Chapter 16: Price and promotion Flashcards
Does he opt for skimming or for a penetration price?
In the case of skimming, the provider puts his product on the market. If more and more consumers decide to purchase such a luxury product, the provider will lower the product step by step. He skims the price with the aim of maximizing profit. In a penetration strategy, the provider wants to quickly gain market share through a low price. We saw this happen when Ryanair, as a budget provider, entered the aviation market.
what entry strategies are there:
skimming
penetration price
loss leader
price differentiation
price discrimination
psychological pricing
Global surcharge calculation:
In practice, price setting is done through the global surcharge calculation. We apply a fixed factor to the purchase price paid for the item that should, in principle, be sufficient to cover all costs, including the profit. We call this factor surcharge factor or the calculation factor. If this factor is determined separately for each article, we speak of cost calculation. The allocation of specific costs at item level is, however, very laborious in retail, due to the large numbers of items that can make up an assortment.
In general, we apply global or uniform storage calculation in retail as the first step in the pricing strategy. The calculation factor is applied indiscriminately to all items in a total assortment (uniform surcharge calculation) or a sub-assortment (differentiated surcharge calculation).
Why sometimes one should deviate from initial pricing via universal storage calculation at a later stage?
Deviations from the global surcharge calculation
Reasons for deviation:
competition
geographic aspect
time factor
assortment factor
Deviations from the global surcharge calculation
competition
uniform surcharge calculation can lead to a price for certain products that is higher than the same products at the competition. If these items are important for sales and if the items determine the price image of the store (which means that consumers are very price-conscious when it comes to these items), we are forced to adjust the pricing of these items. Most consumers know only a limited number of prices. Therefore, the price image of a store is often derived by consumers from the pricing of only a few items. Such price-imaging items are called key items. And it is the pricing of these key items that is important for the positioning of one’s own store compared to the competition. Key items must:
o Must be items of which the consumer knows the price
o Must be products from the core range
o The products must be comparable to those of the competitor
The selection of items that meet these requirements results in a key item list.
Deviations from the global surcharge calculation
geographic aspect
global surcharge calculation leads to the same pricing in all stores of a retail company. This is certainly true for a relatively small country like the NL, where regional differences in demand are limited and distances are not so great that distribution costs vary widely between regions. Yet there are also players who consciously opt for local pricing. For instance, Jumbo. In some areas, competition is much stronger and more price-aggressive than in others. It is then wise to deviate from the central storage factor and use a regional storage factor. Regional differences in demand may also lead to certain assortment items being priced differently.
Deviations from the global surcharge calculation
time factor
one can or must temporarily deviate from the global surcharge calculation for
o Maintenance of the price image
o Influencing the sales trends (temporary promotions)
o Markdowns: some products do not run well. One cannot leave this kind of products indefinitely in the store because there is a lack of space and because markdowns lead to assortment pollution
o Market developments: may mean that we do not achieve the predetermined mark-up in practice, because we have to adjust to the market price level. This is the case, for example, in the market for laptops. The development of new models is so fast that laptops bought just a few months ago can no longer be sold at the original price because they are obsolete.
Deviations from the global surcharge calculation
assortment factor
consumers rarely judge the price image of a store only on absolute price comparison at item level. The consumer’s judgement is primarily based on the first impression of the price structure. In order to achieve a logical price structure, it may therefore be necessary to deviate from the global surcharge calculation for certain products in a sub assortment. Strategic importance of this aspect especially for the fashion and non-food sector.
price image of a store
we mean the consumer’s perception of the price level applied by the store compared to the competition.
Price perception = price image of a retailer in the mind of the customer. Influenced by:
● Actual pricing
● Price range covered by the products in the assortment
● Price structure of the assortment:
● Store layout, in-store communication, store location, employees etc. influence the
perception about a retailer
Many factors influence the price image of a store. Sometimes these factors can be influenced by the company itself, sometimes they cannot be influenced. For example, the entry of a large-scale discounter into a market can affect the price image of existing suppliers -completely beyond the retailer’s control.
Those influencing factors:
general pricing of the assortment
influence of price range of the assortment
influence of price structure of the assortment
general pricing of the assortment
consumer primarily looks at the resulting price level and measures this against a kind of average perception. This average perception of the store is compared to the average perception of the market and to that of a number of competitors. Is an unconscious psychological processing of impressions. Important for suppliers to closely monitor the average price of a sub assortment in relation to the market, as a first check on the development of the price image. A company whose average price is lower than that of the corresponding range in the market is more likely to be perceived by consumers as cheap. Secondly, consumers do not only look at the absolute price level, but especially at the relative price of the supplier compared to the market or the competitor.
influence of price range of the assortment
also the price range used influences the price image. The price range is actually a measure for the spread of the prices around the average price level discussed above. Companies with a large price range are perceived as more expensive than those with a smaller price range.
influence of price structure of the assortment
the price structure in the
market is characterised by relatively low volume sales in the very lowest price categories (quality is usually viewed negatively here), large volumes in the lower and middle price categories and small volumes in the highest price categories. The way in which the retailer’s actual price structure relates to the consumer’s market reference framework can have a major impact on price image.
Price elasticity = % change in the volume sold (which is not the same as sales) of an item due to a % change in price.
E < -1 elastic price products
● Price increases reduce volume
● Often luxury goods (Gucci handbag)
E = -1 neutral price products (bread)
E > -1 inelastic price products
● Price reductions lead to a decrease in volume
● Can be used to minimise the negative return effects of the actions with other, pricer
elastic items.
● complementary items are often price inelastic (cross-selling or ‘additional sales’ with
the aim of reducing the negative margin effects of the tent offer). Inelastic items often concern primary goods with low receipt amounts, for which there are few substitutes in the market
True price elasticities are often difficult to measure.
