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Price is an integral element of the retail marketing mix. It is the source of revenue for the retailer.
The price of the merchandise also projects the image of the retail store to the consumer.
Considerations in setting Retail Pricing
Customer Price Sensitivity
Generally, as the price of a product increases, the sales for the product will decrease because fewer and fewer customer feel that the product is a good value.
The price sensitivity of customers determines how many units will be sold at different price levels.
If the customers in the target market are not very price sensitive, sales will not decrease significantly if the prices are increased.
Competition
Competition for the product and the competitor’s price for a similar product in the market also needs to be taken into consideration.
In case if product is unique and does not have any competition, it can command a premium price.
On the other hand, in case if there are similar products in the market, then the retailer will have to charge a lower price.
Legal and Ethical Pricing Issues
Price Discrimination
It occurs when retailers charge different prices for identical products and /or services sold to different customers.
Predatory Pricing
It arises when a dominant retailer sets prices below its cost to drive competitive out of business. Eventually, the predator hopes to raise prices when the competition is eliminated.
Horizontal Price Fixing
It involves agreements between retailers that are in direct competition with each other to set the same prices. This practice clearly reduces competition and is illegal.
Retail Pricing Strategies
1. High | Low Pricing
Retailers using a high/low pricing strategy frequently offer weekly discount for merchandise through sales promotions.
Some retailers augment low prices and advertising with special in-store activities, such as product demonstrations, giveaways, and celebrity appearances.
Increases profits
High/low pricing allows retailers to charge higher prices to customers who are not price-sensitive and will pay the “high” price and to charge lower prices to price-sensitive customers who will wait for the “low” sale price.
Creates excitement
A “get them while they last” atmosphere often occurs during a sale. Sales draw a lot of customers, and a lot of customers create excitement.
Sells merchandise
Sales allow retailers to get rid of slow-selling merchandise.
2. Everyday Low Pricing [EDLP]
It is a strategy adopted by retailers who continually price their products lower than other retailers in the area.
The objective is to assure buyers that they need not wait for a sale or promotion to achieve attractive prices across the range of products they want to buy.
Assures customers of low prices
Many customers are skeptical about initial retail prices. They have become conditioned to buying only on sale-the main characteristic of a high/low pricing strategy.
Reduces advertising expenses
The stable prices caused by EDLP limit the need for the weekly-sale advertising used in the high/low strategy. In addition, EDLP retailers do not have to incur the labor costs of changing price tags and signs and putting up sale signs.
Reduces stock-outs
The EDLP approach reduces the large variations in demand caused by frequent sales with large markdowns. As a result, retailers can manage their inventories with more certainty. Fewer stock-outs mean more satisfied customers, resulting in higher sales.
3. Market Skimming Pricing
Market skimming is a pricing strategy in which a retailer sets a relatively high price for a product or service at first, and then lowers the price over time.
It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
When other retailers see the high margins available in the industry, they may decide to quickly enter.
4. Market Penetration Pricing
Penetration pricing is opposite of market skimming. It is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price..
Penetration pricing is most commonly associated with the marketing objective of increasing market share or sales volume, rather than short term profit maximization.
Price penetration is most appropriate when companies attempt to enter new or international markets.
This video is on Retail Pricing and it has the following sub-topics.
Time Stamps
0:00 What is a Retail Pricing Strategy?
0:53 Considerations in setting Retail Pricing
2:25 Retail Pricing Strategies
9:23 Retail Pricing - Examples