Retail Pricing

Strategies EDLP 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 consumer’s purchase decision time-dependent

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 Strategies EDLP vs HIGH/LOW

INTERNAL FACTORS Item Price Variable Cost Per Unit Manufacturer’sprice per unit Allocated: Transportation Labor “Shrinkage” Product Characteristics Demand Patterns - Perishable - Seasonal? - Easily obsolete? Product Line Category/Item Role/Strategy Does the itemdraw shoppers tothe store? Does the itemoffer one-stop-shoppingconvenience?

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”

Pricing Product Product Line Pricing 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

Pricing Product 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

Pricing Product 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

Pricing Competition price matching 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

Pricing Competition 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 chain’s price image Strategic importance of the category (i.e., is it a “Destination” category?)

Pricing Consumer 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

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

Consumer Price Sensitivity Price 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

Consumer Price Sensitivity Price Image The best evidence available indicates that consumers use different mechanisms to determine the price image of a retailer

Consumer Price Sensitivity Product 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

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 information

Pricing Consumer 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)

Pricing Consumer 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

Pricing Price 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

Pricing Laws - 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

Pricing Laws – 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

Pricing Laws – 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” Don’t disparage merchandise