This article is written by Sweta Singh.
Need for Pricing Decisions
Today’s market is full of alternatives for customers and customers are more knowledgeable about the options available in the market, pricing selections are becoming more crucial. As a result, they are better positioned to look for decent value when they purchase goods and services. Value is the relationship between what consumers receive (the deemed benefit of the goods and services provided by the retailer) and what they must pay for it.Retailers can boost value and encourage more trades by lowering prices or raising perceived benefits. For some clients, A good bargain is just paying the least amount possible given the additional advantages provided are unimportant to them, according to retailers. Others are willing to pay more for additional perks if they feel they will receive value for their money in either service or product quality. Retailers' sales and earnings will drop if their prices are higher than the benefits they offer. However, if retailers set prices too low, they may see a rise in sales but a decline in earnings due to the smaller profit margin.
Pricing Strategies
Retailers generally employ two pricing strategies: (1) everyday low pricing and (2) high/low pricing. The benefits and drawbacks of each of these tactics are described in this article.High/Low Pricing
Through sales campaigns, retailers who use a high/low pricing strategy frequently—often weekly—discount the initial prices of goods. Some shoppers, on the other hand, get used to regular reductions and just wait for the items they want to go on sale before stocking up at the reduced costs. This type of pricing strategy is utilised by numerous large businesses (including, in North America, Reebok, Nike, and Target). The fashion and shoe industries compete in part through high-low pricing (Macy's, Nordstrom, etc.).Everyday Low Pricing
Many retailers have embraced an everyday low-pricing (EDLP) strategy, including supermarkets, home improvement stores, and discount stores. With this tactic, the emphasis is placed on the consistency of retail pricing at a level midway between the usual, non-sale price and the deep-discount sale price of high/low retailers. Even while EDLP merchants support their policy of constant pricing, they don't experience sales as regularly as their high/low rivals.Everyday low pricing is a little deceptive because low doesn't necessarily mean "lowest." Although EDLP-using shops aim for low pricing, they aren't always the best deals available. A sale price at a high/low store could be the lowest price offered in a market at any particular time. True EDLP retailers, such as Walmart, Costco, or Target, almost never offer discounts because they have already beaten the industry prices.
Advantages of pricing strategies
1. Increases revenue:Retailers can charge higher prices to non-price-sensitive customers who will pay the "high" price and lower prices to price-sensitive customers who will wait for the "low" discount price by using the high/low pricing strategy.
Stirs up excitement during a sale, there is frequently an atmosphere of "grab them while they last." Many people are attracted by sales, and many customers generate enthusiasm. Some shops add unique in-store events like product demonstrations, freebies, and celebrity appearances to their low prices and advertising.
2. Sells Slow moving merchandise:
Stirs up excitement during a sale, there is frequently an atmosphere of "grab them while they last." Many people are attracted by sales, and many customers generate enthusiasm. Some shops add unique in-store events like product demonstrations, freebies, and celebrity appearances to their low prices and advertising.
2. Sells Slow moving merchandise:
Sales enable retailers to get rid of inventory that isn't moving quickly by reducing the price.
3. Ensures affordable prices for clients:
3. Ensures affordable prices for clients:
Customers generally have doubts regarding initial retail prices. They have developed the habit of only purchasing during sales, which is the key element of a high/low price plan. Customers are informed by the EDLP strategy that they can expect to pay the same low prices each time they shop at an EDLP business. Customers do not need to read advertisements or wait for sales to start on the things they want.
4. Lowers operating and advertising costs:
4. Lowers operating and advertising costs:
The weekly-sale advertising utilised in the high/low strategy is less necessary due to the consistent prices brought on by EDLP. Additionally, EDLP sellers are exempt from paying the labour costs associated with updating sale signs and price tags.
5. Decreases stock-outs and enhances inventory control:
5. Decreases stock-outs and enhances inventory control:
The EDLP strategy lessens the significant changes in demand brought on by frequent sales with substantial markdowns. Retailers may more confidently manage their stocks as a result. Fewer stock-outs translate into happier consumers, which boosts revenue. In addition, by lowering the average inventory needed for special promotions and backup stock, a more predictable customer demand pattern enables the merchant to increase inventory turnover.
Price Elasticity is commonly used to measure price sensitivity. This is the ratio of the percentage change in quantity sold to the percentage change in price.
Competition: Customers have a wide range of options for products and services, and they frequently look for the best deal. As a result, when setting their own prices, retailers must take their rivals' into account.
Retailers have the option of pricing higher, lower, or online with their rivals. The selected Pricing policy must be in line with the overall strategy of the retailer and its comparable market standing. Consider Walmart and Tiffany & Co. as examples. Walmart strives to undercut its rivals' prices on the goods it sells. Tiffany, in contrast, provides its clients with important advantages that go beyond the products themselves. Customers are ensured by the company's brand name and customer care that they will be happy with the products they buy. Tiffany is able to charge more than rivals because of the distinctiveness of its offering.
Image: An Amazon bundle example built around one major high-runner item: a Nikon camera.
References
Levy, M., Weitz, B. A., Grewal, D., & Madore, M. (2012). Retailing management (Vol. 6). New York: McGraw-Hill/Irwin.
Zentes, J., Morschett, D., & Schramm-Klein, H. (2007). Strategic retail management. Springer.
Wang, R., Zhou, X., & Li, B. (2022). Pricing strategy of dual-channel supply chain with a risk-averse retailer considering consumers’ channel preferences. Annals of Operations Research, 309(1), 305-324.
Factors for setting retail pricing
Customer price sensitivity and cost: In general, as a product's price rises, sales of that product decline as fewer and fewer consumers think the product is a good value. How many units will be sold at various price points depends on how sensitive consumers are to price changes. If target market consumers are highly price-sensitive, price increases will have a significant negative impact on sales. Sales won't be greatly affected by price increases if clients aren't overly price-sensitive.Price Elasticity is commonly used to measure price sensitivity. This is the ratio of the percentage change in quantity sold to the percentage change in price.
Competition: Customers have a wide range of options for products and services, and they frequently look for the best deal. As a result, when setting their own prices, retailers must take their rivals' into account.
Retailers have the option of pricing higher, lower, or online with their rivals. The selected Pricing policy must be in line with the overall strategy of the retailer and its comparable market standing. Consider Walmart and Tiffany & Co. as examples. Walmart strives to undercut its rivals' prices on the goods it sells. Tiffany, in contrast, provides its clients with important advantages that go beyond the products themselves. Customers are ensured by the company's brand name and customer care that they will be happy with the products they buy. Tiffany is able to charge more than rivals because of the distinctiveness of its offering.
Different types of pricing
1. Penetration pricing:
Using a cheaper price when first making the product or service available, firms utilise penetration pricing as a marketing tactic to draw customers to new goods and services. A new product or service can more easily enter the market and draw clients away from competitors. TJ Maxx uses a permanent penetration strategy to grow its customer base and market share.
2. Competition pricing:
A method known as competitive pricing involves setting a product's price in line with those of competitors. A real-world illustration is the cost of well-liked goods on Amazon.com. To provide the best deal on the market, the retail organizations gathers competition price intelligence.
3. Product line pricing:
It is a multi-tiered design approach used to market the products that a business creates. Product line pricing is a tactic used by organisations to instil in the minds of the customers they are trying to reach an impression of various product quality levels.
4. Psychological pricing:
The theory of this pricing is that consumers will perceive the slightly reduced price as being cheaper than it truly is. An example of psychological pricing is an item that is priced Rs.499 but conveyed by the consumer as four hundred rupees and not five hundred rupees, treating Rs.499 as a lower price than Rs.500.
5. Skimming:
It is a pricing technique that raises the price of new products and then reduces it as rivals enter the market. Skim pricing is the reverse of penetration pricing, which sets low initial rates for newly launched products in an effort to attract a large consumer base. Nike employs price-skimming strategies because they target clients who are aware of the brand and its quality and are prepared to pay a premium price for the product.
6. Bundle pricing:
The practice of bundling complementary goods and services under one price (typically at a discount) is known as bundle pricing. A good example of the use of bundle pricing is by Amazon. Amazon bundles consist of single items sold together, usually at a discounted price compared to purchasing each item individually.
Image: An Amazon bundle example built around one major high-runner item: a Nikon camera.
Conclusion
There are several pricing methods that a business can use; the price strategy is typically dependent on corporate objectives. It is necessary to choose a pricing target before deciding on a pricing strategy. When it comes time to actually price the goods, this will help. There are many pricing strategies from which to pick, just like there are many pricing objectives. The objective should be carefully determined because some tactics are more effective with some objectives than others.References
Levy, M., Weitz, B. A., Grewal, D., & Madore, M. (2012). Retailing management (Vol. 6). New York: McGraw-Hill/Irwin.
Zentes, J., Morschett, D., & Schramm-Klein, H. (2007). Strategic retail management. Springer.
Wang, R., Zhou, X., & Li, B. (2022). Pricing strategy of dual-channel supply chain with a risk-averse retailer considering consumers’ channel preferences. Annals of Operations Research, 309(1), 305-324.
About the Author:
Sweta Singh is currently pursuing Masters in Fashion Technology from NIFT, New Delhi, with an experience of 7 months in SGS India Pvt. Ltd. as Asst. Quality Coordinator. She has done her B. Tech in Apparel Production and Management from the Government College of Engineering and Textile Technology, Serampore.