BMAN31461

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Retail Marketing
New Approaches to
Retail Pricing (1)
Why is Pricing Important?

• Pricing decision is important because customers have alternatives

to choose from and are more informed than ever before.

• Customers are in a position to seek good value.

Value = perceived benefits

perceived costs (price)

• So, retailers can increase value and stimulate sales by increasing

benefits or reducing price.
Price sensitivity of customers
(demand curve)
Quantity Sold at Different
If customers are very price sensitive,
Prices
sales decrease significantly
with price increases
Profit at Different Prices
Price Elasticity

A commonly used measure of price sensitivity:

Elasticity = percent change in quantity sold

percent change in price
Pricing Strategies:
High/Low Pricing
Discount the initial prices through frequent sales promotions

• Advantages
• Increases profits through price discrimination
• Sales create excitement
• Sells merchandise

• Disadvantages
• Train people to buy on deal and wait
• Have an adverse effect on profits
Pricing Strategies: Everyday Low
Pricing
• Emphasizes the continuity of retail prices at a level somewhere
between the regular non-sale price and the deep-discount sale price
of high/low retailers.

• Doesn’t mean lowest price

• Retailers have adopted a low price guarantee policy to reinforce their

EDLP strategy.

• Advantages:
• Assures customers of low prices
• Reduces advertising and operating expenses
• Reduces stockouts and improves inventory management
Profit Impact of Setting a Retail Price:
The Use of Break-Even Analysis
Break-even analysis:

• Determines, on the basis of a consideration of fixed and variable

costs, how much merchandise needs to be sold to achieve a
break-even (zero) profit

• Fixed costs: do not change with the quantity of product produced

and sold.

• Variable costs: vary directly with the quantity of product produced

and sold (e.g., direct labor and materials used in producing a
product)
Breakeven Analysis

Understanding the Implication of Fixed and Variable Cost

Contribution/Unit
Breakeven
point
Fixed Costs
Unit Sales

Fixed cost
Break-even =
quantity Actual unit sales price - Unit variable cost

The quantity at which total revenue equals total cost, and then profit
Occurs for additional sales
New approaches to
retail pricing
The Phenomenon
• Size of UK retail market: 440 bn

• 1 bn in price cuts (Asda, copied by all others…)

• Food prices on the move…

• Does/can price cuts work?

Objectives
• The concept of price knowledge and its measurement

• Understanding of behavioral pricing as a valuable

pricing strategy
• Impact of behavioral pricing on marketing strategy
Outline

1. Behavioral Pricing: Concept Background

2. Price Knowledge Studies

3. Trick or Treat?

4. Summary
Outline

1. Behavioral Pricing: Concept Background

2. Price Knowledge Studies

3. Trick or Treat?

4. Summary
Price Wars – Cost of Living Crisis
Do consumers realize and understand favorable pricing?

As a precondition to valuing a price as low, the consumer must have at

least a vague idea of the normal price.

Only if that idea of “normal price” is present consumers can assess

whether or not the offer is a bargain.

Importance to analyze consumers‘ price knowledge

Impact of Changing Prices on Earnings (lines represent
equal earnings)

necessary increase in sales 100

to obtain equal earnings
80

60

40

price decrease: 20%

20
price decrease: 10%
20 40 60 80 variable unit cost
[in % of current prices]
price increase: 10%

price increase: 20% -20

-40

possible decrease in sales to

obtain equal earnings
Recap.: Pricing Systems

Competitor Promotional

Marketing
Direct-Cost Psychological
Orientated
Value

Segmentation Misc
Framework: Behavioral Pricing

Reception of Evaluation of Storage of

price price price
information Information Information
(e.g. price interest) (e.g. reference price) (e.g. price knowledge)

Important price knowledge studies:

I NGS
AD
Brown 1969; Conover 1986; Dickson and Sawyer 1990; Diller 1988; Estelami 1998; RE
Estelami et al. 2001; Evanschitzky, Kenning, Vogel 2004; Krishna et al. 1991; Le Boutillier et
al. 1994; Mazumdar and Monroe 1990; McGoldrick and Marks 1987, Monroe and Lee 1999;
Urbany and Dickson 1991; Vanhuele and Drèze 2002; Zeithaml and Fuerst, 1983.
 Price Knowledge
Price knowledge (-awareness) is the consumers’
ability to keep prices in mind.
(Aalto-Setälä and Raijas 2003)

Price Knowledge
!
Explicit Implicit Long-term Short-term
knowledge knowledge memory memory
Estimating Prices
Vis-à-vis actual
Price estimation
sales price

Actual price above

high price
high price
Actual price above
normal price

Price band around

normal price
normal price

Actual price below

normal price
low price
Actual price below
low price
Prices
Estimating Prices
Vis-à-vis actual
Price estimation
sales price

 Product is perceived as too

high price Actual price above
expensive
normal price

Price band around  Product is perceived as ‘well

normal price
normal price priced’

Actual price below

low price  Product is perceived as too
normal price
inexpensive!

Prices
Your price knowledge…
Outline

1. Behavioral Pricing: Concept Background

2. Price Knowledge Studies

3. Trick or Treat?

4. Summary
 Two Empirical Studies on Price Knowledge
Study 1:
• Apparel department store chain

• Sample size: 1.527

Study 2:
• Food retail chain

• Sample size: 998

Process: For each shown product, the consumers were asked to

indicate its normal, low, and high price before starting the purchase
occasion
 Focus on explicit price knowledge stored in long-term memory
The accuracy of the price estimation was measured
by 3 indicators:

1. Non-responses (e.g. Goldman 1997)

2. Width of the price band

3. Price estimation error (PEE) (e.g. Dickson and Sawyer 1990;

Estelami 1998; Evanschitzky, Kenning, Vogel 2004 )
The accuracy of the price estimation was measured
by 3 indicators:

1. Non-responses (e.g. Goldman 1997)

2. Width of the price band

3. Price estimation error (PEE) (e.g. Dickson and Sawyer 1990;

Estelami 1998; Evanschitzky, Kenning, Vogel 2004 )

actual price  estimation of normal price

PEE 
actual price

Evanschitzky, Kenning, Vogel 2004

Results: Study 1 – Fashion Retail
Ad 1)
• On average, less than 26% of the consumers have any idea of
the price for a particular product.

• No significant differences with respect to age, gender, income,

and education between those who failed to estimate prices and
those who didn’t.

Ad 2)
• The width of the price band as an indicator of price uncertainty
varies from 55.16% to 79.89% at the group level.
• Variations between the 4 groups are significant [p < .01].
Ad 3)
• The range of absolute PEE extends from 24.55% to 37.95% at
the group level (Ø 30.19%). Group means do not significantly
differ (p > .1).

%
40

38
35
30

28
25
20

10

shoes underwear menswear ladies' wear

Ad 3)

this would be the ‘correct price’

1: 18.18% 2: 60.61% 3: 15.15% 4: 6.06%

estimated estimated estimated

low price normal price high price
Ad 3)
• Looking at the PEE (including algebraic sign), we conclude that
consumers overestimate prices in almost 80% of all cases.

this would be the ‘correct price’

1: 18.18% 2: 60.61% 3: 15.15% 4: 6.06%

estimated estimated estimated

low price normal price high price
Ad 3)
• Looking at the PEE (including algebraic sign), we conclude that
consumers overestimate prices in almost 80% of all cases.
• Even notable: They estimate the actual sales price to be lower
than the expected low price in nearly 20% of all products.

this would be the ‘correct price’

1: 18.18% 2: 60.61% 3: 15.15% 4: 6.06%

estimated estimated estimated

low price normal price high price
Results: Study 2 – Food Retail
Results: Study 2 – Food Retail
Vis-à-vis actual
Price estimation
sales price

high price Actual price above

normal price 12,5%
27,3%
normal price
Price band around
normal price 14,8%
Actual price below
normal price 28,4%
low price
Actual price below 72,7%
low price 44,3%
Prices
 Findings so far…
• The price knowledge of consumers is rather low because of
frequent variation in prices and a lack of consumer awareness for
such products due to the relatively short life cycles of apparels.
• Consumers tend to overestimate prices. Therefore retailers could
have room for moderate price variations.
• The pricing of products should not be exclusively based on
neoclassical price theory, but also on consumers’ price knowledge.

 Setting prices based on price knowledge