Pricing strategies in Retail

Introduction
• A retailer must price merchandise in a way that besides satisfying the
customers, achieves profitability for the firm. Pricing is a crucial
exercise due to its direct relationship with a firm’s goals and its
interaction with other retailing matters. A pricing policy, if not
appropriate, send a store out of competition.
• A pricing strategy must be consistent over a period of time and
consider retailer’s overall positioning, profits, sales and appropriate
rate of return on investment. Lowest price does not necessarily be the
best price, but the lowest responsible price is the best right price. The
difference between price and cost is profit which can be very high
when the sales person wants to exploit an urgent situation.
External influences on Retail pricing
• Customers
• Suppliers
• Competitors
• Government
Customers
• A retailer needs to understand the price sensitivity of customers that
form his target segment. The price sensitivity of customers is based
on various personal, social or geographical factors and presents a
major challenge for retailers while setting prices.
• Different customer segments are:
1. Economy
2. Image-oriented
3. Convenience-oriented
4. Loyalty-oriented
5. Variety-oriented
• Economic consumers: They shop around for the lowest price possible.
They don’t differentiate between various retailers on factors such as
store image and service, other than price.
• Convenience- oriented consumers: They don’t find the activity of
shopping enjoyable. Preference is given towards nearby locations, or
minimum effort or time to be spent on shopping. These consumers
prefer online shopping. They are willing to pay higher prices for
reducing their shopping efforts.
• Image-oriented: These consumers are not price conscious. They buy
prestigious brands from value stores that offer high degree of customer
service. They differentiate between various stores on the basis of
image and the product they stock. These customer prefer retailers such
as Tiffany, Mehrasons, and Dewan Saheb.
• Variety-oriented: These customers look for diversity in the product
category they purchase. They prefer retailers who offer a wide range
and assortment to choose from. They look for fair prices.
Some examples are Nalli’s sarees and Haldiram’s for eating joint.

• Loyalty- oriented: These customers from familiar stores, where the

owner or the retail personnel recognizes them. These customers
prefer that the retailers be known to them, and they also look for
strong relationships with the establishments or the personnel. They
could pay slightly above average prices, or may look for discounts
since they have been loyal to the retailer
Suppliers
• Sometimes retailers and manufacturers have different objectives,
which leads to a conflict. Cause of conflict is generally the price set by
retailer. Both the retailer and supplier like to have control over the
price of service or product as per their image, goals and objectives.
Other causes of conflicts are:
• Manufacturers are selling their products directly to the final customer
via internet at lower prices.
• Introduction of new products at lower prices.
• Manufacturers sell goods to final customer via exclusive distribution
network or through manufacturer owned outlets.
• Apart from manufacturer or wholesalers, the other suppliers to the
retailers are their employees, landlords, supplier of fixed assets etc.

• The following characteristics influence the bargaining power of

supplier:
• Number of suppliers, size of suppliers and fragmented source of
supply.
• Number of substitutes for a particular merchandise.
• The switching cost from one supplier to other.
• The suppliers level of forward integration in order to obtain higher
prices and margins.
Competitors
• Competitors are the most influential factors in determining the
price.competitive environment affects the freedom of a retailer to fix
prices at a greater extent. Competition may range from being a
perfect competition to a monopoly.
• Types of competition are:
• Perfect Competition: It is a rare phenomenon and may not even
exist.In this products are homogeneous, information is perfect,
everybody is a price taker, firms earn only normal profits, the absence
of barriers to entry will mean that other firms will enter the market
and the price level down until there are only normal profits to be
made.
• Monopoly: Monopoly is said to exist when the production of good or
service with no close substitute is carried out by a single firm with the
market power to decide the price of its output. In monopoly
production is less and sell at a higher price. The price is decided by
calculating the quantity of output at which its marginal revenue
would equal its marginal cost. There are circumstances in which
natural monopoly exists for ex: Water distribution, Competition in
such cases would be inefficient.
• Oligopoly: It is when few firms dominate the market. Often they can
together behave as a single monopoly , by forming a cartel. They may
collude informally by preferring gentle non price competition to a
price war. The behavior of oligopolists are hard to predict. If they
compete on price they would produce as much and charge as little .
Example is cola war between Coca Cola and Pepsi, As they are the
only two major players.
• Monopolistic competition: It is also known as imperfect competition.
There are fewer firms than in perfectly competitive market and each
can differentiate their product from others by advertising or through
small differences in design.
• The threat of new competitors depends on the barrier to new entry,
Following are some barriers:
1. Economies of scale.
2. High initial investments and fixed costs.
3. Brand loyalty of customers.
4. Protected intellectual properties like patents, licenses etc.
5. Good customer relations to the existing customers.
6. High switching costs for customers.
Government
• Govt policies and legal issues affecting the retail environment can be
broadly divided into two:
• One that affects buying of merchandise
• One that affects the customer.
Issues affecting buying of merchandise:
• Price discrimination: When the vendor sells the same product to 2 or
more customers at different prices, it amounts to price
discrimination.
• Trade Discount: It is abatement given in suggested prices to
customers in different lines of trade. Wholesalers often receive lower
prices for the same quantity purchased.
• Vertical price fixing: it involves agreement to fix prices between
parties at different level of the same merchandise channel. The
agreements are usually to set prices at the manufacturer’s suggested
retail price. Pricing above or below MRP is often a source of conflict.
Selling under MRP is allowed but above it is forbidden by law.
Issues affecting buying of customers:
• Horizontal price fixing: It involves agreements between retailers that
are in direct competition with one another to have same prices. It is
illegal as it suppresses competition and raises cost to consumer. It is
like when suppose there are three vendors and two of them join
hands and reduce prices to get third vendor out of competition.
• Predatory Pricing: It means establishing merchandise prices to drive
competition away from the marketplace, which is illegal. However,
retailer can sell the merchandise at different prices at different
geographical locations if the cost of delivery or sale is different.
• Manufacturers use 2 basic strategies to price their products while
taking into account various taxes. These are:
1. Weighted average price: In this, manufacturer accepts that their
profit margin will vary from state to state. However, this is generally
unacceptable to manufacturers. Manufacturer prints a price,
exclusive of tax and reimburses the actual taxes paid to the
distributors, retailers etc. Thus this includes an element of in-built
tax.
2. Pricing for highest tax rate: The problem with this is that
consumers with lower tax rates have to pay a price in which they
are not interested in paying. The only people who gain are
members of trade.
Retail pricing objectives
• Profit Objective: The retail store may price its product with the
objective of maximizing profits in the short run or long run or both. It
must be implemented carefully as it may lead to unethical practices
such as overcharging or deceiving the customers. Marketeers may
price their products with the objective of only attaining a target rate
of return on their investment. This is particularly with products in
mature stage of their life cycle.
• Market share objective: The retailer may price their products with
the intention of increasing their market share or stabilizing it. They
can set their product price lower than that of competitors.
• Competitor oriented objective: The retailer may price their product to
counter any existing move by their competitors. A retailer may
deliberately price their merchandise low for following reasons:
1. Discourage potential retailers from entering the market.
2. Expedite the exit of the potential competitors from the market.
3. Fasten the exit of marginal firms.
4. Spoil the market of retail competitors with an eye on getting future
benefits.

• Buyer oriented objective: The aim of such pricing is to maintain

socially acceptable prices and be fair to customers. The prices of
goods at Super bazaars such as margin free and Rithu can be
considered buyer oriented.
• Government oriented objective: Pricing of some products are
constrained by laws, or may be influenced by govt actions. Prices of
petrol, groceries, and vegetables In India are at some extent
controlled by govt policies. Consumer protection act 1986, MRTP act,
and indirect taxes have a bearing on the pricing of the merchandise.

• Product oriented objective: Retailers sometimes make their offerings

more visible by means of pricing. Customers are generally attracted
by advertisements in newspapers highlighting special offers and
discounts. With a lower price, the retail store can catch the attention
of buyers, and this will help him to introduce new offerings, increase
the sale of weak products, or reduce their stock at the end of season.
Retail pricing approaches
• Pricing strategies affect both profit margins and positioning of
retailers . There are various pricing strategies, which can be followed
by the retailer depending on their business objectives.
• There are 3 approaches based on the long term objectives of the
retailer:
• Discount orientation: In this approach low pricing is used as a major
tool for competitive advantage. The store portrays a low status image
and offers fewer shopping frills than rivals. Profit margins are kept low
to target price based customers. The model works on high inventory
turnover and lower operating costs.
• At the market orientation: In this strategy average prices are set. It
offers solid service and a nice atmosphere to the middle class
shoppers. Margins are average to good and stocks are moderate to
above quality products. some discount retailers also own such stores
to capture customers who would shift to a higher priced store as their
income increases. Example : westside in India which focused on
providing value for money merchandise for the entire family and also
providing international shopping experience.
• Upscale orientation: In this approach advantage is derived from the
prestigious image of store. The profit margins per unit are high,
coupled with higher operating costs and lower inventory turnover.
These stores usually offer distinctive product offerings and provide
high quality service, building up customer loyalty. The products stored
generally go with the image of stores. For ex : a store would store
hugo boss perfumes and rado watches .