Emerging Trends in Retail Pricing Practice: Implications for Research Levy, Grewal, Kopalle and Hess, Journal of Retailing 80 (2004)

Main Topic Contrasting traditional optimal pricing techniques with emerging pricing techniques and their effects on the retail market. Further academic research is critical in creating a dynamic optimal pricing strategy

Traditional Pricing Techniques –Keystone markups 50% in retail –Fixed markdowns Fashion Retail –Price setting based on competition Creating price war –Pricing products solely on cost Cost Plus Pricing = THE DEATH SPIRAL

Problems with Traditional Pricing Techniques Retailers use these techniques because they are easy to calculate and implement and help maintain a price image However… These approaches do not create optimal price or markdown –Can not capitalize on consumer surplus System wide merchandise markdowns dont take into consideration of the differing regions Inflated price sensitivity due to past reference price

Approach to Determining Optimal Price 1.Price sensitivity –Considering elasticity of product in conjunction with seasonal changes 2.Substitution effects –Price discount in one, might cause demand increase in another, must evaluate relative margins of two products 3.Dynamic effects of price promotion overtime –Consumers reference price are influenced on past prices, brand promotion frequency and type of store 4.Segment-based pricing –Consumers in different markets react differently with regard to their own and cross price elasticity's as well as price changes

Approach to Determining Optimal Price 5.Cross-category effects –Must consider the complete basket of good simultaneously to be in a better position to optimize price and promotion levels 6.Retailer Costs –Must consider not only the wholesale price, but the trade deals from manufacturer and retailer, which in turn give rise to retail discounts and temporary price reductions from retailer to consumer 7.Extent of competitor influence –Two key constraints for retailers are their lack of knowledge of prices and competing retail stores and the sensitivity of demand to prices in those stores

What Prevents Retailers From Using Appropriate Pricing Strategy? Ease of implementation –Traditional, rule based pricing is far easier to calculate and implement vs. merchandise optimization techniques Managerial assumptions –Example: Pricing optimization software may report an optimum price of $2.90, but a manager may assume that customers do need read the full price, increasing it to $2.99 Price change costs –It takes money to change prices (menu costs) Lack of sufficient data –Retailers may not have the appropriate data to make proper pricing decisions

In Relation to the Nintendo Wii 1.Retail outlets are the end of the supply chain. -Need to create good relationships with their retailers and be smart about who they partner with. -Non-traditional retailers vs. traditional retailers 2.The Nintendo Wii is a new product in the gaming console market. Traditional pricing strategies may not be effective. -Dont get caught up in keystone markups and other rigid pricing strategies that dont focus on the current information at hand.