Retail Pricing Retailing MKTG 3346

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