MKT320: Retailing - Pricing Strategy Notes

Pricing Strategy in Retailing

Pricing Options for Retailers

  • The price tag in a store reflects the retailer's strategy, positioning, and understanding of its customers.
  • Pricing influences customer perception, competition, and brand image, beyond covering costs and earning profit.
  • Retailers compete through different pricing strategies:
    • Rock-bottom prices (e.g., Lulu Hypermarket).
    • Competitive parity (e.g., Sharaf DG).
    • Creating a sense of prestige (e.g., Galeries Lafayette).

Three Major Pricing Orientations in Retail

  1. Discount Orientation:

    • Consistently offering low prices, frequent promotions, or clearance sales.
    • Attracts price-sensitive customers.
    • Strategy is high volume, low margin.
    • Focuses on affordability and mass appeal.
    • Example: Lulu Hypermarket weekly promotions and bundle offers.

  2. At-the-Market Orientation:

    • Pricing matches the average prices of competitors for similar merchandise.
    • Balances perceived value with competitive pricing.
    • Example: Sharaf DG matches market prices for electronics with service-based differentiation.

  3. Upscale Orientation:

    • Retailers price merchandise above the market average.
    • Reflects premium quality, exclusivity, or luxury branding.
    • Strategy is high margin, low volume.
    • Emphasizes brand image, superior service, and aspirational value.
    • Example: Level Shoes in The Dubai Mall positions itself as a luxury footwear destination, offering exclusive designer brands with concierge-level customer service.

External Influences on Pricing Decisions

  • Factors influencing pricing strategy:
    • Consumers
    • Government (federal, state, and local)
    • Manufacturers, wholesalers, and other suppliers
    • Current and potential competitors

Role of External Factors in Pricing Strategy

  • Consumers: Preferences, price sensitivity, and perceived value shape willingness to pay.
  • Government: Regulates through laws on price fairness, taxes, import duties, and consumer protection.
  • Manufacturers, Wholesalers, Suppliers: Influence retailer markups through the cost of goods sold, credit terms, and supply chain stability.
  • Current and Potential Competitors: Competitive pricing pressures force retailers to adjust strategies to maintain market position.

Market Segments by Price Sensitivity

  • Economic consumers
  • Status-oriented consumers
  • Assortment-oriented consumers
  • Personalizing consumers
  • Convenience-oriented consumers

Consumer Price Sensitivity by Market Segment

  • Economic consumers: Shop around for the lowest prices.
  • Status-oriented consumers: More interested in prestige brands and strong customer service than in price.
  • Assortment-oriented consumers: Seek retailers with a strong selection and want fair prices.
  • Personalizing consumers: Shop where they are known and will pay slightly above-average prices.
  • Convenience-oriented consumers: Look for nearby stores with long hours and may use catalogs or the Web. They will pay higher prices for convenience.

A Framework for Developing a Retail Price Strategy

  • A systematic approach to develop, implement, and adjust a pricing strategy, considering both internal goals and external market forces.

Steps in Developing a Retail Price Strategy

  1. Retail Objectives:

    • Defining what retailers want to achieve through pricing:
      • Profit maximization (Market skimming)
      • Market penetration
      • Brand positioning
      • Customer traffic generation
    • Example: Sharaf DG may aim to increase market share in the UAE by offering competitive pricing on electronics during the GITEX (Gulf Information Technology Exhibition) sale season.

  2. Broad Price Policy:

    • Reflects the retailer's overall pricing orientation:
      • Discount pricing
      • Competitive pricing (at-the-market)
      • Premium pricing (upscale)
    • Example: Lulu Hypermarket follows a discount-oriented policy, while Galeries Lafayette adopts an upscale price policy.

  3. Price Strategy:

    • Defining specific tactics:
      • Psychological pricing (e.g., AED 99.99)
      • Value-based pricing
      • Cost-based pricing
      • Competitor-based pricing
    • Example: Max Fashion uses psychological pricing (e.g., AED 29.99), Home Centre applies value-based pricing, Carrefour follows cost-based pricing, while Sharaf DG adopts competitor-based pricing.

  4. Implementation of Price Strategy:

    • Applying the chosen strategy across product categories and locations, using different tools and software.
    • Example: Amazon uses AI to automatically adjust prices based on real-time competitor data and demand fluctuations.

  5. Price Adjustments:

    • Using price as an adaptive mechanism to variables:
      • Competition
      • Seasonality
      • Demand patterns
      • Merchandise costs
      • Performance
      • Feedback
      • Market changes
    • Types of adjustments:
      • Markdowns (to clear inventory)
      • Promotions/discounts (to increase traffic)
      • Price increases (due to rising supplier costs)
    • Example: Max Fashion may offer 30–50% markdowns at the end of the season to make room for new collections.

External Influences

  • External factors (consumer behavior, competitor actions, supplier pricing, government regulations) can shape or disrupt every stage.
  • Example: A sudden VAT increase or shipping cost hike in the UAE would require all steps to be reassessed, especially pricing implementation and adjustments.