Getting Pricing Right – Nordstrom vs. Abercrombie & Fitch

The recession has tested even the most resilient business model.  Through it, Nordstrom has glowed while Abercrombie & Fitch glowered.  What caused the disparity in performance between these two strong firms?  Their pricing strategies.

Performance Differences

As the February 2010 fiscal reporting season began, Nordstrom indicated revenue increased by 11%, same-store sales were up by 6.9%, and profit soared by 153%.  In contrast, Abercrombie & Fitch reported revenue decreased by 4.6%, same-store sales were down by 13%, and profit earnings plummeted by 31%.  Such a disparity in performance deserves a closer, more strategic, examination.

Strategy Differences

During the Great Recession, Nordstrom expanded it range of prices.  For instance, they introduced a new exclusive line of Elie Tahari professional women’s clothing priced 30% lower than Elie Tahari’s main collection.  Nordstrom also introduced the under-$100 Easy Money jean brand.  This wider variety of price points wasn’t a new recessionary response for Nordstrom.  Even before the Great Recession, Nordstrom’s price and quality points varied widely, from a $29.95 pair of Crocs plastic clogs to $1,000-plus pair of Jimmy Choo boots.

In contrast, Abercrombie & Fitch held true to its strategy of high-end fashion.  With prices reaching twice that of its competitors and a healthy aversion to discounting, Abercrombie and Fitch unfortunately found itself lacking the strategic flexibility of firm’s like Nordstrom.  Hence, when the recession hit and customers began trading down, Abercrombie & Fitch increasingly found itself irrelevant.

Price Menus – A Route through the Eye of the Pricing Storm

Whether you call it price menus, versioning, or price range management, the pricing strategy of offering customers a variety of quality and price points better enables the firm to remain relevant to its customers throughout economic cycles.  When a firm offers only a single price and quality point, its ability to consistently be relevant to customers is greatly hampered.

Given a horrid economic climate, many retailers which failed to offer a broad enough range of price points were driven to reach deep into discounting in order to remain relevant to their customer base.

Unfortunately, discounting high quality goods generally destroys profits faster than it creates customers.  As Sergio Marchionne, the new Chief Executive of Chrysler, correctly noted, “Unprofitable volume is not volume I want … We have a very good track record on how to destroy an industry – run the [plants] just for the hell of volume, and you’re finished.”  In a similar sentiment, we should praise Mike Jeffries, Chief Executive of Abercrombie & Fitch, in his stated avoidance of discounting of “… we have never and do not ever plan to be a promotionally led business…”

From the cases of Nordstrom and Abercrombie & Fitch, we can detect the value of price menus in a firm’s pricing strategy as a means to avoid excessive discounting while still offering a wide variety of price points.  During high economic turbulence, a business needs to offer a broad and flexible range of price points in order to create and keep customers.  A pricing and product strategy that offers its customers a broad menu of price and quality points from which to select enables the firm to remain relevant throughout turbulence.

It would be unfair to state that Abercrombie and Fitch missed the boat.  Perhaps it would be more fair to state that Abercrombie & Fitch placed a bet on a short and shallow recession with the expectation of holding its brand value high and remaining relevant for future purchases (an outcome which still may come true).  In contrast, we can see that Nordstrom spread its bets and found their hedging strategy of offering a wide range of price and quality points, a winner.

To get through the eye of an economic storm, these business cases indicate that price menu management is key.

References

• Rachel Dodes, “Nordstrom’s Caution, Price Mix Paying Off,” Wall Street Journal, (23 December 2009): B1.
• Kate Linebaugh and Jeff Bennett, “Marchionne Upends Chrysler Ways,” Wall Street Journal, (12 January 2010): B1.
• Elizabeth Holmes, “Abercrombie & Fitch’s Style Sense Wears Thin With Some Shoppers,” Wall Street Journal, (3 February 2010): B1.
• Karen Talley, “Abercrombie & Fitch’s Profit Declines 31%,” Wall Street Journal, (17 February 2010): B5.
• Rachel Dodes, “Nordstrom Income Soars,” Wall Street Journal, (23 February 2010):  B3.