In this article, the author provides five guiding priciples for successful pricing in the convenience store and gas station industries. This market specific example provides pricing insights that pricers in highly competitive and highly price sensitive consumer markets can apply to successfully implement their pricing strategies. Author Dr. Andreas von der Gathen is Senior Partner and Member of the Board with Simon-Kucher in Bonn. He is the Global Head of the company’s Consumer and Retail Practice. Click here to contact the author: https://goo.gl/gAFOPf.

The Pricing Advisor, April 2017

Prices can be found everywhere you go: while shopping, on billboards, on television, etc. No matter which way you turn, you get price information. Why are prices so important? For the customer, the price represents what you have to give up to buy a certain product. Since the average customer has a limited budget, the prices tell them what they can afford or not afford. For gas station convenience store operators, however, price is clearly the most important determinant of profits. While costs can only be influenced in the mid-term, prices can be augmented quickly. In other words, profits or gross earnings can either greatly benefit – or greatly suffer – from a singular price change.

For gas station convenience store operators, the price is a critical instrument for edging ahead of the competition and gaining a better positioning. As its name suggests, these stores offer customers first and foremost convenience – something customers accept and are willing to pay more for. Still, these convenience store operators walk a precarious line when it comes to prices. If the premium is too high, it will damage the price image and customers will stop buying. So what is the right price for gas station convenience stores? A structured and system-supported approach to finding the optimal price provides answers to this question. Here are five guiding principles:

1. Position yourself using the prices of focus articles – but skim other products in the process.

More often than not, pricing can be greatly improved if you use a differentiated approach. For example, while several product categories have a strong impact on the price image in convenience stores, customers are not necessarily aware of the prices of other products. If the price image has a strong impact on the gas station convenience store, then the operator must be careful that it doesn’t demand too high of prices from their customers. Otherwise, they may go to the gas station next door.

2. Adjust the price structure to the volume and quality – or your customers may walk away confused.

Customers don’t compare every price and they usually don’t make the effort to calculate every time they want to know if a price is too high. But, every customer does have the intuition to know if, for instance, the prices for two different package sizes (e.g. 0.5 liter vs. 1 liter) represent a good deal or not. Meaning, you don’t have to price every single article as such, but you should pay attention to the structure of the assortment when setting prices.

3. Apply only relevant the price points (price thresholds) – otherwise you’ll give away profit margins.

Customers often make their purchase decisions based on price thresholds, which is why operators should factor this in when determining prices. Customers usually don’t see the volume difference between, say, a price ending of 5 (e.g. €.95) or 9 (e.g. €.99). The purchased volume is the same for both prices. But prices ending with 9 generate four cents more in gross earnings per purchased article. The highest profit level can be achieved with prices that are just below the price threshold!

4.Factor in the willingness to pay of customers – don’t just orientate your prices on the wholesale price.

Prices are often set using intuition and influenced by the wholesale price and the target margin, the competitors’ prices and, if applicable, by the manufacturers’ suggested retail price. It’s unusual that the optimal price is set in a systematic manner. That’s because the customers’ willingness to pay is often not factored in when setting prices. For a specific article, the willingness to pay is reflected by the volume purchased at a certain price. Prices can’t be optimally set if you don’t know how much your customers are willing to pay. Customer surveys are one means of estimating the price-demand relation.

5.Check your prices regularly – or be faced with an unpleasant surprise.

It’s crucial to regularly check your prices to see if they still work well. Price checks are most necessary if there have been major changes in the wholesale price (margin changes), in the assortment (changes in the price logic) and in customer behavior (changes in customer willingness to pay). Frequent price checks are an effective means of securing optimal prices in the long term.

Conclusion:

The price is one of the most important competitive instruments available to gas station convenience store operators. Nevertheless, its strong effect on the profit margin and, subsequently, the overall profits is often neglected. But if operators are willing to act along these five simple guiding principles, they will soon boost margins in spite of similar price images – it’s in their hands.