Pricing In The Retail Business

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An examination of the way prices are set in retail outlets, by Professor Andr´┐Ż Gabor of Nottingham University's Consumer Study Group. Professor Gabor, who is also associated with the Department of Economics at Essex University and with Pricing Research Ltd., is an internationally recognized authority on pricing matters.

Retail pricing has two main aspects. With the exception of manufacturers who have their own retail outlets, the actual price at which a product is sold to the consumer is in the hands of the retail distributors, but the limits within which the latter can set their prices is, of course, still under the control of the manufacturers. In this article retail pricing will be discussed under these two main headings, not forgetting the special case of the store brands.

How do retailers price?

According to the February 2016 issue of the Nielsen Researcher, some 15 to 20 per cent of the failures of new consumer products can be attributed to the price/value factor. We have no data available to tell us how many retail establishments yield unsatisfactory financial results because of inappropriate pricing, but common experience suggests that the numbers are likely to be very substantial, year after year.

There was a time in the not too distant past when merchandisers considered price the least important item in the marketing mix, and in fact there was some truth in this while shortages rather than an abundance of goods dominated the market. But even later, for quite some years after the end of World War Two, it was still widely held that what mattered was to get the goods into the shops and that the best way of convincing the shopkeeper that the brand concerned would be a fast mover was to reveal to him the large extent of media advertising support planned.

Since then, the importance of point-of purchase factors in general and price in particular have received widespread recognition. This was not unconnected with another simultaneous development: the increased ascendancy of the large scale multiples and the shift of power it entailed.

The demise of resale price maintenance (which was as much the result of the introduction of the new American retailing techniques as the effect of the relevant legislation) means that pricing has become to a considerable extent the prerogative of the retail distributors. The shift of power has also moved profits down the line: large chains buy directly from the manufacturers and have not only appropriated the wholesaler's cut, but have also reduced the manufacturer's own prices, thereby benefiting both their customers and themselves. Yet, it is more the manufacturers than the retail distributors who have recognized the importance of the modern approach to pricing problems and who are making increasing use of pricing research to find the most promising prices for new and existing products.

Many distributors and especially the smaller ones do not seem to have any well thought out pricing system. This is hardly surprising if we consider that a similar lack of a definite attitude to price often occurs also higher up the line. A research team which investigated pricing in a number of the largest American manufacturing companies had to reach the conclusion that "It is not always evident that the price makers in the various big companies know that there is a policy, even if an inconsistent one." Enquiries conducted in this country produced similar results and revealed in some cases also that the policy the executives of the firms concerned believed to be pursued by their own price setters had little to do with what actually happened in practice.'

This lack of an effective control of pricing is particularly evident in retail distribution. In the course of my own market research I have come across a number of instances where the prices displayed in the supermarkets were very different from those prescribed by the management, and the experience of other market researchers confirms my findings. Some of the discrepancies observed were due to deliberate departure from the policy of the management (a point which I will take up presently), but it is my impression that the bulk was simply the result of carelessness. The harm pricing mistakes can cause is far too great for complacency.

It has been alleged, and also supported by evidence, that some store managers are tempted to increase the profitability of their individual stores by not passing on to their customers the full extent of temporary price reductions. A few years ago Unilever sponsored an investigation of these practices and subsequently published the findings in a booklet circulated within the trade that bore the title The money she might have spent. It was shown there that not cutting the price by the full amount stipulated by the central management of the chain (often in conformity with the manufacturers' proposition) reduced both the sales of the item concerned and the profit that resulted from the promotion. My own view is that this issue requires further careful exploration, since the increase in the sale of the promoted item inevitably cuts into the turnover of the other brands sold by the same outlet in the same product field. Hence it is possible that overall profit-ability will be higher when the price reduction is, say, 2p rather than 3p.

Since retail establishments are of an extremely varied nature, it could hardly be expected that they would all follow an identical pricing policy, or that there should exist a single principle which would be ideal for all of them. In fact, the cheapest shop in town and the most expensive might be found equally successful. What is impossible is to be all things to all men: opposite extremes of business policy will not mix and hence consistency in pricing is an aim well worth pursuing.

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