Retail Pricing Retailing MKTG 3346

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Retail Pricing Retailing MKTG 3346

  1. 1. Retail Pricing Retailing MKTG 3346 Professor Edward Fox Cox School of Business/SMU
  2. 2. Pricing Strategies EDLP vs HIGH/LOW <ul><li>Everyday Low Pricing (EDLP) </li></ul><ul><ul><li>Prices are set between regular non-sale price and deep discount sale prices </li></ul></ul><ul><ul><li>May consider it as “Everyday Stable Prices” </li></ul></ul><ul><li>High/Low Pricing </li></ul><ul><ul><li>Prices are higher than EDLP competitors, but promote frequent sales featuring lower prices </li></ul></ul><ul><ul><li>Makes the consumer’s purchase decision time-dependent </li></ul></ul>Adapted from Levy/Weitz
  3. 3. Pricing Strategies EDLP 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. 4. Pricing INTERNAL FACTORS <ul><li>Item Price </li></ul>Category/Item Role/Strategy <ul><li>Does the item draw shoppers to the store? </li></ul><ul><li>Does the item offer one-stop-shopping convenience? </li></ul>Variable Cost Per Unit <ul><li>Manufacturer’s price per unit </li></ul><ul><li>Allocated: </li></ul><ul><li>Transportation </li></ul><ul><li>Labor </li></ul><ul><li>“ Shrinkage” </li></ul>Product Characteristics <ul><li>Demand Patterns </li></ul><ul><ul><li>Perishable </li></ul></ul><ul><ul><li>Seasonal? </li></ul></ul><ul><ul><li>Easily obsolete? </li></ul></ul><ul><li>Product Line </li></ul>
  5. 5. How Does Item Pricing Affect Sales of a Brand or Product Line? <ul><li>The relative price of each item within a brand affects total brand sales </li></ul><ul><li>Price per unit varies based on: </li></ul><ul><ul><li>Different sizes </li></ul></ul><ul><ul><li>Different quality levels or features </li></ul></ul>Consumers are pretty effective at identifying and selecting the “best buys”
  6. 6. Pricing PRODUCT <ul><li>Product Line Pricing refers to pricing items within the product line, or brand, so that as the price per unit decreases as quantity increases </li></ul><ul><li>Is important because the consumer is confused if the price per unit does not decline as the quantity increases – “irrational” pricing </li></ul><ul><li>Failure to price rationally is likely to result in low sales volumes for larger sizes, making them less profitable based on ABC </li></ul>
  7. 7. Pricing PRODUCT <ul><li>There are two major causes of product line pricing problems: </li></ul><ul><ul><li>The manufacturer does not price so that cost per unit drops with increased features or quantity </li></ul></ul><ul><ul><li>Pricing base models, or popular sizes, aggressively (at low margins) requires other items within the brand to be priced at higher margin </li></ul></ul>Items with more (features) are priced too high
  8. 8. Pricing PRODUCT <ul><li>To avoid product line pricing problems: </li></ul><ul><ul><li>Buyers/category managers (or pricing specialists) should be careful when making price changes </li></ul></ul><ul><ul><li>A “price simulator,” or some other tool, can be developed by which relative prices for items within a brand are determined automatically </li></ul></ul><ul><li>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 </li></ul><ul><ul><li>It can irritate and upset customers, reducing satisfaction and loyalty </li></ul></ul>
  9. 9. Pricing COMPETITION <ul><li>The most common form of competitive pricing is price matching </li></ul><ul><ul><li>Must be able to monitor competitors’ prices </li></ul></ul><ul><ul><li>Easy to implement </li></ul></ul><ul><ul><li>Applied more often to frequently purchased items </li></ul></ul><ul><li>In packaged goods, may also maintain a percentage spread relative to other formats on key SKUs </li></ul><ul><ul><li>e.g., spread between national brands and private labels </li></ul></ul><ul><li>Price matching guarantee </li></ul>The effect of competition is muted by exclusive products or when comparison is difficult
  10. 10. Pricing COMPETITION <ul><li>However, if competitors price a category at too low a gross margin, it does not mean that their prices should be matched </li></ul><ul><li>Category pricing should take into account the following, along with competitor prices: </li></ul><ul><ul><li>Consumer price sensitivity </li></ul></ul><ul><ul><li>Importance of the category to the chain’s price image </li></ul></ul><ul><ul><li>Strategic importance of the category (i.e., is it a “Destination” category?) </li></ul></ul>
  11. 11. Pricing CONSUMER PRICE SENSITIVITY <ul><li>Product categories are not uniformly responsive to prices – some are more sensitive to price levels than others </li></ul><ul><li>Consumers also may respond differently than one another to price levels </li></ul>Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price
  12. 12. Consumer Price Sensitivity RETAILER CONSEQUENCES <ul><li>Price sensitivity can have different consequences for the retailer: </li></ul><ul><li>Price image - How do item prices and category price levels affect how consumers feel about the prices in the store </li></ul><ul><li>Product substitutability - How willing are consumers to substitute one product for another in the category </li></ul>
  13. 13. Consumer Price Sensitivity PRICE IMAGE <ul><li>Specific types of categories have a greater impact on price image than others: </li></ul><ul><ul><li>Frequently purchased categories </li></ul></ul><ul><ul><li>Categories in which consumers spend a lot of money </li></ul></ul><ul><li>Categories which are important to price image can be identified by analyzing categories’ frequency of purchase and actual expenditure </li></ul><ul><li>Products within a category also have different effects on price image: </li></ul><ul><ul><li>Leading, high-share brands have a major impact on price image </li></ul></ul><ul><ul><li>Aggressive pricing of private label does not as pronounced an impact on price image </li></ul></ul>
  14. 14. Consumer Price Sensitivity PRICE IMAGE <ul><li>The best evidence available indicates that consumers use different mechanisms to determine the price image of a retailer </li></ul>Source: Center for Retail Management, Northwestern University
  15. 15. Consumer Price Sensitivity PRODUCT SUBSTITUTABILITY <ul><li>Product substitutability can be measured by: </li></ul><ul><ul><li>Price elasticities - the effect of price changes of an item on sales of that particular item. </li></ul></ul><ul><ul><li>Cross-price elasticities - the effect of price changes of one item on other items in the category. </li></ul></ul><ul><ul><ul><li>If a brand has high brand equity, it has low cross-price elasticities </li></ul></ul></ul><ul><ul><ul><li>If a brand has little brand equity, it has high cross-price elasticities </li></ul></ul></ul>Suppliers may be able to measure price elasticities, but can seldom produce cross-price elasticities
  16. 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. 17. Consumer Price Sensitivity MEASUREMENT TOOL <ul><ul><li>This measurement tool is may be augmented with price elasticity information </li></ul></ul>
  18. 18. Pricing CONSUMER PRICE AWARENESS <ul><li>Mindless Shopping for Packaged Goods: </li></ul><ul><ul><li>Average time between arriving and departing from product category is 12 seconds </li></ul></ul><ul><ul><li>In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size </li></ul></ul><ul><ul><li>21% could not offer a price estimate when asked </li></ul></ul><ul><ul><li>Only 50% were able to state correct price </li></ul></ul><ul><ul><li>93% did know relative price (i.e., higher, lower or the same as other brands in category) </li></ul></ul>Source: Dickson and Sawyer (1990)
  19. 19. Pricing CONSUMER REFERENCE PRICES <ul><li>Consumers Evaluate the Prices They See Compared to… </li></ul><ul><li>External </li></ul><ul><ul><li>List prices / sale prices </li></ul></ul><ul><ul><li>Other products on the shelf </li></ul></ul><ul><ul><li>Retailers use shelf tags to “help” consumers make comparisons </li></ul></ul><ul><li>Internal </li></ul><ul><ul><li>Prices during recent visits to this and other retailers </li></ul></ul><ul><ul><li>Memory of price may not be accurate </li></ul></ul><ul><ul><li>If brand is frequently discounted, consumers tend to lower their internal reference </li></ul></ul>Consumers use external and internal information to determine whether they are getting a good deal
  20. 20. Pricing PRICE AS A SIGNAL <ul><li>Price not only exercises its traditional economic role of reducing demand, but also offers the customer information about product quality </li></ul><ul><li>When is price used to signal quality? </li></ul><ul><ul><li>When there is little information about product quality available </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li>“Credence” goods </li></ul></ul></ul><ul><ul><ul><li>Fashion items </li></ul></ul></ul>
  21. 21. Pricing LAWS - PRICE DISCRIMINATION <ul><li>Occurs when vendor sells same product to two or more customers at different prices. </li></ul><ul><li>Generally illegal from vendor to retailer except when: </li></ul><ul><ul><li>costs are different </li></ul></ul><ul><ul><li>quantity and functional discounts are offered </li></ul></ul><ul><ul><li>changing market conditions </li></ul></ul><ul><li>Generally legal from retailer to consumer </li></ul>
  22. 22. Pricing LAWS – PREDATORY PRICING <ul><li>Pricing under cost so as to drive competition from the marketplace </li></ul><ul><li>Illegal! </li></ul><ul><li>Retailers can charge different prices at different locations if costs are different </li></ul>
  23. 23. Pricing LAWS – BAIT-AND-SWITCH <ul><li>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). </li></ul><ul><li>Can occur if </li></ul><ul><ul><li>Retailer out of advertised model </li></ul></ul><ul><ul><li>Retailer has advertised model, but disparages it </li></ul></ul><ul><li>Retailers should: </li></ul><ul><ul><li>Have sufficient quantities on hand </li></ul></ul><ul><ul><li>Give a “rain check” </li></ul></ul><ul><ul><li>Don’t disparage merchandise </li></ul></ul>

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