How retailers can end price wars

Pricing has often been the tune to dance to as customers and service providers sought their perfect partners. Yet in recent years, both companies and consumers have become unhealthily obsessed with the battle for lower prices. There's a danger they are dancing with the devil.

Brands might argue that they have no choice but to put on their discount shoes and race to the bottom in them. After all, the majority of customers are willing to abandon brand loyalties if they can find a discount of only 11 percent elsewhere, according to new research by Accenture Strategy. Even in areas assumed to be price inelastic, such as purchases of medical procedures, 35 percent of consumers surveyed admit they make their decisions based on cost.

Sale signs at a retail store in New York.
Scott Mlyn | CNBC
Sale signs at a retail store in New York.

Rather than pinning the blame on one camp or the other, let's recognize that it takes two to tango. Consumers are effectively colluding with brands. Fifty-two percent of consumers we surveyed agreed that they are as much to blame for the increased focus on pricing over quality. That at least offers a chance for some redemption. So, in an atmosphere where price is the main driver in purchase decisions, how can companies compete without hurting the bottom line?

It's hard to put a finger on how this dangerous dance began, but digital technologies and new disruptive business models certainly added gasoline to a fire that was perhaps sparked by the downturn of 2008.

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Through technology, consumers at every level have an abundance of information at their fingertips, with 63 percent using deal sites to find better prices. Offer up something better, and 55 percent will take advantage of a deal, even if they are pleased with their existing provider.

For most companies, prices just can't go any lower. Luckily for them, customers are beginning to look for alternative value propositions and many are recognizing there is a trade-off for "lowest price." Consider how Uber customers are willing to pay higher prices at certain times, showing that they are open to paying more for a convenient service they deem superior to that of traditional taxi services. Thirty-seven percent of consumers surveyed said the purchase of a discount-priced product or service backfired on them in the last year, ultimately causing them to regret not buying the higher-priced alternative. And certain segment groups are looking for different value propositions. Recent research by Havas Media and Accenture found that two-thirds of mothers and 18-34 year-olds actively buy sustainable brands. Almost a quarter of the younger cohorts say they always consider the social and environmental ethics of brands when making purchasing decision.

With consumers beginning to understand the lowest price trade-off, the window of opportunity to exit the pricing wars is finally open. But, real change can only happen if companies wave the white flag of surrender to considering only price and look toward new models. There are a few things companies need to focus on to find a smooth exit – customers, value and differentiation.

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Shape the customer – don't just win them

If a customer chooses to make a purchase purely on price, they really aren't your customer at all. They take on the role of a transient shopper. Become customer-centric, work to understand why a consumer needs or wants a particular product and you can begin to show them that there is more to a deal than a discount. By applying digital tools and analytics to that data, you can generate insights to segment customers into meaningful categories, customize offers to meet each segment's needs, and price each product or service according to the value delivered.

Think about shoe shopping online before Zappos. Before it came around, most people wouldn't consider purchasing something as intimate as a pair of shoes before having the chance to try them on. When the company brought a new digital shopping environment to market, they trained an entire consumer base that shopping online could be an amazing experience, not just by offering better prices, but better selection and customer service. Not to mention the free two-way shipping.

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Value first — then price

Sell customers on the value, then work the price angle and you can convert consumers willing to pay more for better goods into customers. This is likely to be more than an education game. Customers are demanding an experience in place of a product or service. That means maintaining the customer relationship long after the sale, turning customer service into opportunities to learn what consumers want, and creating new tailored service offerings. All three require strategies based on the utilization of consumer data not available to us just five years ago.

One notable trend in consumer shopping that has been totally data driven and using value, not price, is the newly minted subscription craze, or what could be called the "boxification" of shopping. These companies are putting data to work to choose goods they believe their customers will like, saving them a trip to the store. Coupled with great customer service these new companies are seeing massive growth via shoppers looking for a unique experience, not a better price.

Differentiate to grow

When companies finally move beyond trying to win customers on price alone, a magical thing will happen – companies will find their loyal customer base. When pricing was the only communication vehicle that mattered, it really dampened the impact and growth potential from each point of contact. Now every touch point becomes a unique opportunity to differentiate, attract customers and earn their loyalty.

Of course pricing still matters, but companies need to stop competing for every purchase and instead fight for every sustainable customer. If they succeed, they will break out of today's vicious cycle and starting dancing to a new tune.

Commentary by Tom Jacobson, global managing director of pricing and profit optimization in the sales & customer service practice at Accenture Strategy.