PRICING STRATEGIES IMPORTANCE Setting the proper price point is instrumental in attracting your target customer. Some customers are willing to pay more for a product as long as they feel they are getting value for their dollar. Most customers however are price-sensitive and are always seeking the lowest possible price. Retailers have responded to customer needs with a variety of retail formats ranging from bargain basement to high-end retailing.
TODAY WE WILL DISCUSS
1. Why some retailers have frequent sales while others attempt to maintain an everyday low pricing strategy.
2. How retailers set their prices.
3. What Pricing Strategy retailers can use to influence purchases.
4. Under what circumstances can retailers pricing practices get them into legal trouble.
EVERY DAY LOW PRICING (EDLP)
Emphasizes continuity of retail pricing somewhere between regular non-sale price points and deep-discount sale price of competitors.
Strives for low pricing but does not necessarily mean “Lowest”.
As there are few price fluctuations, “same price”may be more descriptive.
Some retailers may offer “Low Price Guarantee”.
Walmart/Canadian Tire/Business Depot utilize this EDLP strategy.
Retailers offer prices often higher than their competitors prices, but utilize advertising to promote frequent sales.
This strategy once used primarily for end-of –season markdowns but due to increased retail competition are now much more frequent.
Reduced Price Wars- Successful EDLP strategies reduce customer scepticism about initial retail prices. This promotes store loyalty and more frequent customer purchases, enabling retailers to avoid highly competitive price wars.
Reduced Advertising- EDLP reduces the need for weekly advertising, and stable pricing means catalogues do not become outdated as quickly.
Reduced Stockouts- EDLP limits fluctuations in merchandise demand due to sales. This results in less out-of-stocks and a more satisfied customer.
Same Merchandise Appeals to Multiple Markets- Initial high price point targets the less price sensitive but fashion leading consumer. As markdowns begin the more price sensitive shopper seeks to purchase. When merchandise is blown-out, the bargain basement shopper is attracted.
Sales Create Excitement- Sales draw crowns, and crowds create excitement
Sales Move Merchandise- All merchandise will sell eventually. Sales clear out merchandise even if margins decrease.
Emphasis on Quality- Initial high price points send a message to the consumer about the high quality of the merchandise. When a sale then occurs the consumer uses the high price point as a point of reference.
PRICE SETTING APPROACHES
COST-ORIENTED- The retail price is determined by adding a fixed percentage to the cost of the merchandise.
DEMAND-ORIENTED- Retailers set their prices based on what they think the customer is willing to pay.
COMPETITION-ORIENTED- Retailers set their prices based their competitors prices rather that cost or demand implications.
In Canada retailers are relatively free to promote adjustments to their initial retail prices in order to generate sales. Common price adjustments include;
4. PRICE BUNDLING
5. MULTIPLE UNIT PRICING
6. VARIABLE UNIT PRICING
A reduction to an initial retail price for the purpose of clearance or promotion. Marked down merchandise not account for approximately 20% or retail sales.
Clearance sales used to get rid of; 1.slow moving merchandise 2. obsolete merchandise 3. end-of-season merchandise 4. merchandise priced higher than competitors.
Promotion utilizes the high-low strategy to promote merchandise through sales in an effort to; 1. make room for new merchandise 2. generate cash in order to purchase new merchandise and 3. increase retail store traffic.
Discounts are offered on specified items when purchased at a certain store.
Attracts price-sensitive shoppers.
Encourages multi-purchases of non discounted items.
Attracts first time shoppers.
Protects market share.
A portion of the purchase price is returned to the customer upon proof of purchase.
Generally used with higher priced merchandise so that customer perceives the savings as being worth the time and effort.
Similar to couponing but the manufacturer has no handling costs.
Often referred to as “phantom” discounting because often the consumer does not follow through with the rebate redemption.
Bundling and Variable Pricing
Price bundling offers two or more products but at one price. Used to increase sales volume.
Multiple-Unit bundling is similar to price bundling but multiple units of only one product is sold.
Variable Pricing occurs when different prices for the same product are charged at different stores, in different markets or in different zones. Usually variable pricing is a tactic used by retailers to compete with competitors for market share in specific areas.
Legal Issues in Retail Pricing
Price Discrimination- occurs when a vendor sells identical products to two or more customers at different prices.
This practice is only illegal if the sale lessens competition (favouring one retailer over another).
Sale conditions often justify pride discrimination (qty ordered/transportation costs etc).
Quantity discounts occur when ordering high quantities.
Functional discounts (trade discounts) occur when prices are lowered to customers in different trades, ie. Wholesaler vs. retailer. This practice is legal provided the wholesaler performs more functions than the retailer in the distribution channel.
Predatory pricing occurs when a market dominating firm charges below-cost prices for some goods in order to drive out or discipline a rival firm.
The burden of proof falls on the firm challenging the pricing strategy. Very difficult to prove.
Vertical price fixing involves agreements to fix prices between parties at different levels of the same marketing channel ( vendors and retailers).
The agreement is usually to set prices at the MSRP, and the disagreement occurs when either party tries to sell above or below the MSRP.
Some vendors coerce retailers into maintaining the MSRP by cancelling or delaying shipments to retailers who fall below the price.
Retailers have also been known to sell above the MSRP on popular items (Harley Davidson), damaging the manufacturers brand image.
Horizontal Price Fixing
This occurs when two or more retailers agree to fixed prices even though they are in direct competition with each other.
This practice reduces competition in the market and favours the retailer over the consumer.
Bait and Switch Tactics
Retailers lure customers into a store with lower than usual sales promotions (Bait), then tries to up-sell the customer to a higher priced brand or informs the customer that the advertised brand is sold out.
Scanned versus Posted Price
This occurs when the price charged at the electronic scanner differs from the price advertised where the merchandise was purchased.
Normally these mistakes occur accidentally and sometimes are beneficial to the consumer.
Retailers have been found guilty of purposely using this tactic.