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Retail PricingRetail Pricing
RetailingMKTG 3346
Professor Edward Fox
Cox School of Business/SMU
Pricing StrategiesEDLP vs HIGH/LOW
Everyday Low Pricing (EDLP)Prices are set between regular non-sale price and deep
discount sale pricesMay consider it as “Everyday Stable Prices”
High/Low PricingPrices are higher than EDLP competitors, but promote frequent
sales featuring lower pricesMakes the consumer’s purchase decision time-dependent
Adapted from Levy/Weitz
EDLP Strategy
4 Advantages
Reduced Price Wars
Reduced Advertising
Improved In-Stock Levels
Reduced Stockouts & Improved Inventory Management
High/Low Strategy
4 Advantages
Same Merchandise Appeals to Multiple Markets
Creates Excitement
Moves Merchandise
Emphasis on Quality or Service
OR
Pricing StrategiesEDLP vs HIGH/LOW
Source: Adapted from Levy and Weitz
Pricing INTERNAL FACTORS
Item Price
Variable CostPer Unit
• Manufacturer’s price per unit
Allocated:• Transportation• Labor• “Shrinkage”
Product Characteristics
• Demand Patterns- Perishable- Seasonal?- Easily
obsolete?• Product Line
Category/Item Role/Strategy
• Does the item draw shoppers to the store?
• Does the item offer one-stop-shopping convenience?
How Does Item Pricing Affect Sales of a Brand or Product Line?
The relative price of each item within a brand affects total brand sales
Price per unit varies based on:Different sizesDifferent quality levels or features
Consumers are pretty effective at identifying and Consumers are pretty effective at identifying and selecting the “best buys”selecting the “best buys”
PricingPRODUCT
Product Line PricingProduct Line Pricing refers to pricing items within the product line, or brand, so that as the price per unit decreases as quantity increases
Is important because the consumer is confused if the price per unit does not decline as the quantity increases – “irrational” pricing
Failure to price rationally is likely to result in low sales volumes for larger sizes, making them less profitable based on ABC
PricingPRODUCT
There are two major causes of product line pricing problems:
The manufacturer does not price so that cost per unit drops with increased features or quantity
Pricing base models, or popular sizes, aggressively (at low margins) requires other items within the brand to be priced at higher margin
Items with more (features) are priced too highItems with more (features) are priced too high
PricingPRODUCT
To avoid product line pricing problems:Buyers/category managers (or pricing specialists) should
be careful when making price changesA “price simulator,” or some other tool, can be developed
by which relative prices for items within a brand are determined automatically
Items that are not properly priced by vendors, i.e., items that have higher unit costs as quality/quantity increases, should be dropped from the product lineIt can irritate and upset customers, reducing satisfaction
and loyalty
PricingCOMPETITION
The most common form of competitive pricing is price price matchingmatchingMust be able to monitor competitors’ pricesEasy to implementApplied more often to frequently purchased items
In packaged goods, may also maintain a percentage spread relative to other formats on key SKUse.g., spread between national brands and private labels
Price matching guarantee
The effect of competition is muted by exclusive The effect of competition is muted by exclusive products or when comparison is difficult products or when comparison is difficult
PricingCOMPETITION
However, if competitors price a category at too low a gross margin, it does not mean that their prices should be matched
Category pricing should take into account the following, along with competitor prices:Consumer price sensitivityImportance of the category to the chain’s price imageStrategic importance of the category (i.e., is it a
“Destination” category?)
PricingCONSUMER PRICE SENSITIVITY
Product categories are not uniformly responsive to prices – some are more sensitive to price levels than others
Consumers also may respond differently than one another to price levels
Price sensitivity (price elasticity) reflects how purchase Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in pricebehavior changes with changes in price
Consumer Price SensitivityRETAILER CONSEQUENCES
Price sensitivity can have different consequences for the retailer:
Price imagePrice image - How do item prices and category price levels affect how consumers feel about the prices in the store
Product substitutabilityProduct substitutability - How willing are consumers to substitute one product for another in the category
Consumer Price SensitivityPRICE IMAGE
Specific types of categories have a greater impact on price image than others:Frequently purchased categoriesCategories in which consumers spend a lot of money
Categories which are important to price image can be identified by analyzing categories’ frequency of purchase and actual expenditure
Products within a category also have different effects on price image:Leading, high-share brands have a major impact on
price imageAggressive pricing of private label does not as
pronounced an impact on price image
Consumer Price SensitivityPRICE IMAGE
The best evidence available indicates that consumers use different mechanisms to determine the price image of a retailer
Rule How Consumers Make Decision
Implication for Retail Pricing
Frequency Based on frequency of your prices beating competitor’s prices
Beat competitors on a large number of items by a small difference
Comparable Key Items
Based on comparison of items shopped for which price levels are known
Be low only on key items
Discounts Depth of discounts for categories/items shopped
Price high but offer consumers value through heavy discounting
Source: Center for Retail Management, Northwestern University
Consumer Price SensitivityPRODUCT SUBSTITUTABILITY
Product substitutability can be measured by:Price elasticities - the effect of price changes of an item on
sales of that particular item.
Cross-price elasticities - the effect of price changes of one item on other items in the category.
If a brand has high brand equity, it has low cross-price elasticities
If a brand has little brand equity, it has high cross-price elasticities
Suppliers may be able to measure price elasticities, Suppliers may be able to measure price elasticities, but can seldom produce cross-price elasticitiesbut can seldom produce cross-price elasticities
Size of household expenditure per year
Size of item expenditure per trip
Perceived substitutability of products within category
Degree of competition in category between retail
Use of category by competitors to generate traffic
Consumer Price Sensitivity FACTORS AFFECTING PRICE SENSITIVITY
Consumer Price Sensitivity MEASUREMENT TOOL
This measurement tool is may be augmented with price elasticity informationThis measurement tool is may be augmented with price elasticity information
PRICE SENSITIVITY
LowMediumHighCriteria
Size of household expenditure / year
Size of item expenditure / shopping trip
Substitutability among items in the category
Competition in the category between retail classes of trade
Use of category by competitors to generate traffic
Overall Price Sensitivity
PricingCONSUMER PRICE AWARENESS
Mindless Shopping for Packaged Goods:Average time between arriving and departing from
product category is 12 secondsIn 85% of purchases only the chosen brand was
handled, and 90% of shoppers inspected only one size
21% could not offer a price estimate when askedOnly 50% were able to state correct price93% did know relative price (i.e., higher, lower or the
same as other brands in category)
Source: Dickson and Sawyer (1990)
PricingCONSUMER REFERENCE PRICES
Consumers Evaluate the Prices They See Compared to…External
List prices / sale pricesOther products on the shelfRetailers use shelf tags to “help” consumers make comparisons
InternalPrices during recent visits to this and other retailersMemory of price may not be accurate If brand is frequently discounted, consumers tend to lower their
internal reference
Consumers use external and internal information to Consumers use external and internal information to determine whether they are getting a good deal determine whether they are getting a good deal
PricingPRICE AS A SIGNAL
Price not only exercises its traditional economic role of reducing demand, but also offers the customer information about product quality
When is price used to signal quality?When there is little information about product quality
availableExamples
“Credence” goodsFashion items
PricingLAWS - PRICE DISCRIMINATION
Occurs when vendor sells same product to two or more customers at different prices.
Generally illegal from vendor to retailer except when:costs are differentquantity and functional discounts are offeredchanging market conditions
Generally legal from retailer to consumer
PricingLAWS – PREDATORY PRICING
Pricing under cost so as to drive competition from the marketplace
Illegal!Retailers can charge different prices at different
locations if costs are different
PricingLAWS – BAIT-AND-SWITCH
Lure customers into store by advertising a product at a lower than usual price (the bait) and then induces customer to switch to higher-priced model (the switch).
Can occur ifRetailer out of advertised modelRetailer has advertised model, but disparages it
Retailers should:Have sufficient quantities on handGive a “rain check”Don’t disparage merchandise