Retailing
MKTG 6211
Retail Pricing
Professor Edward Fox
Cox School of Business/SMU
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
Adapted from Levy/Weitz
Pricing Strategies
EDLP vs HIGH/LOW
EDLP Strategy
High/Low Strategy
4 Advantages
4 Advantages
Reduced Price Wars
Same Merchandise
Appeals to Multiple
Markets
Reduced Advertising
Improved In-Stock
Levels
Reduced Stockouts &
Improved Inventory
Management
OR
Creates Excitement
Moves Merchandise
Emphasis on Quality or
Service
Source: Adapted from Levy and Weitz
Pricing
INTERNAL FACTORS
Variable Cost
Per Unit
Product
Characteristics
Category/Item
Role/Strategy
• Manufacturer’s
price per unit
Allocated:
• Transportation
• Labor
• “Shrinkage”
• Demand Patterns
- Perishable
- Seasonal?
- Easily obsolete?
• Product Line
• Does the item
draw shoppers to
the store?
• Does the item
offer one-stopshopping
convenience?
Item Price
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 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
 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 –
“Staple” or “Niche” categories (not “Occasional” or
“Seasonal”)
 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 - How do item prices and category price
levels affect how consumers feel about the prices in
the store
 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
Rule
Frequency
Comparable
Key Items
Discounts
How Consumers Make
Decision
Implication for Retail
Pricing
Based on frequency of
your prices beating
competitor’s prices
Based on comparison of
items shopped for which
price levels are known
Depth of discounts for
categories/items shopped
Beat competitors on a
large number of items
by a small difference
Be low only on key
items
Price high but offer
consumers value
through heavy
discounting
Source: Center for Retail Management, Northwestern University
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 crossprice elasticities
If a brand has little brand equity, it has high crossprice elasticities
Suppliers may be able to measure price elasticities,
but can seldom produce cross-price elasticities
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
Consumer Price Sensitivity
MEASUREMENT TOOL
PRICE SENSITIVITY
Criteria
High
Medium
Size of household expenditure / year
Size of item expenditure / shopping trip
Substitutability among items in the category
Competition in the category between retail classes of trade
Use of category by competitors to generate traffic
Overall Price Sensitivity
This measurement tool is may be augmented
with price elasticity information
Low
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)
Source: Dickson and Sawyer (1990)
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
Pricing
CONCLUDING COMMENTS
 Retailers often set price by simply setting margin goals or
by matching competition
 Unfortunately this approach does not “optimize” profits, because it
fails to recognize the role of the category and its sensitivity to
price
 Retailers must know how the pricing of one item affects both its
sales and the sales of other items in the category in order to
understand an item’s actual impact on the category sales and
profitability
 Moreover, retailers must understand how item prices
affect price image and consumer loyalty in order to
assess the impact of price on store traffic and profits