Hillstrom’s Pricing: A Practical Guide to Understanding and Optimizing Customer Behavior via Prices

by Kevin Hillstrom

This fascinating booklet is about how the mix of price levels a retailer offers in its selection of merchandise affects customer behavior. In his 30-year career in retail, Kevin Hillstrom worked for Nordstrom, Eddie Bauer, and Land’s End as well as 225 clients in his consulting practice.

The author examines sales data by price range, merchandise category, channel, and customer life cycle (new customers vs. repeat customers) over a span of five years. Most pages include a spreadsheet or graph showing data from a hypothetical company with declining sales, along with commentary on how the author analyzes the numbers to figure out what’s going on. The target audience for the booklet appears to be catalog and ecommerce retailers.

“I frequently talk about merchandise productivity, about the importance of thoroughly understanding if merchandise is the cause of the business struggles. This booklet takes us a step further, analyzing the leading cause of merchandise productivity issues that I’ve identified over the past two years. It is common to see modest merchandise productivity declines caused by changes in pricing strategy, especially among new items (which are introduced at price points that are simply too high).”

Retailers frequently offer deep discounts plus free shipping. This may be because their merchandise was not priced properly to begin with.

“In theory, a healthy brand has no reason to discount / mark down items, especially good-selling items. This analysis becomes a proxy for business health. You should be able to see the moment when Management ‘panicked’ when depicting the relationship graphically.”

“Merchants notice that sales totals are not meeting expectations, then ask Marketing to promote deeper discounts/promotions across the board. Deeper discounts fuel a feedback loop, as existing items become even cheaper. The dynamic causes fewer new items to become winning/existing items, which means next year existing items will perform less well.”

The mix of price points is important. From the data of the hypothetical company, Hillstrom broke down sales by price range and concluded the company’s customers who buy cheaper items spend more in total. “By killing off cheap items and moving into expensive items, the brand hurts/reduces customer loyalty.”

“I’ve learned that customers have a ‘sweet spot’… a price point band where they prefer to spend their money. If you alter your assortment into other price points and away from the ‘sweet spot’ you risk damaging downstream customer behavior.”

The author also looks at the different dynamics by sales channel.

“If the customer is ordering from a catalog, the customer is buying what the brand is telling the customer to buy, whereas online the customer is choosing what the customer wants to buy.”

“In my project work, there are two consistent trends. First catalogs tend to push customers toward higher price points in an effort to maximize gross margin dollars. Second, email marketing tends to push customers toward lower price points in an effort to maximize open rates and click through rates.”

“In some of my project work social media pushes customers toward popular items. If your winners are clustered in a price point [band] social media will amplify sales in that price point band.”

“Make sure you analyze price points across marketing channels and look for multi-year trends. You are likely to learn that your marketing efforts bias what the customer purchases. In some cases, this results in a bad trend, especially if Management is trying to move the brand in one direction (higher price points) and the customer is focusing on email marketing (lower price points).”

Strong sales can mask underlying problems.  “There are a lot of moving parts in a business. Many of my clients outrun horrible merchandise productivity by acquiring new customers at high rates… which is clearly a good tactic if it is affordable.”

Hillstrom also makes an important point about metrics. “If there’s one failure of digital measurement, it is this… digital analytics is blind to merchandising failures.”

It is worth noting that Hillstrom has a degree in statistics. One would need some proficiency in data analysis in order to reconstruct the spreadsheets in this book.

Hillstrom, Kevin. Hillstrom’s Pricing: A Practical Guide to Understanding and Optimizing Customer Behavior via Prices. Phoenix, Arizona: s.p., 2019. Buy from Amazon.com

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