RETAIL PRICING STRATEGY
The visionary chairman of US Dollarstore Inc. Mr. Joe Kieren identified in an intensive survey conducted in the year 2000 that 16.5% of the total mega general merchandise sale of $150 billion was through the dollarstore segment. The company US Dollarstore Inc. was thereby founded by group of entrepreneurs under his expert leadership to cash on the great proven success of the Dollarstore concept and introduce this into the upcoming international market. Further the company has ventured into international franchising with the noble motto of giving the developing economies a taste of the best value for money merchandise in these most exciting fun stores through strong franchise network of growth oriented entrepreneurs which they never had before. US Dollar Store is a multi-million dollar overseas business expansion arm of a Florida, USA based Incorporation .The concept, and image and its unique business strategy has a proven record-breaking profit history of more than a decade. US Dollar Store has core activities in General Merchandise products and services. They have agreements/arrangements and close tie-ups with quality warehouses, production units and established supply chain management in America and all over the world. This high yielding B2B venture has already got proven ability to redefine and lead the Merchandise Shopping segment, and has now come out to start running all over the world. Often the term "dollar store", used by the store, can be misleading. Some stores with the word "dollar" in the name, and even some claiming to be "dollar stores", have items that technically cost (more or) less than a dollar. The problem with the name is also compounded by sales taxes, which leads to taxable items costing the customer more than a dollar. A discount store is a retail operation that sells at prices substantially lower than conventional retailers. To offset the lower prices, expenses are kept down by minimizing free customer services, maximizing the use of self-service, and using inexpensive fixtures, decorations, and displays. In addition, improvement of operational efficiency is continually sought to control costs. Modern discount stores typically sell a mix of hard goods (e.g., refrigerators, televisions) and soft goods (e.g., apparel) and other general merchandise
Price is one of the P’s of Marketing Mix and an important determinant of profitability. Retail pricing is as old as retail itself. Yet, retailers are beginning to spend more time evaluating and redefining retail pricing strategies to increase traffic and sales. Retailers’ pricing strategies include decisions on the frequency, depth, and duration of deals—ultimately determining the final price paid by the consumers for a brand.
Retailers are increasingly recognizing and accepting that cost reduction programs and process reengineering alone cannot optimize profitability. Even retailers who have established seemingly sophisticated thought processes for pricing are re-examining their approach. True profit potential cannot be realized until virtually every item in the store is optimally priced i.e. is, priced to produce the ideal balance between volume and profit. Pricing is usually decided at headquarters, but where it really counts is in the store. For price changes to be effective, store operations must change to keep pace with changing strategies.
DEFINITION OF PRICE:1) The sum or amount of money at which a thing is valued, or the value which a seller sets on his goods in market; that for which something is bought or sold, or offered for sale; equivalent in money or other means of exchange; current value or rate paid or demanded in market or in barter; cost.
2)Price in economics and business is the result of an exchange and from that trade we assign a numerical monetary value to a good, service or asset
DISCOUNT STORES VALUE FOR MONEY PREMIUM GOODS
Level of competition
Level of competition
Level of competition
Nature of format
Nature of format
Nature of format
Depending on the nature of the format a retail outlet would plan its pricing strategy. From the above model we can infer that taking into the consideration the target segment and the type of product retailer will have to set competitive prices. A premium goods store would be high on each price, value and quantity offered and the target segment is even willing to pay the requisite price for the premium attached to the product or service. In a value for money format the game is played with price by offering customers quality products at compatible prices. A discount store would have offers running throughout the store.
FACTORS AFFECTING PRICING STRATEGIES FOR RETAIL
PROMOTIONAL OFFERS PRICING STRATEGY
LOCATION & DEMOGRAPHICS
PURCHASING POWER PARITY
Format: - Retailers face a complex task in formulating pricing strategies and tactics for multiple
products in today’s competitive environment. Depending on the nature of the format retailer has to set prices which go in tandem with the nature of format. Price levels differ right from discount stores to hypermarket.
Merchandise: - All large retailers need to realize that some products are more important than
others. A special price on one product will have a greater impact on customers than a similar special on another product. Hence pricing strategy related to merchandise requires planning for aggregations of products--the product mix--typically recognize and exploit the characteristics of these leader products. The product mix concept recognizes that consumers buy a bundle of goods with various levels of price sensitivity.
Promotional Offers:- The use of different sales promotion tools could, for instance, have an
impact on a firm’s cost structure and thereby on pricing decisions. The size of the advertising and promotion budget could also influence pricing Decisions. Price-promotion intensity for a store is significantly associated with competitor price level and competitor deal frequency. Retailers price promote more intensively in larger stores and in categories with small numbers of brands. Promotion intensity is high for a storable product that performs a destination category. When brand preference is high or when manufacturers advertise heavily, retailers vary their prices and promotions, coordinating them—presumably leveraging manufacturer’s marketing efforts through integrated marketing activities.
Store Operations: -Different stores have different relative prices for a brand, i.e. price
premiums/ discounts for a brand relative to the mean category price. For example, an upscale store may have a different price level for a particular brand than a convenience store. Hence, we measure the relative price depending upon the type of the store and the operation cost involved. Pricing strategy is also associated with chain size, chain positioning, store size, category assortment, storability, necessity, brand preference, own-price elasticity, own-deal elasticity, and cross price elasticity.
Purchasing Power Parity: - Purchasing power parity is an economic technique used when
attempting to determine the relative values of two currencies. It is useful because often the amount of goods a currency can purchase within two nations varies drastically; based on availability of goods, demand for the goods, and a number of other, difficult to determine factors. A firm adopts this strategy when it sets its prices in a range where most buyers would find the prices acceptable and appropriate. Parity pricing is used by firms with lower industry control and market share. Firms adopting this strategy do so in lieu of charging a higher price for fear that competition could gain a significant advantage due to volume sales and experience cost savings.
Location and Demographics:-A dimension of competition and pricing relates to location. It
originates from the variability of exposure, status, and convenience associated with different sites. Store chains need to implement pricing by region or demographic zone. They need to analyze buyer behavior taking into consideration the age, education, income and gender. Retailers have to
change their pricing strategy according to the geographical boundaries as a price set for a particular region may not be acceptable as a price for the product in other region.
METHODS OF RETAIL PRICING:1) Vertical Price Fixing: - It involves agreements to fix prices between parties at
different levels of the same marketing channel (e.g. retailers and wholesalers).The agreements are usually to set prices at the manufacturers suggested retail price. Retailers today are allowed to sell below MRP. However cannot sell above MRP as it is not permissible under the existing law.
2) Horizontal Price Fixing: - It involves agreements between retailers that are in direct
comparison with one another to have the same prices. Horizontal pricing is always illegal since it suppresses competition and often raises the cost to the customer. There is a possibility that if any two retailers join hands and reduce their prices, the third retailer in the same locality may lose sales.
3) Predatory Pricing: - This means establishing merchandise prices to drive competition
away from market place. It is a pricing strategy where large retailers sell goods and services at very low prices with an objective to reduce competition, thus causing small retailers to go out of the business. A retailer can, however, sell the same merchandise at different prices at different geographic location if the costs of sale or delivery are different. In Indian context, various government agencies exercise a strong influence on the price levels through legal and policy directives.
4) Discount Pricing:-Here low prices are used as the major tool for competitive advantage
as it works best for value based customers .The store portrays a low status image and offers fewer shopping frills. Profit margins are kept low to target price-based customers. The model works on high inventory turnover and lower operating costs.
5) Every Day Low Pricing (EDLP):-EDLP has been popularized by large retailers like
Wal-Mart, Home Depot. The strategy entails continuity of retail prices below the MRP mentioned on goods. Here the goods are either sold below their normal prices, or some sales promotion scheme is available. For EDLP to work, volumes are necessary so that stores can negotiate with the manufacturers for bargain prices.
6) High-Low Pricing: - In high-low pricing, retailers offer prices that are sometimes
above their competitor’s EDLP, but they use advertisements to promote frequent sales. A sale is organized at the end of the season to serve basically two purposes. One, goods that have not managed to get sold is disposed off. Second the sale provides an opportunity for a different target segment to visit the store. High low pricing is used by stores like Lifestyle.
7) Loss Leader Pricing: - Retailers sometimes price particular fast moving products at a
lower price to attract customers to the store. Once the customers are in the store, they can be persuaded to buy more profitable products.
8) Skimming Pricing: - Price skimming is a pricing strategy in which a retailer sets a
relatively high price for a product or service at first, then lowers the prices the price over time. It allows the retailer to recover its sunk costs quickly before competition steps in and lowers the market price.
9) Penetration Pricing:-Penetration pricing is the pricing technique of setting a relatively
low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with the marketing objective of increasing market share or market volumes, rather than short term profit maximization.
10) Odd-Even pricing: - It is setting at odd numbers to denote a lower price or a good
deal or setting prices at even numbers to imply higher quality. Odd prices are associated wit lower prices; they are typically used by retailers who either sell at below the market or at the market prices.
11) Reference Pricing: - It uses consumers’ frame-of-reference that is established
through previous experience of purchasing the product or high levels of information search.
12) Prestige Pricing: - A strategy where a retailer assumes consumer will not buy
goods and services at a price deemed low. It is based on price –quality association. Prestige pricing uses high prices to convey a distinct image for the product. It refers to the practice of setting a high price for a product throughout its entire life cycle.
10) Psychological Pricing: - Psychological pricing is a method of setting intended to
have special appeal to consumers. Prestige pricing, reference pricing and odd –even pricing, are all different types of psychological pricing.
11)Multiple Unit Pricing: - Retailers use multi unit pricing to encourage additional
sales and to increase profits. The gross margin tat is sacrificed in a multiple unit sale is more than off- set by the savings that occur from reduced selling and handling expenses.
12)Bundled Pricing: - It is the practice of offering two or more different products or
services at one price. Price bundling is used to increase both unit and rupee sales by bringing traffic into the store.
13)Pre –Emptive Pricing: - Pre-emptive pricing is a strategy which involves setting
low prices in order to discourage or deter potential new entrants to the retailers market
and is especially suited to markets in which the retailer does not enjoy any market privilege and entry to the market is relatively straight forward.
14)Extinction Pricing: - Extinction Pricing has the overall objective of eliminating
competition, and involves setting very low prices in the short time in order to ‘under cut’ competition, or alternatively repels potential new entrants.
15)Perceived –Value Pricing: - It is method of pricing in which seller attempts to set
the price at the level that the intended buyers value the product. If the perceived value is high, the retailer can charge premium price for the product.
16)Mark- Up pricing:-It drives cost-oriented pricing wherein a retailer sets prices by
adding per unit merchandise costs, retail-operating expenses, and the desired profit.
17)Mark down: - It is referred to as reduction from the original retail price of an
offering to meet the lower price of another retailer, tackle inventory over stocking, clear out old stock of merchandise from shop floor, and increase customer traffic.
18)Market Penetration: - It is a pricing strategy in which the retailer seeks to achieve
large revenues by setting low prices and selling high unit volume.
Future of pricing strategy
All the strategy related decisions in future will be related to pricing. Different retailers will customize in terms of pricing like a hypermarket will go for every day low prices, category killers will adopt predatory pricing and kill the competition, discount store would follow discount pricing and neighborhood store would undertake more and more promotional offers and would play the game with bundling.
The gradual opening of the sector might ensure competition that is conducive for encouraging incremental business, rather than cut-throat competition. Consumers will also benefit through lower prices facilitated by greater competition. Care should be taken to ensure that opening up the sector to big players does not promote cartels and create monopolies, given the absence of a proper regulatory framework. In order for the modern retail sector to grow, it is necessary that steps are taken for reviewing laws, building a better regulatory framework, restructuring the tax regime and encouraging investment significantly.
QUESTIONS FOR PRACTICE:Q.1) How can you define pricing in retail? Q.2) Explain the PVQ analysis with any retail example of your choice. Q.3) Illustrate and explain the Pricing Strategies in retail with relevant examples from Asian context Q.4) Explain the various methods of pricing which can be used by retailers for his operations