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 don’t 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
–
6.
Must consider the complete basket of good
simultaneously to be in a better position to optimize
price and promotion levels
Retailer Costs
–
7.
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
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.
-
2.
Non-traditional retailers vs. traditional retailers
The Nintendo Wii is a new product in the gaming
console market. Traditional pricing strategies may
not be effective.
-
Don’t get caught up in keystone markups and other rigid
pricing strategies that don’t focus on the current
information at hand.