Retail Pricing

1
Retailing MKTG 3346
Retail Pricing
Professor Edward Fox Cox School of Business/SMU
2
Pricing StrategiesEDLP vs HIGH/LOW

• Everyday Low Pricing (EDLP)
• Prices are set between regular non-sale price and
  deep discount sale prices
• May consider it as Everyday Stable Prices
• High/Low Pricing
• Prices are higher than EDLP competitors, but
  promote frequent sales featuring lower prices
• Makes the consumers purchase decision
  time-dependent

Adapted from Levy/Weitz
3
Pricing StrategiesEDLP vs HIGH/LOW
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
Source Adapted from Levy and Weitz
4
Pricing INTERNAL FACTORS
Category/Item Role/Strategy

• Does the item draw shoppers to the store?
• Does the item offer one-stop-shopping convenience?

• Item Price

5
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 sizes
• Different quality levels or features

Consumers are pretty effective at identifying and
selecting the best buys
6
PricingPRODUCT

• Product 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

7
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 high
8
PricingPRODUCT

• To avoid product line pricing problems
• Buyers/category managers (or pricing specialists)
  should be careful when making price changes
• A 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 line
• It can irritate and upset customers, reducing
  satisfaction and loyalty

9
PricingCOMPETITION

• The most common form of competitive pricing is
  price matching
• Must be able to monitor competitors prices
• Easy to implement
• Applied more often to frequently purchased items
• In packaged goods, may also maintain a percentage
  spread relative to other formats on key SKUs
• e.g., spread between national brands and private
  labels
• Price matching guarantee

The effect of competition is muted by exclusive
products or when comparison is difficult
10
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 sensitivity
• Importance of the category to the chains price
  image
• Strategic importance of the category (i.e., is it
  a Destination category?)

11
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 behavior changes with changes in price
12
Consumer Price SensitivityRETAILER CONSEQUENCES

• Price sensitivity can have different consequences
  for the retailer
• Price image - How do item prices and category
  price levels affect how consumers feel about the
  prices in the store
• Product substitutability - How willing are
  consumers to substitute one product for another
  in the category

13
Consumer Price SensitivityPRICE IMAGE

• Specific types of categories have a greater
  impact on price image than others
• Frequently purchased categories
• Categories 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 image
• Aggressive pricing of private label does not as
  pronounced an impact on price image

14
Consumer Price SensitivityPRICE IMAGE

• The best evidence available indicates that
  consumers use different mechanisms to determine
  the price image of a retailer

Source Center for Retail Management,
Northwestern University
15
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, but can seldom produce cross-price
elasticities
16
Consumer Price Sensitivity FACTORS AFFECTING
PRICE SENSITIVITY
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
17
Consumer Price Sensitivity MEASUREMENT TOOL

• This measurement tool is may be augmented with
  price elasticity information

18
PricingCONSUMER PRICE AWARENESS

• Mindless Shopping for Packaged Goods
• Average time between arriving and departing from
  product category is 12 seconds
• In 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 asked
• Only 50 were able to state correct price
• 93 did know relative price (i.e., higher, lower
  or the same as other brands in category)

Source Dickson and Sawyer (1990)
19
PricingCONSUMER REFERENCE PRICES

• Consumers Evaluate the Prices They See Compared
  to
• External
• List prices / sale prices
• Other products on the shelf
• Retailers use shelf tags to help consumers make
  comparisons
• Internal
• Prices during recent visits to this and other
  retailers
• Memory 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 determine whether they are getting a good deal
20
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 available
• Examples
• Credence goods
• Fashion items

21
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 different
• quantity and functional discounts are offered
• changing market conditions
• Generally legal from retailer to consumer

22
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

23
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 if
• Retailer out of advertised model
• Retailer has advertised model, but disparages it
• Retailers should
• Have sufficient quantities on hand
• Give a rain check
• Dont disparage merchandise