The price is the main market regulator of the cost of goods. The price of goods, as we know, includes in addition to its cost and the level of trade mark-up. It is the level of trade markup that allows a company to stay afloat and ensure its viability. Due to pricing, enterprises can build a strategy for their development and operation. The retail sector is particularly sensitive to the pricing strategy, as it operates in the retail service segment and therefore the long-term operation of the enterprise depends on the adequacy of the price set for the goods. Therefore, the development strategy of pricing in retail, discussed in this article, is very relevant and important for the analysis of the topic.
price management, price, retail sector, strategy.
Pricing is one of the main aspects to a successful business model, and as well as one of the most challenging ones. Retail sellers always try hard to find the right counterbalance between profit optimization, and at the same time, traffic maintenance. “It’s probably the toughest thing there is to do,” tells Charles Toftoy, management science associate professor at George Washington University Inc. He states that it’s part art and part science.
Majority understand pricing strictly from a financial point of view, but a good pricing strategy is something more. A reasonable pricing strategy ensures that you have good opportunities in rivalry, so you’re supposed to tie your price to the cost. As long as retailers need to make price part of their offering, the prices must allow to compete in the market, not only by means of lower prices, but also with a good price that makes sense. It enables to make profit without decreasing the volume.
Traders want people to buy things in their stores, however, most of the clients uphold or grow their traffic — so you can count only on that. Such companies need to create a sustainable pricing strategy that develops healthy margins and good traffic which is very vital for them [1].
There are many myths associated with price points, especially when it comes to aversion to rounding. A vast majority of retailers still use simple «multipliers» as a basic approach to their cost of goods sold (COGS). It means that the cost of an item is multiplied by X to get to their (desired) selling price without rounding the resulting price. When this happens, it is very common to see shelves filled with products at a price using every available dollar increment, sometimes up to a penny. (figure 1).
Fig. 1. The effects of price endings
However, so far, too many different price points create misperception in the buyer’s mind. For example, what’s the difference between two identical items priced within two dollars of each other?
According to Lindstorm M, when considering a price threshold, it is crucial to emphasize on what is known as consumer psychology. Researches show that $100 is different from $ 99 in customer’s consciousness. There is also a big contrast between price tags having two or three digits.
For example, there is a company that sells eyewear and frames. They didn't have effective price rounding rules, and as a result, they had a lot of different price points; consequently, it led to some complexities and money wasted in vain. Consultants have seen that the usage of efficient price points reduces complexity and brings millions of dollars for the bottom line steadily. They recommend to avoid having too many price points and strategically manipulate key thresholds [2].
Nevertheless, setting price points (and price endings) is more complicated than it looks like. As shown in the chart above, price endings have four effects, some of them contradict others:
– Round figures are easier to ‘process’ and commonly look more “honest”;
– endings in 9 (or.99) can use the “left digit effect” (consumers read from left to right and round numbers down) and the “just below” effect ($99 is perceived as altered from $100).
Besides, research done by William Poundstone has shown that the relative strength of these impacts is different in every region of the world. In North America, endings in 9 or.99 are the norm, while Europe typically uses rounded prices like 0 or 5. In many Asian countries, especially, due to their believes and superstitions, endings in 8 are very common [3].
When it comes to pricing, manufacturer ponders about how he can compete with online competition, especially giants like Amazon, eBay or Taobao, for example? Nowadays, many customers can find the same products in the stores and in online stores as well. However, online stores offer products at a considerably lower price. This is a problem not only for manufacturers, but also for retailers.
Competition with online stores on price is a losing strategy. It is very difficult to compete on price only, especially when a company has the same product or SKU sold on online stores. As an alternative, experts advise companies toensure an agreement with their manufacturer to get an exclusive product, according to which the manufacturer can’t sell on online stores.
Unless company can cope it, then it has to focus on value. It gets what it pays for. If its product is offered on online store, then company needs to offer more value by better service like product demonstrations, the ability to open the box, to try the product on, or to obtain training from staff on how to use the product. [2]
Best Buy is a good example of a winning strategy against online competition:
– they invested a lot in training their employees to improve in-store customer service and expanded their offer, i.e. clients are consulted by the staff before a purchase;
– they also have online ordering system in their store: items can now be shipped from the stores themselves (or picked up in store), which gives more opportunity for clients;
– ensured they are competitive enough in pricing against online pricing;
The results are more than great. Over the past 5 years, Best Buy’s stock has more than tripled whereas many other retailers are trying hard to keep their business alive.
As for the discounts and promotions, many businesses offer too many, or offer them unproductively. Many clients become discount-addicted. They admit it doesn't work most of the time, but at the same time, they don't know how to reject it [3].
Many B2C companies in the retail, hotel or restaurant industries become stuck offering. They offer too many promotions, such as senior discounts, new member discounts plus seasonal discounts altogether or price matching in a bid to remain competitive. It’s important to understand that heavy discounting may attract traffic in the short-term, but it’s usually not sustainable.
William P. states that discounting must be done very carefully and strategically. Promotions can be very effective if implemented strategically, especially from a seasonal standpoint. For example, school promotion, as well as competitor-driven, promotion focused on competitors, usually goes well. More permanent types of discounts should be tied to a unique value offering, as a set, in which consumers would be interested. The retailers leveraging their loyalty programs are typically considered as the most successful at promotion; it means, if they use what they know about their customers’ preferences, they can design more clear, targeted offers that characteristically bring excellent results. For example, a convenience store (24-hour store) noticed, that the majority of its loyal customers were avid coffee lovers. Having made thorough analysis, it then started offering discounts based on frequency (by 10 coffees, get the 11th free) to its loyal customers and observed an increase in their overall spend and basket size [3].
On the other hand, combining discounts (e.g. a “new customer” discount on top of a senior discount on top of 50 % off) is usually unproductive and does not stimulate sales or traffic. As far as possible, the possibility to offer discretionary discounts also needs to be taken away from sales personnel’s duties in store, and leaving it for store’s management team only.
Regardless of the company's industry, whether it makes a promotion or a discount, it is important to measure the success of the promotion and base decisions on past achievements. In all cases, applying a “test-measure-learn” cycle is alike to what is done in the software industry is key. Coming from this suggestion, experts claim that discounting should not be eliminated, but rather optimized.
Most retailers ignore it when it comes to measuring the performance of their pricing actions, particularly, when it refers to discounts and promotions. Yet, monitoring is key to all successful pricing stimulators.
Depending on the size of the business, managing and analyzing the data is a challenge in and of itself. Some businesses are inundated by the huge size of their data — Terabytes are now the new metric benchmark. But more importantly, they bumped into the fact that the data is usually dispersed across various sources and systems, which makes reconciling incredibly uncomfortable. However, it is very important to invest initial funds in the development of a viable data set that can be updated and monitored on an ongoing basis.
There is a large framework, including differences in price and volume ratios, that can allow a retail seller to monitor its performance and effectively evaluate it when needed. It is typically practical to keep two years of transactional data, including point of sale data such as purchased items, their quantity, location, date, time, net prices and retail prices. Based on this data, companies, can in this case, consider pricing strategies including segmentation, store tiering, and Omni-channel pricing (i.e. offering different prices for online vs app vs in-store transactions). Chains and franchises, occasionally, find store tiering as a potential solution, because these pricing strategies include offering different prices for items depending on the location, category of products or type of merchandise [4].
It can be concluded that it is necessary to study and adjust pricing as necessary on a monthly or even weekly basis — regular monitoring of prices is a key. Hence, tracking how price elasticity of products develops over time is also critically important, even if it requires more advanced analytical modeling. At last, the strategy of the retail competitive pricing is crucial for finding the accurate counterbalance of a competitive price that will sustain ongoing profit margin and volume of sales.
Thus, with four basic pricing strategies considered, applying which in the constant practice of retail enterprises can increase profitability and efficiency, as well as build an effective strategy and tactics of interaction with their customers.
References:
- Cose R. “The nature of the firm/The theory of the firm”, Series “Milestones of economic thought”. Edited by V. M. Galperin. — St. Petersburg: Economic School, 2015. — 92–93 pp.
- Lindstorm M. “Buyology: Truth and Lies About Why We Buy” (2008). — 59 p., 64 p., 111 p., 137 p.
- William P. “Priceless: The Myth of Fair Value (and How to Take Advantage of It)”, 2010. — 41 p., 77 p., 106 p.
- Nikolayeva O. E. “Strategic management accounting” (Russian). — Moscow: Editorial URSS, 2013. — 297 p., 304 p.
