance for Regional Grocers
Recommendations for Pricing Strategy
This section provides the roadmap recommendations for grocers looking to implement changes in their strategy. The recommendations includes establishing a baseline, modeling enhancements, and determining details. This is important as it provides a structured approach to implementing changes.
Recommendation #1 – Leverage advanced assembly practices and methods to lower costs per order by batching out more orders together.
Using advanced practices is a proven way to lower direct-labor cost per order that generates greater efficiencies as order density grows (Chart 13). One key to realizing more of the potential savings is being able to increase the number of orders assembled per pick session (Chart 14).
Executive note: Consider a service fee structure that can help build order density during the assembling and distribution activities as well as offset some of the cost to fulfill an online order.
By increasing the number of orders assembled per pick session, grocers can significantly lower the direct-labor cost per order.
Recommendation #2A - The fee structure should financially reward customers for behaviors that enable the retailer to reduce costs and should pass a reality check.
For fees to provide the desired win-win outcome, grocers need to better understand that the explicit fee is a cost that some customers may either want to avoid entirely or want to pay no more than necessary, depending on their respective trip mission, need state, etc.
Executive note: Estimate the potential impact that implementing a variable fee based on cycle time will have on reshaping order demand in order to gauge the second-order-effect related to improving assembling productivities.
By understanding customer perspectives on fees, grocers can design a fee structure that not only covers costs but also incentivizes customer behaviors that contribute to cost efficiency.
Recommendation #2B - Design a variable fee structure based on order cycle times. This can help reshape demand in ways that create a win-win outcome.
Given the choice, many customers would select a later time slot versus paying a premium for receiving their order sooner (Chart 15a and 15b). As a result, the customer saves, and the retailer also benefits due to an improved ability to batch more orders during the same pick session (Table 5).
Executive note: In addition to leveraging a variable fee structure, assess if it makes sense to add a “free” option as a way to attract more customers and/or remain competitive versus key rivals.
By offering customers the choice to select a later time slot at a lower cost, grocers can incentivize behaviors that align with their operational efficiency goals.
Recommendation #2C - Add a “free” tier to the fee structure to attract more customers (Chart 16) and enable marketing to leverage the power of “free”.
Many people want to avoid paying service fees, so offering a free option helps a retailer to position and market its services as an attractive alternative compared to operators who always offer free pickup (or effectively do so based on their fee structure), like several national grocers.
Executive note: Conduct a cost-benefit analysis on how adding a “free” tier impacts revenue projections from service fees as well as the sales lift associated with acquiring and retaining customers.
This approach not only has the potential to attract new customers but also to retain existing ones, thereby enhancing customer loyalty and market share.
Recommendation #2D - Estimate how adding a “free” tier to the fee structure impacts the assembly stage and the ability to cover direct labor cost.
Most customers appear willing to place a Pickup order for next day if that enables them to completely avoid paying any service fee (Chart 17a and 17b). However, a retailer should identify other ways to offset the labor cost beyond improving assembly productivities (Table 6).
Executive note: Grocers can start by establishing an estimate for the upper range or band for the fee structure that applies to confidently fulfilling an expedited or express order based on internal lead time standards.
This approach not only caters to customer preferences but also ensures that the operational costs are covered, thereby maintaining profitability.
Recommendation #2E - Determine the upper fee band by assuming no assembly or distribution efficiency associated with expediting a single Pickup order.
It could cost almost $13 to fulfill an expedited order given it will likely be assembled by itself (#1). However, most grocers would be reluctant to charge that high of a fee. So, as with credit cards, retailers can consider factoring in a portion of the fee into product pricing (Table 7).
Executive note: Consider ways to subsidize some portion of the fee while still making it high enough to serve as an explicit reminder to the customer that online shopping is a value-added service provided by the grocer.
This approach not only ensures that the costs of expedited orders are covered but also maintains a reasonable fee structure for customers.
Recommendation #2F - Factor in a markup on product prices to help lower the explicit fee that customers pay and reduce some of the friction for customers (Table 8).
By accounting for a portion of the labor costs in product pricing, as is done with credit card fees, grocers can reduce fees, which is a key reason why customers stop using a specific service whether they’re ordering via a 3P or 1P site/app. (Chart 18).
Executive note: Consider how to apply demand-shaping tactics like this to reward the customer choices that help reduce their cost to service online orders.
This approach not only reduces friction for customers but also manages the costs-to-serve online orders.
Recommendation #2G - Leverage a three-tier fee structure to pass along increased savings to customers who are motivated by paying lower or no service fees.
Pickup is about saving customers time as the potential time savings equates to nearly one hour if compared to in-store shopping. And, because customers value their own time differently and have different need states, this structure lets the customer make the choice (Table 9).
Average Time Spent
When Grocery Shopping
(Exclude travel time to and from store)
Source: Brick Meets Click estimates; Bureau of Labor Statistics, American Time Use Survey, 2021, 18 years and over, average time spent grocery shopping
Executive note: Identify the range of fees in a 3-tier approach that are most appropriate for shaping demand with their customers, like $7.95, $4.95 and $1.95, or something else. Then assess the benefit of a free option to grow the customer base.
This approach not only caters to different customer preferences but also incentivizes behaviors that align with the grocer's operational efficiency goals.
Recommendation #3 - Assess the markup necessary to cover the direct labor costs after accounting for labor efficiencies, media monies, and service fees.
Grocers who leverage the fee structure to more effectively drive labor efficiencies, while still generating meaningful monies, can apply a lower markup (Chart 19 Markup) compared to a grocer that hasn’t improved its pick and pack practice and is forfeiting fees without realizing increased AOVs (Chart 19 Baseline).
- Pick session: 100% single-order, manual pick session (basic method)
- Weighted average fee: $0.99 based on 80% > $35 purchase threshold to avoid fee and 20% paying a $4.95 fee.
- Pick session: 15% single-, 25% two-, and 60% three-order pick session (advanced method)
- Weighted average fee: $2.43 based on same order mix as pick session paying $7.95, $4.95, and $0.00/free respectively.
- Pick session: 20% single-, 40% two-, and 40% three-order pick session (advanced method)
- Weighted average fee: $4.35 based on same order mix as pick session paying $7.95, $4.95, and $1.95 respectively.
Executive note: Determine whether to include other related costs into the calculation (beyond direct labor cost) when considering the online markup. And, if Delivery is available via the retailer’s 1P site, then adjust to account for its direct costs to fulfill.
This approach not only manages the cost-to-serve online orders, but also incentivizes operational efficiency.
Recommendation #4 - Communicate that online prices may be higher/vary versus shopping in-store and/or even possibly the weekly ad.
A Regional Grocer, a Hard Discounter, and a Wholesale Club banner each marked up the prices on its 1P site/app by varying degrees, likely driven by different decisions related to their respective businesses.
Executive note: Determine where to locate this information so that customers who are interested can find it. Also, be sure to clearly communicate to team members why prices may be different online so that they are informed and can answer questions.
By clearly communicating these differences to customers, grocers can manage customer expectations and maintain trust.
Recommendation #5 - Consider protecting advertised items and other promoted products to avoid customer confusion and/or frustration when ordering online.
Doing this helps to make the online ordering stage more seamless as it could be a source of friction for customers who review the circular before and/or while building their online basket (Chart 21).
Executive note: Reweigh the markup target, factoring out the sales related to protected items. Also determine if and/or how you want to protect known value items (KVIs), by either handling like an ad item or applying a lower markup rate.
This approach not only reduces friction for customers but also ensures that the value proposition of advertised and promoted products is maintained.
Recommendation #6 - Establish the 1P site ideally as the lowest place to shop online, or at minimum, be sure that it’s at parity with 3P sites (Chart 22).
Although 3P marketplaces may expand the market reach of the banner or attract net new customers, managing the pricing among 1P and 3P sites helps a regional grocer capture a larger share of demand online.
Executive note: Grocers should better understand what role retail media plays in its overall ecommerce and omnichannel strategies as this pricing philosophy is more essential for those looking to leverage retail media on its site.
This approach not only enhances the value proposition of the 1P site but also ensures competitiveness in the eGrocery market.
In this section, we have explored comprehensive recommendations to reevaluate your pricing strategy, enhance customer experiences, and optimize operational efficiency. Below we will provide a summary of the key suggestions:
- Harness Advanced Assembly Practices - Implement advanced assembly methods to significantly lower costs per order. By increasing the number of orders assembled per pick session, direct-labor costs can be curtailed, leading to better operational efficiency. Simultaneously, consider instituting a service fee structure that balances the costs incurred during assembly and distribution phases, providing a fair pricing model to consumers.
- Strategize Fee Structure - Design an innovative fee structure that creates a win-win situation. This should reward customers for their behaviors that contribute to cost efficiency. Implement a variable fee structure rooted in order cycle times. This helps in demand management and creates a conducive environment for cost savings for both the customer and the retailer.
- Evaluating Impact of Free Tier - Conduct a rigorous analysis to understand the impact of introducing a "free" tier on your assembly operations and your ability to cover direct labor costs. Consider incorporating a markup on product prices to effectively lower the explicit fee that customers pay, making the service more attractive.
- Implement Three-Tier Fee Structure - Deploy a three-tier fee structure to cater to a wider customer base, including those motivated by lower or no service fees. This strategy not only addresses customer preferences but also nudges them towards behaviors that align with the retailer's operational efficiency objectives.
- Markup Assessment - Thoroughly assess the necessary markup to cover direct labor costs after factoring in labor efficiencies, media income, and service fees. Determine whether to include other related costs into the calculation for a comprehensive understanding of online markup.
- Transparent Price Communication - Maintain customer trust by clearly communicating the potential variations in online and in-store prices. Transparency is key to managing customer expectations and ensuring their continued patronage.
- Protection for Promoted Products - Consider safeguarding advertised items and other promoted products to eliminate potential confusion and frustration when customers order online. This tactic ensures a seamless online shopping experience.
- Maintain Pricing Parity - Strategize to establish your 1P site as a competitive shopping destination - ideally, the most affordable place to shop online. At minimum, ensure parity with 3P sites to capture a larger share of online demand.
Our next section 'Closing the Online Pricing Loop' will help you bring these recommendations into a cohesive, effective pricing strategy for your online grocery business.
Mark develops the overall marketing strategy for Mercatus and leads the team responsible for market insights, branding, product marketing and demand generation.