Module 7
Pricing and Retail Communications
a. Pricing Strategies
Retailers using a high/low pricing strategy frequently—often weekly—discount
the initial prices for merchandise through sales promotions. However, some customers
learn to expect frequent sales and simply wait until the merchandise they want goes on
sale and then stock up at the low prices.
Many retailers, particularly supermarkets, home improvement centers, and
discount stores, have adopted an everyday low-pricing (EDLP) strategy. This strategy
emphasizes the continuity of retail prices at a level somewhere between the regular
nonsale price and the deep-discount sale price of high/low retailers. Although EDLP
retailers embrace their consistent pricing strategy, they occasionally have sales, just not
as frequently as their high/low competitors.
The term everyday low pricing is somewhat misleading because low doesn’t
mean “lowest.” Although retailers using EDLP strive for low prices, they aren’t always
the lowest prices in the market. Walmart is renowned for its everyday low prices, and it is
so effective in its approach that it even can promise relatively lower prices on
traditionally higher-priced goods such as organic produce. Still, at any given time, a sale
price at a high/low retailer may be the lowest price available in a market. To reinforce
their EDLP strategy, many retailers have adopted a low-price guarantee policy that
guarantees customers that the retailer will have the lowest price in a market for products
it sells. The guarantee usually promises to match or beat any lower price found in the
market and might include a provision to refund the difference between the seller’s offer
price and the lower price. Target, for example, offers to match the prices listed by various
online and local brick-and-mortar competitors within 14 days of the purchase, including
CVS, Kohl’s, Amazon, Walmart, and Wayfair.
b. Setting Retail Prices
Generally, as the price of a product increases, sales of the product decrease,
because fewer and fewer customers believe the product is a good value. The price
sensitivity of customers determines how many units will be sold at different price levels.
If customers in the target market are very price-sensitive, sales will decrease significantly
when prices increase. If customers are not very price-sensitive, sales will not decrease
significantly if the prices are increased.
One approach that can be used to measure the price sensitivity of customers is a price
experiment. Consider the following situation: A restaurant chain wants to determine the
best price for a new item, a riblet basket. It selects restaurants in the chain with a similar
trade area and sets prices at different levels in each of the restaurants for a week. Assume
that the variable cost of the riblets is $5 per plate and the fixed cost of operating the
restaurant for a week, including costs for rent, labor, and energy, is $8,000. The results of
this experiment. Notice that as prices increase, the fixed costs remain the same, sales and
variable costs both decrease, but sales decrease at a faster rate than variable costs. So the
highest profit level occurs at a $7 price. If the restaurant considers only customers’ price
sensitivity and cost in setting prices, it would set the price for the riblet basket with these
demand characteristics at $7 to maximize profits.
Consumers have lots of choices for goods and services, and they typically search for the
best value. Retailers therefore need to consider competitors’ prices when setting their
own. The previous discussion about setting price on the basis of customer price
sensitivity (elasticity) ignores the effects of competitors’ prices. For example, assume the
restaurant chain that conducted the experiment had a $7.50 price for the riblet basket and,
following the results of its experiment, dropped its price to $7.00 to increase sales and
profits. If the increased sales occurred, other restaurant chains would see a decline in their
sales and react by dropping their prices to $7.00, and the experimenting restaurant chain
might not realize the sales and profit increases it anticipated.
Services are intangible and thus cannot be inventoried. When retailers are selling
products, if the products don’t sell one day, they can be stored and sold the next day.
However, when a plane departs with empty seats or a play is performed without a full
house, the potential revenue from the unused capacity is lost forever—a key reason that
service providers were hit hard by the COVID-19 pandemic.14 In addition, most services
have limited capacity. For example, restaurants are limited in the number of customers
that can be seated. Due to capacity constraints, service retailers might encounter
situations in which they cannot realize as many sales as they could make. For example,
airlines’ dynamic pricing techniques monitor reservations and ticket sales for each flight
and adjust prices according to capacity utilization. Prices are lowered on flights when
sales are below forecasts and there is significant excess capacity. As ticket sales approach
capacity, prices are increased.
Other service retailers use less sophisticated approaches to match supply and demand.
For example, more people want to go to a restaurant for dinner or see a movie at 7:00
p.m. than at 5:00 p.m. Restaurants and movie theaters thus might not be able to satisfy the
demand for their services at 7:00 p.m. but have excess capacity at 5:00 p.m. Therefore,
restaurants and movie theaters often price their services lower for customers who use
them at 5:00 p.m. rather than 7:00 p.m. in an effort to shift demand from 7:00 p.m. to
5:00 p.m. Accordingly, service providers such as OpenTable seek to help retailers
leverage these demand shifts through surge pricing. When the desired product is more
desirable, such as a 7:00 reservation at the hottest restaurant in town, OpenTable offers
Premium Reservations that allow diners to pay an extra fee to book the best seats in the
house. The rideshare service Uber relies on similar pricing strategies to balance the
demand for its services.
Due to the intangibility of services, it is often difficult for customers to assess service
quality, especially when other information is not available.18 Thus, if consumers are
unfamiliar with a service or service provider, they may use price to make quality
judgments. For example, most consumers have limited information about lawyers and the
quality of legal advice they offer, so they might base their assessment of the quality of
legal services offered on the fees they charge. They may also use other nondiagnostic
cues to assess quality, such as the size and décor of the lawyer’s office.
Another factor that increases the dependence on price as a quality indicator is the risk
associated with a service purchase. Customers are reticent to entrust their medical or legal
problems to low-cost providers. The risk need not be expensive. Some customers may
find the risk associated with inexpensive hair salons or tattoo parlors to be too much as
well. Because customers depend on price as a cue of quality and because price creates
expectations of quality, service prices must be determined carefully. In addition to being
chosen to manage capacity, prices must be set to convey the appropriate quality signal.
Pricing too low can lead to inaccurate inferences about the quality of the service. Pricing
too high can set expectations that may be difficult to match in service delivery.
Many retailers need to set prices for more than 50,000 SKUs and make thousands of
pricing decisions each month. From a practical perspective, they cannot conduct
experiments or do statistical analyses to determine the price sensitivity for each item.
Therefore, they rely on some standard analytical approaches, such as those based on cost
or break-even points, which they then adapt to their unique situation by relying on pricing
software and Internet, mobile, and social capabilities.
Hypothetically, PetSmart is considering an introduction of a new private-label, dry dog
food targeting owners of older dogs. The cost of developing this dog food is $700,000,
including salaries for the design team and costs of testing the product. Because these
costs do not change with the quantity of product produced and sold, they’re known as
fixed costs. PetSmart plans to sell the dog food for $12 a bag—the unit price. The
variable cost is the retailer’s expenses that vary directly with the quantity of product
produced and sold. Variable costs often include direct labor and materials used in
producing the product. Because PetSmart will be purchasing the product from a private-
label manufacturer, the only variable cost is the dog food’s cost, $5, charged by the
private-label manufacturer.
To set initial prices, the software uses historical sales data from its own and
competitors’ stores. It determines the price–sales relationship of complementary items—
those that have a similar sales pattern, such as Pepsi and Lay’s Potato Chips. Thus, not
only can the software tell buyers the best price for Pepsi, but it also suggests a price for
the chips. Buyers can also determine how much Pepsi they will sell at a given price if
they lower the price of Coke or their private-label (or store) brand. The software can
incorporate other factors, such as the store’s image (e.g., inexpensive or premium price),
where the nearest rival is located, seasonal factors (e.g., soft drinks sell better in the
summer than in the winter), or whether an item is featured in coupons or other
promotions. It can set decision rules, such as optimizing the regular price to never be
more than a nickel above a competitor’s price. Or the software might suggest offering a
very competitive price on products for which customers are very sensitive, such as milk
or diapers, but take a larger margin on less price-sensitive items, such as baby accessories
and store brands.
The growth of the electronic channel, the popularity of social media, and the
adoption of smartphones have greatly changed the way consumers get and use
information to make purchasing decisions based on price. Traditionally, price
competition among storebased retailers offering the same merchandise was reduced by
geography, because consumers typically shopped at the stores and malls closest to where
they lived and worked. However, Internet sites such as Shopzilla, ShopSavvy, and
BuyVia allow customers to compare prices across a range of retailers. Retailers need to
take these factors into account as they go about setting their prices and price promotions.
Growing numbers of consumers also opt in to services that provide mobile offers
through various applications (e.g., Foursquare, Travello). Because these mobile apps can
account for customers’ geographic location, once users grant them access to their phones,
they allow retailers to offer price promotions when shoppers are in close proximity using
geofencing. Such relevant, timely mobile offers appeal to shoppers, and the redemption
of digital coupons accordingly is growing at an astronomical rate.
Mobile offers can be delivered by a host of different methods too. For example,
the many features included in Meijer’s mobile app allow its grocery shoppers to create
and update shopping lists, access Meijer perks (e.g., coupons, sale items), receive alerts
about items on sale, and use real-time mapping tools to find the merchandise in a given
store. Then they can pay for their fuel purchases at gas pumps installed outside stores,
which automatically recognize their accounts from their phones.
As these examples show, consumers shopping electronically collect price
information with little effort, but they also get a lot of other information about the quality
and performance of products, which may leave them less sensitive to price. An Internet
site that offers custom-made Oriental rugs can clearly show real differences in the
patterns and materials used for construction. Electronic grocery services offered by
Safeway allow customers to sort cereals by nutritional content, thus making it easier to
use that attribute in their decision making. If a customer wants to make an egg dish for
breakfast, the site can recommend recipes that include eggs, as well as providing the
relevant nutritional information. The additional information about product quality in turn
might lead customers to pay more for high-quality products, leading to a diminished
influence of price.
c. Markdowns
The preceding section reviewed how retailers initially set prices on the basis of
the merchandise cost and desired maintained margin. However, retailers also take
markdowns by reducing the initial retail price. This section examines why retailers take
markdowns, how they optimize markdown decisions, how they reduce the amount of
markdowns, and how they liquidate markdown merchandise.
Retailers’ reasons for taking markdowns can be classified as either clearance (to
dispose of merchandise) or promotional (to generate sales). Clearance markdowns are
examined in this section, and promotional markdowns are discussed later in this, as a
method of increasing sales and profits. When merchandise is selling at a slower rate than
planned and will become obsolete at the end of its season, or is priced higher than
competitors’ goods, buyers generally mark it down for clearance purposes. Slow-selling
merchandise decreases inventory turnover; prevents buyers from acquiring new, better-
selling merchandise; and can diminish the retailer’s image for selling the most current
styles and trends.
Markdowns are part of the cost of doing business, and thus, buyers plan for them.
They tend to order more fashion merchandise than they forecast actually selling because
they are more concerned about underordering and stocking out of a popular item before
the end of the season than about overordering and having to discount excess merchandise
at the end of the season. Stocking out of popular merchandise can have a detrimental
effect on a fashion retailer’s image, whereas discounting merchandise at the end of the
season just reduces maintained markup.
Thus, a buyer’s objective isn’t to minimize markdowns. If markdowns are too
low, the buyer is probably pricing the merchandise too low, not purchasing enough
merchandise, or not taking enough risks with the merchandise being purchased. Buyers
set the initial markup price high enough that even after markdowns and other reductions
have been taken, the planned maintained markup is still achieved.
Retailers traditionally created a set of arbitrary rules for taking markdowns to
dispose of unwanted merchandise. One retailer, for instance, identifies markdown
candidates when its weekly sell-through percentages fall below a certain level. Another
retailer cuts prices on the basis of how long the merchandise has been in the store—
marking down products by 20 percent after 8 weeks, then by 30 percent after 12 weeks,
and finally by 50 percent after 16 weeks. Such a rule-based approach, however, is
limiting because it does not consider the demand for the merchandise at different price
points or in different locations and thus produces less-thanoptimal profits.
The optimization software described previously in this, used to set initial retail
prices, can also indicate when to take markdowns and how much they should be in
different locations. It works by continually updating its pricing forecasts on the basis of
actual sales throughout the season and factoring in differences in price sensitivities. For
example, the software recognizes that in early November, a winter item’s sales are better
than expected in Colorado, so it delays taking a markdown that had been planned but
takes the markdown in New England. Each week, as new sales data become available, it
readjusts the forecasts to include the latest information. It computes literally thousands of
scenarios for each item—a process that is too complicated and timeconsuming for buyers
to do on their own. It then evaluates the outcomes on the basis of expected profits and
other factors and selects the action that produces the best results across all regions.
Retailers have several options for reducing the amount of markdowns. They can
work closely with vendors to choose merchandise and coordinate deliveries to help
reduce the financial burden of taking markdowns. They can also buy smaller quantities to
make it easier to forecast demand for a shorter time period and create a feeling of
scarcity. Finally, retailers can strive to offer a good value.
Selling the unsold merchandise to another retailer is a very popular strategy
among retailers. For instance, off-price retailers such as TJX Corporation (owners of
T.J.Maxx and Marshalls), Nordstrom Rack, and Ross Stores purchase end-of-season
merchandise from other retailers and sell it at deep discounts. However, this approach for
liquidating unsold merchandise enables retailers to recoup only a small percentage of the
merchandise’s cost—often a mere 10 percent.
Markdown merchandise can be consolidated in a number of ways. First, the
consolidation can be made into one or a few of the retailer’s regular locations. Second,
markdown merchandise can be consolidated into another retail chain or an outlet store
under the same ownership. Retailing View 14.3 highlights Crazy Cazboy’s, a unique off-
price retailer that brands can turn to when they need to sell their consolidated unsold
merchandise. Saks Fifth Avenue OFF Fifth, Nordstrom Rack, and Neiman Marcus Last
Call Clearance Center also use this approach, but these outlets operate under the same
ownership as the main sales channel. Third, unsold merchandise can be shipped to a
distribution center or a rented space such as a convention center for final sale. However,
consolidation sales can be complex and expensive due to the extra transportation and
record keeping involved.
d. Pricing Techniques for Increasing Sales and Profits
Dynamic pricing, also known as individualized pricing, refers to the process of
charging different prices for goods or services based on the type of customer; time of the
day, week, or season; and level of demand. Ideally, retailers could maximize their profits
if they charged each customer as much as the customer was willing to pay.
Dynamic pricing has always been popular in some retail sectors, such as
automobile and antique dealers, in which customers are used to haggling over prices. And
it is very popular with some services, such as airlines and Uber, to match supply and
demand. In the travel industry, airlines can even tailor ticket prices to how much each
individual customer is willing to pay. For example, two people can book tickets for the
same flight on the same day and still pay different prices, depending on their purchase
history. Such capabilities also raise some ethical considerations, though; for example,
should an airline charge more if it learns, through the search history on a passenger’s
computer, that a relative is ill? The demand in this case is acute, so the traveler would
likely pay nearly any price to be able to visit, but whether the airline is right to change the
prices in such cases remains a topic of contention
Internet retailers especially have increased their use of dynamic pricing
techniques due to their ability to process the vast amount of purchase information that is
available. But it is not very practical in the brick-and-mortar arena for consumer products
such as detergents or cereals. First, it is difficult to assess each customer’s willingness to
pay. Second, these retailers cannot change the posted prices in stores as customers with
different willingness to pay enter the store. Third, customers might feel they are being
treated unfairly if they realize that they are being charged a higher price than other
customers.
Retailers employ promotional markdowns to promote merchandise and increase
sales. Markdowns can increase customer traffic flow. Retailers plan promotions in which
they take markdowns for holidays, for special events, and as part of their overall
promotional program. They hope that customers will purchase other products at regular
prices while they’re in the store. Another opportunity created by promotional markdowns
is to increase the sale of complementary products. For example, a supermarket’s
markdown on hot dog buns may be offset by increased demand for hot dogs, mustard,
and relish—all sold at regular prices.
Whereas our discussion of clearance markdowns earlier in the focused primarily
on how retailers get rid of unwanted merchandise, this merchandise can also be used to
attract different market segments based on their degree of price sensitivity. Fashion-
conscious customers who have a high willingness to pay because they want to be the first
to wear the latest fashions self-select to pay higher prices. More price-sensitive customers
wait to buy the merchandise at the end of the season when prices are lower.
Coupons offer a discount on the price of specific items when they’re purchased.
Coupons are issued by manufacturers and retailers in newspapers, on products, on the
shelf, at the cash register, over the Internet and mobile devices, and through the mail.
Retailers use coupons because they are thought to induce customers to try products for
the first time, convert first-time users to regular users, encourage large purchases,
increase usage, instill loyalty, and protect market share against the competition. Coupons
are an attractive way to target price-sensitive customers because they will likely expend
the extra effort to collect and redeem coupons, whereas priceinsensitive customers will
not.
Price bundling is the practice of offering two or more different products or
services for sale at one price. For instance, McDonald’s offers a bundle of a sandwich,
French fries, and a soft drink in an Extra Value Meal at a discount compared with buying
the items individually. Price bundling increases both unit and dollar sales by increasing
the amount of merchandise bought during a store visit.
Quantity discounts, also called multiple-unit pricing, refers to the practice of
offering two or more similar products or services for sale at one lower total price. For
example, a convenience store may sell three one-liter bottles of soda for $2.39 when the
price for a single one-liter bottle is 99 cents—a saving of 58 cents. Like price bundling,
this variablepricing approach is used to increase sales volume. Depending on the type of
product, however, customers may stockpile the items for use at a later time, thus having
no impact on sales over time.
Zone pricing is the practice of charging different prices in different stores,
markets, regions, or zones. Retailers generally use zone pricing to address different
competitive situations in their various markets. For example, some multichannel retailers
implement zone pricing by asking customers to enter their zip code if they want a price
quote. A single city might comprise five or so pricing zones, categorized by its proximity
to a Walmart versus a less economical regional grocery chain, for example. Although
widely considered unethical, many retailers have charged higher prices in stores located
in lower-income or urban areas because these customers, including older retirees, have
less access to alternatives. Furthermore, the cost of operating businesses in those areas
can be more expensive than in others.
Leader pricing is the practice of pricing certain items lower than normal to
increase customers’ traffic flow or boost sales of complementary products. Some retailers
call these products loss leaders. In a strict sense, loss leaders are sold below cost and
would therefore be considered predatory pricing, which is discussed in the next section.
But a product doesn’t have to be sold below cost for the retailer to use a leader pricing
strategy. The best items for leader pricing are frequently purchased products like white
bread, milk, and eggs or well-known brand names like Coca-Cola and Kellogg’s Corn
Flakes. Customers take note of ads for these products because they’re purchased weekly.
The retailer hopes consumers will also purchase their entire weekly grocery list while
buying the loss leaders.
Leader pricing, a strategy commonly employed by retailers to attract customers
through competitive pricing on select items, has been both a boon and a bane in the retail
landscape. While it aims to lure in consumers with enticing deals, it also introduces
certain challenges, one of which is the phenomenon of "cherry pickers."
Cherry pickers, as the term suggests, are shoppers who meticulously sift through
various stores, cherry-picking only those items that are on special or offered at a
discounted rate. They exhibit a distinct behavior pattern of seeking out bargains rather
than engaging in full-fledged shopping. This behavior, although seemingly advantageous
to consumers, presents a conundrum for retailers.
The primary concern lies in the profitability aspect for retailers. Cherry pickers,
by their very nature, tend to focus solely on discounted items, often bypassing regular-
priced merchandise. This selective shopping behavior undermines the intended purpose
of leader pricing, which is to drive overall sales and foot traffic. As a result, while
retailers may see an influx of customers during promotional periods, the actual return on
investment may not align with expectations, as these customers contribute
disproportionately less to overall revenue.
Moreover, the presence of cherry pickers can disrupt inventory management and
operational efficiency for retailers. The fluctuating demand created by these selective
shoppers makes it challenging for retailers to accurately forecast sales and manage
inventory levels. This can lead to issues such as overstocking of discounted items and
stockouts of regular-priced merchandise, both of which can have adverse financial
implications.
Furthermore, cherry pickers can detract from the overall shopping experience for
other customers. Their focused approach to seeking out bargains may result in
overcrowding and longer wait times at checkout counters, causing frustration for other
shoppers who are looking for a seamless and efficient shopping experience.
Addressing the issue of cherry pickers requires a delicate balance between
attracting bargain-seeking customers and maintaining profitability. Retailers may
consider implementing strategies such as diversifying promotional offerings, enhancing
customer engagement through loyalty programs, and optimizing pricing and discount
structures to encourage more comprehensive shopping behaviors. By strategically
addressing the challenges posed by cherry pickers, retailers can better leverage leader
pricing as a tool for driving sustainable growth and profitability in today's competitive
retail landscape.
Retailers frequently offer a limited number of predetermined price points within a
merchandise category, a practice known as price lining. For instance, because Kroger’s
vision for its store brands is to build loyalty among customers, with strong store brands
that are exclusive to the retailer, it pursues a price lining store brand strategy to provide
Kroger products to all customer segments. Developing products for all these customer
segments means that Kroger closes any gaps in the ability of its current assortment to
meet customers’ needs.
Odd pricing refers to the practice of using a price that ends in an odd number,
typically a 9. Odd pricing has a long history in retailing. In the nineteenth and early
twentieth centuries, odd pricing was used to reduce losses due to employee theft. Because
merchandise had an odd price, salespeople typically had to go to the cash register to give
the customer change and record the sale, making it more difficult for salespeople to keep
the customer’s money. Odd pricing was also used to keep track of how many times an
item had been marked down. After an initial price of $20, the first markdown would be
$17.99, the second markdown $15.98, and so on.
The results of empirical studies in this area are mixed;26 however, many retailers
believe that odd pricing can increase profits. The theory behind odd pricing is the
assumption that shoppers don’t notice the last digit or digits of a price, so that a price of
$2.99 is perceived as $2.00. An alternative theory is that “9” endings signal low prices.
Thus, for products that are believed to be sensitive to price, many retailers will round
down the price to the nearest 9 to create a positive price image. If, for example, the price
would normally be $3.09, many retailers will lower the price to $2.99.
e. Legal and Ethical Pricing Issues
A reference price serves as a pivotal point in consumers' decision-making
processes, influencing their perceptions of value and aiding in the evaluation of product
offerings. This concept, deeply ingrained in consumer psychology and retail marketing
strategies, plays a significant role in shaping purchasing decisions and consumer
behavior.
At its core, a reference price acts as a benchmark against which buyers assess the
actual selling price of a product or service. It provides consumers with a frame of
reference, enabling them to gauge whether the current price represents a good deal, a
discount, or a premium compared to what they perceive as the standard or regular price.
Retailers often label this reference price as the "regular price" or "original price," creating
a comparison point that guides consumers in their evaluation process.
When consumers encounter a product labeled with both a "sale price" and a
corresponding reference price, it triggers a cognitive comparison mechanism. This
comparison is integral to the perception of value and can significantly influence
purchasing behavior. Research in behavioral economics suggests that consumers tend to
anchor their judgments around reference points, adjusting their perceptions of value
based on the deviation from this reference.
The presentation of a discounted "sale price" alongside a higher reference price
can elicit various psychological effects. Firstly, it creates a sense of perceived savings, as
consumers perceive the difference between the sale price and the reference price as a
tangible benefit. This perception of savings can evoke feelings of satisfaction and
reinforce the decision to purchase.
Moreover, the juxtaposition of the sale price with the reference price can enhance
the perceived value of the product or service. Consumers may interpret the discounted
price as indicative of a higher value proposition, leading to an increased willingness to
buy. This phenomenon is particularly pronounced in situations where the discount
appears substantial relative to the reference price.
Furthermore, the presence of a reference price can contribute to the perception of
scarcity and urgency, driving consumers to act quickly to capitalize on the perceived
value proposition. Retailers often leverage this psychological mechanism to stimulate
demand and accelerate purchasing decisions, particularly during promotional events or
sales periods.
However, it's essential to note that the effectiveness of reference pricing strategies
can vary based on various factors, including consumer demographics, product category,
and competitive dynamics. Additionally, excessive reliance on reference pricing without
genuine value proposition or transparency can undermine consumer trust and lead to
skepticism.
In conclusion, reference pricing serves as a powerful tool in retail marketing,
influencing consumer perceptions of value and purchase decisions. By strategically
leveraging reference prices alongside promotional pricing tactics, retailers can enhance
the perceived value of their offerings and stimulate consumer demand effectively.
If the reference price is bona fide, the advertisement is informative. If the
reference price has been inflated or is just plain fictitious, however, the advertisement is
deceptive and may cause harm to consumers. But it is not easy to determine whether a
reference price is bona fide. What standard should be used? If an advertisement specifies
a “regular price,” just what qualifies as regular? How many units must the store sell at
this price for it to be a bona fide regular price—half the stock? A few? Just one? Finally,
what if the store offers the item for sale at the regular price but customers do not buy
any? Can it still be considered a regular price? In general, if a seller is going to label a
price as a regular price, the Better Business Bureau suggests that at least 50 percent of the
sales should have occurred at that price.
Predatory pricing arises when a dominant retailer sets prices below its costs to
drive competitive retailers out of business. Eventually, the predator hopes to raise prices
when the competition is eliminated and earn back enough profits to compensate for its
losses. For instance, taxi companies have accused Uber of using predatory prices to
undercut competition and create a monopoly in key markets.29 However, retailers
generally may sell merchandise at any price as long as the motive isn’t to eliminate
competition, and this motive is very difficult to prove.
Vendors often encourage retailers to sell their merchandise at a specific price,
known as the manufacturer’s suggested retail price (MSRP). Vendors set MSRPs to
reduce retail price competition among retailers and stimulate them to provide
complementary services. Vendors enforce MSRPs by withholding benefits such as
cooperative advertising or even refusing to deliver merchandise to noncomplying
retailers. The latest U.S. Supreme Court ruling suggests that the ability of a vendor to
require that retailers sell merchandise at MSRPs can be decided on a case-by-case basis,
depending on the individual circumstances.
Horizontal price fixing involves agreements between retailers that are in direct
competition with each other to set the same prices. This practice clearly reduces
competition and is illegal. As a general rule of thumb, retailers should refrain from
discussing prices or terms and conditions of sale with competitors. If buyers or store
managers want to know competitors’ prices, they can look at a competitor’s
advertisements, its websites, or its stores.
A bait and switch is an unlawful, deceptive practice that lures customers into a
store by advertising a product at a lower-than-normal price (the bait) and then, once they
are in the store, induces them to purchase a higher-priced model (the switch). Bait and
switch usually involves the store either having inadequate inventory for the advertised
product or pushing salespeople to disparage the quality of the advertised model and
emphasize the superior performance of a higher-priced model. To avoid disappointing
customers and risking problems with the Federal Trade Commission (FTC), the retailer
should have sufficient inventory of advertised items and offer customers rain checks if
stockouts occur. A rain check is a promise to customers to sell currently out-of-stock
merchandise at the advertised price when it arrives.
f. New Media Elements
Retailers are increasing their emphasis on communicating with customers through
their websites, which are used to build their brand images; inform customers of store
locations, special events, and the availability of merchandise in local stores; and sell
merchandise and services. Many retailers also devote areas of their websites to
community building. These sites offer an opportunity for customers with similar interests
to learn about products and services that support their hobbies and to share information
with others.
Visitors can also post questions seeking information or comment about issues,
products, and services. For example, REI, an outdoor apparel and equipment retailer,
offers adventure travel planning resources for hiking trips, bike tours, paddling, adventure
cruises, and other trips. By doing so, REI creates a community of customers who engage
in activities using the merchandise that REI sells. The community thus reinforces REI’s
brand image.
Many retailers encourage customers to post reviews of products they have bought
or used on their websites. Research has shown that these online product reviews increase
customer loyalty and provide a competitive advantage for sites that offer them.10 In a
further effort to appeal to consumers and encourage them to interact with the retailer in
various ways, some websites provide video content and interactive, virtual activities to
advertise products and collect user data.
The evolution of e-commerce has revolutionized the way customers interact with
retailers' websites, ushering in an era of unparalleled personalization and interactivity.
Depending on how customers navigate and engage with these online platforms, they can
experience tailored experiences that cater to their preferences, browsing history, and
demographic profiles. This personalized approach not only enhances user satisfaction but
also plays a pivotal role in driving conversion rates and fostering long-term customer
loyalty.
One of the key advantages of online retail platforms is the ability to deliver highly
targeted messages and content to individual users. Through sophisticated algorithms and
data analytics, retailers can track and analyze customer behavior, enabling them to
present relevant products, recommendations, and promotions in real-time. This level of
customization creates a seamless and intuitive browsing experience, where customers feel
understood and valued by the retailer.
Moreover, the interactive nature of websites allows for dynamic engagement with
customers through various channels, such as live chat, virtual assistants, and interactive
product demos. These features empower customers to seek assistance, ask questions, and
explore product features in a way that mimics the in-store shopping experience. By
fostering direct communication between customers and retailers, online platforms can
address concerns, provide support, and guide purchasing decisions more effectively.
However, while the benefits of personalized and interactive experiences are
undeniable, it's essential to acknowledge the associated costs and challenges for retailers.
The maintenance and operation of a sophisticated website entail substantial investments
in technology, infrastructure, and personnel. From website development and hosting to
ongoing updates and security measures, the cost of maintaining an online presence can be
significant, particularly for small and medium-sized enterprises (SMEs).
Furthermore, ensuring a seamless and responsive user experience across various
devices and platforms requires continuous optimization and testing. This ongoing effort
to enhance website performance, usability, and accessibility adds another layer of
complexity and cost for retailers. Additionally, as customer expectations continue to
evolve, retailers must stay ahead of the curve by investing in innovative features and
technologies to remain competitive in the digital marketplace.
Despite these challenges, the cost per exposure on retailer websites remains
comparatively moderate compared to traditional advertising channels. Unlike print,
television, or radio advertisements, which require upfront investments and may have
limited reach and targeting capabilities, online platforms offer greater flexibility and
scalability in reaching target audiences. Retailers can leverage digital marketing tools
such as pay-per-click (PPC) advertising, search engine optimization (SEO), and social
media marketing to optimize their advertising spend and maximize return on investment.
In conclusion, the personalized and interactive experiences offered by retailers'
websites have redefined the way customers engage with brands online. While the cost of
maintaining and operating these platforms can be substantial, the benefits in terms of
customer engagement, conversion rates, and brand loyalty justify the investment for
retailers looking to thrive in the digital age. By continually innovating and adapting to
evolving consumer preferences, retailers can create immersive online experiences that
drive growth and differentiation in a competitive marketplace.
Many retailers actively employ search engine marketing (SEM) to improve the
visibility of their websites in the results prompted by consumer searches. One SEM
method relies on search engine optimization (SEO). In this process, website designers
create and adjust the website content to match various search queries that consumers
might type in, so the retailer’s own site is more likely to appear closer to the top of a
search engine results page (SERP). These SERPs feature organic lists of results, such that
the search engine (e.g., Google) provides them in response to a user’s keyword query,
without requiring any payment. Another SEM method uses paid search through
sponsored link advertising programs. When the search platform, like Google, contracts
with a retailer to provide a sponsored link, that website will appear above or to the right
of the organic search results.
E-mail involves sending messages over the Internet to specific individuals.
Retailers use e-mail to inform customers of new merchandise and special promotions,
confirm the receipt of an order, and indicate when an order has been shipped. The
increased use of customer databases has enabled retailers to identify and track consumers
over time and across purchase situations. As a result, e-mail can be highly personal, and
the message can be tightly controlled. However, when the same message is delivered
electronically to all recipients, e-mails more closely resemble a more impersonal
medium, such as mass advertising. Because e-mail recipients can respond back to the
retailer, it is considered an interactive medium. Finally, the cost per exposure is low.
Mobile marketing, also called mobile commerce, m-commerce, or mobile
retailing, is marketing through wireless handheld devices such as smartphones and
tablets. Smartphones have become far more than tools to place calls; they offer a kind of
mobile computer with the ability to obtain sports scores, weather, music, videos, and text
messages, as well as purchase merchandise. Marketing success rests on integrating
marketing communications with fun, useful apps that are consistent with these consumer
attitudes toward mobile devices. In response, firms are steadily improving customers’
potential experience with their mobile interface. Retailers often use mobile channels to
deliver coupons or other promotional offers, such as free shipping to customers who
purchase online from the retailer while in its brick-and-mortar store. They also can
leverage the location-based technology to deliver tailored, local messages to customers to
drive them into their stores.
By communicating through the applications installed on consumers’ mobile
phones, they can send even more detailed messages that reflect their location, as
determined by GPS technology. With the GPS-based application, users also can
recommend nearby retailers to friends in the area. Furthermore, the app’s data analytic
capabilities allow retailers to track the impact of mobile marketing campaigns. Burger
King used location-based marketing to great effect when it targeted consumers in close
proximity to local McDonald’s locations. Consumers in these locations (who had
downloaded the Burger King app) would receive a special discount voucher, designed to
convince them to change their plans and head to Burger King instead. The “Whopper
Detour,” as the stunt was called, not only drove the highest foot traffic to Burger King
restaurants in years but also increased app downloads threefold.
Social media include various forms of electronic communication, which users can
employ to create online communities in which they share ideas, information, their
interpersonal messages, and other content (e.g., videos). Three major online facilitators of
social media are YouTube, Facebook (which also owns Instagram), and Twitter. As
another online vehicle that encourages word-of-mouth communications, online forums
help consumers review, communicate about, and aggregate information about products,
prices, and promotions. These forums also allow users to interact among themselves (e.g.,
form a community), some of which even facilitate retail purchases related thoughts and
product evaluations with both other like-minded consumers and the retailers.
Retailers use social media to engage their customers in proactive dialogue.15
When a retailer provides content in a social media website, people often begin sharing
and commenting on it. The retailer then must monitor the feedback and respond if
necessary—especially if the commentary is negative. Sentiment analysis is the process of
analyzing data posted on social media sites to assess customers’ overall valence (positive,
neutral, or negative) and the intensity of their sentiments. It can be used to understand
overall attitudes and preferences for products and advertising campaigns. Scouring
millions of sites by combining automated online search tools with text analysis
techniques, sentiment mining yields qualitative data that provide new insights into what
consumers really think. Retailers plugged into this real-time information can become
nimbler and make quick changes to a product rollout or a new advertising campaign.
teractive. When the message is produced by the retailer, it can be controlled, but
when customers are involved, as is the case with reviews, there is little control over the
message. Likewise, the level of information content depends on who is doing the
communicating. The cost per exposure for social media is relatively low compared with
traditional media.
s On a blog (weblog), an individual blogger or a group of users regularly posts
opinions and various topical information on a web page. The administrator of the blog
can be an independent person, a retailer, or another type of firm. A well-received blog
can communicate trends, announce special events, and create word of mouth, defined as
communication among people about an entity, such as a retailer, product, or service.16
Blogs connect customers by encouraging communities to form and facilitating longterm
relationships between customers and a retailer, which then can respond directly to any
members concerns or comments.
By their very nature, blogs are supposed to be transparent and contain authors’
honest observations, which can help customers determine their trust and loyalty levels. If,
however, the blog is created or sponsored by a retailer, the information may be positively
biased. Also, retailers have limited control over the content posted on blogs; thus, the
information might be negative or incorrect. Many retailers use blogs as part of their
communication strategy. On the Canopy blog, the community of registered members
identify the best products available for purchase on Amazon, with the acknowledgment
that it is “Amazon-curated.” The link to the retailer is part of its appeal; visitors know
that they can access these products quickly and easily.
A particular type of blog, identified by its brevity, is the microblog, the most
famous of which is Twitter. Initially tweets were limited to 140 characters, though in
2017, the social media platform extended that limit to 280 characters. Still, even these
longer tweets remain quite brief, requiring users to devise not just short but also timely
and relevant posts. For example, Wegmans tweets about the precise times its produce
deliveries will be arriving, so that shoppers in search of the freshest vegetables know
when to arrive at the store. When retailers tweet, the goal often is to provide such up-to-
theminute updates or short-term promotions, rather than the sorts of brand-building
communications or efforts to encourage customers to upload relevant content that appear
more frequently on Facebook, with its expanded communication options. Such timely
methods of communication and the ease of maintaining a Twitter handle also make the
microblog an appealing channel for both small and large retailers.
Beyond its brevity and speed, Twitter features various options to help retailers
prompt desirable responses among their followers. As a customer service channel,
Twitter gives customers and retailers a way to answer product or service questions
immediately and personally. Including an “@retailer” line in a tweet is likely to get the
company’s attention, enabling a quick response. However, retailers also are learning the
benefits of responding selectively; if they were to answer every complaint, even
ridiculous ones, they risk publicizing the information and making it visible to all their
followers, not just friends who follow the account of the person issuing the complaint.
Thus, for example, Penske’s customer service representatives monitor the company’s
Twitter feed from 7:00 a.m. to 11:00 p.m. daily to provide nearly instantaneous
responses, at least to relevant queries.
A recently introduced Professional Profiles feature on Twitter also allows
businesses to list key information and answers to frequently asked questions on their
main pages, so people looking to discover how late a store is open can find the
information quickly. Furthermore, Twitter’s experiments in e-commerce indicate its
intentions to facilitate more purchases through the channel, including links to retailers’
web shops and a Shop Module that would feature a rotating sample of products available
for purchase.
g. Traditional Media Elements
This form of mass media entails the placement of announcements and persuasive
messages purchased by retailers and other organizations that seek to inform and/or
persuade members of a particular target market or audience about their products, services,
organizations, or ideas.20 The top 200 advertisers in the United States spend an estimated
$163 billion on advertising. Amazon, Comcast, Procter & Gamble, Verizon, Walt
Disney, American Express, AT&T, and General Motors are among the largest
advertisers.
Mass advertising is typically used to generate awareness in the need recognition
stage of the buying process, because of its low cost per exposure and the control retailers
have over the content and timing of the communication. But it is not as effective for
helping consumers search for information, because the amount of information that can be
transmitted is limited. By its very nature, it is impossible to personalize messages or
interact directly with customers. But it is a cost-effective method for announcing sales or
new store openings. Traditionally, mass advertising has been limited to newspapers,
magazines, direct mail, TV, radio, and billboards.
Retailing and newspaper advertising grew up together in the last century. But the
growth in newspaper advertising by retailers has slowed recently as retailers have begun
using other media. For example, newspaper advertising spending accounted for $12.9
billion in 2019, a 12.7 percent decline from the previous year.22 In addition to displaying
ads with their editorial content, newspapers distribute freestanding inserts. A freestanding
insert (FSI), also called a preprint, is an advertisement printed at the retailer’s expense
and distributed as an insert in the newspaper. Although popular with advertisers, there are
so many FSIs in some newspapers that readers can become overwhelmed. As a result,
some retailers have reduced the number of FSIs they use because of the clutter and
because younger readers, who may be their primary target market, don’t regularly read
newspapers.
Most newspapers, except for a select few national newspapers like The Wall
Street Journal and USA Today, are distributed in well-defined local market areas, so they
are effective for targeting specific retail markets. Newspaper readers can go through an
advertisement at their own pace and refer to the part of the advertisement when they
want. But newspaper ads are not effective for showing merchandise, particularly when it
is important to illustrate colors, because of the relatively poor reproduction quality.
Advertising in national magazines is mostly done by national retailers such as
Target and Sephora. With the growth of local magazines, regional editions of national
magazines, and specialized magazines, local retailers can take advantage of this medium.
Many magazines either offer both a print and an online version or have transitioned to
online only. This change in the business model for some magazines from print to online
(or both) enables retailers to reach potential customers at a lower cost per exposure.
Retailers tend to use it for image advertising because the reproduction quality is high.
Direct mail includes any brochure, catalog, advertisement, or other printed
marketing material delivered directly to the consumer through the mail or a private
delivery company.23 Retailers have communicated with their customers through the mail
for as long as the mail has existed. Most of the direct mail goes to customers or the
current resident of the household on a nonpersonalized basis. With the advent of loyalty
and customer relationship management (CRM) programs, retailers are able to personalize
their direct mail to all customers, to a subset of the customers according to their previous
purchases, or even on a personalized basis to individual customers. Although relatively
expensive on a per-customer basis (because of printing, mail costs, and a relatively low
response rate), direct mail is still extensively used by many retailers, because people
respond favorably to personal messages.
Television commercials can be placed on a national network, local stations, or
streaming services such as Netflix, Hulu, or Roku. Retailers typically use TV for image
advertising, to take advantage of the high production quality and the opportunity to
communicate through both visual images and sound. Television ads can also demonstrate
product usage. For example, TV is an excellent medium for car, furniture, and consumer
electronics dealers. This medium also is used extensively to promote sales, particularly at
a local level.
In addition to its high production costs, broadcast time for national TV advertising
is expensive. Spots, which are ads in local markets as opposed to national ads, have
relatively small audiences, but they may be economical for local retailers. To offset the
high production costs, many vendors provide modular commercials in which the retailer
can insert its name or a “tag” after information about the vendor’s merchandise.
Many retailers use radio advertising because messages can be easily targeted to a
specific segment of the market.24 Some radio stations’ audiences are highly loyal to their
announcers, especially in a “talk radio” format. When these announcers promote a
retailer, listeners are impressed. The cost of developing and broadcasting radio
commercials is relatively low.
One disadvantage of radio advertising, however, is that listeners generally treat
the radio broadcast as background, which limits the attention they give the message.
Consumers must get the information from a radio commercial when it is broadcast; they
cannot refer back to the advertisement for information they didn’t hear or don’t
remember.
Billboards are outdoor advertisements that are generally large and appear adjacent
to and above roads or highways. Retailers typically use billboards to attract customers to
a specific store location. Everyone who drives or walks by sees them, so exposure is high.
A potential disadvantage though is that among this vast group of people exposed to the
communication, relatively few of them actually constitute the retailer’s target market.
Given the relatively high price of creating and posting a billboard, as well as the long-
term commitment to and cost of displaying it, billboards can be an inefficient use of
scarce promotional dollars. Still, a billboard on an interstate highway indicating the
location of a nearby Cracker Barrel would be relatively efficient, more so than one for a
fine jewelry store, because nearly every driver is a potential customer of Cracker Barrel,
but relatively few people are likely in the market for fine jewelry in the midst of their
journeys.
Sales promotions are special incentives or excitement-building programs that
encourage consumers to purchase a particular product or service. Some sales promotions
have become integral components of retailers’ long-term CRM programs, which they use
to build customer loyalty. The ability to personalize messages and interact directly with
customers depends on the type of sales promotion retailers use. Generally, however, sales
promotions provide relatively little information. But on the positive side, the ability to
control the message is high, and the cost per exposure is low. The tools used in sales
promotions, such as coupons, rebates, and premiums.
Coupons offer a discount on the price of specific items when they are purchased.
Coupons are issued by manufacturers and retailers in newspapers, on products, on the
shelf, at the cash register, over the Internet, on mobile devices, and through the mail. As
Retailing View 15.3 explains, retailers increasingly are moving toward digital coupons in
the COVID-19 era. Retailers use coupons because they are thought to induce customers
to try products for the first time, convert first-time buyers into regular users, encourage
large purchases, increase usage, and protect market share against competition. Some
retailers have linked coupons directly to their loyalty programs. Members of Albertsons’s
“Just for U” loyalty program receive personalized offers on all their paper and digital
receipts, for example.
Rebates provide another form of discounts for consumers. In this case, however,
the manufacturer, instead of the retailer, issues the refund as a portion of the purchase
price returned to the buyer in the form of cash. Retailers generally welcome rebates from
vendors because they generate sales in the same way that coupons do, but the retailers
incur no handling costs. Vendors can offer generous rebates because the likelihood that
consumers will actually apply for the rebate is low, due to the hassle involved in doing
so. But some retailers offer “instant rebates” that can be redeemed at the point of
purchase. Staples and Apple have simplified the rebate redemption process with “Easy
Rebates” and Apple.com/promo.
A premium offers an item for free or at a bargain price to reward some type of
behavior, such as buying, sampling, or testing. Such rewards build goodwill among
consumers, who often perceive high value in them. Premiums can be distributed in a
variety of ways: They can be included by the manufacturer in the product packaging,
such as the toys inside cereal boxes; placed visibly on the package, such as a coupon for
free milk on a box of Cheerios; handed out in the store; or delivered in the mail, such as
the free perfume offers that Victoria’s Secret mails to customers.
h. Planning the Retail Communication Program
Retailers establish objectives for their communication programs to provide
direction for people implementing the program, as well as a basis for evaluating its
effectiveness. Some communication programs can have a long-term objective, such as
creating or altering a retailer’s brand image. For example, Bob’s Discount Furniture
determined that it really needed to reinvent its image, to prevent consumers from thinking
that it offered discount or cheap products, as opposed to quality furniture at a discount.
So it mounted a multipronged approach, including an augmented reality (AR) app that
allows users to virtually place furniture available through Bob’s in representations of
their rooms at home. A parallel campaign explicitly deals with the idea that, because of
the retailer’s name, it must sell cheap furniture. An animated character, Lil Bob, appears
in the advertisements, describing the company’s philosophy that the discount is what
shoppers get from Bob, not a description of the furniture. Rather than emphasizing
“discount furniture,” the spots try to convince shoppers that the key terms in the retailer’s
name are “Bob’s discount.
Even if retailers’ overall objective is to generate long- and short-term sales and
profits, they often use communication objectives rather than sales objectives to plan and
evaluate their communication programs. Communication objectives are specific goals
related to the retail communication mix’s effect on the customer’s decision-making
process.
In this hypothetical example, most people know about the store and its offering.
The major problem confronting Safeway is the big drop between knowledge and
favorable attitudes. Thus, the store should develop a communication program with the
objective of increasing the percentage of customers with a favorable attitude toward it. To
effectively implement and evaluate a communication program, its objectives must be
clearly stated in quantitative terms. The target audience for the communication mix needs
to be defined, along with the degree of change expected and the time period during which
the change will be realized.
For example, a communication objective for a Safeway program might be to
increase the percentage of customers within a five-mile radius of the store who have a
favorable attitude toward the store from 45 to 55 percent within three months. This
objective is clear and measurable. It indicates the task that the program should address.
The people who implement the program thus know what they’re supposed to accomplish.
An important source of the communication budget is cooperative (co-op)
advertising programs. A cooperative (co-op) advertising program is a promotional
program undertaken by a vendor and a retailer working together. The vendor pays for
part of the retailer’s promotion but dictates some conditions. For example, Best Buy and
Sony might share the expenses for retail ads that feature Sony digital TVs. In addition to
lowering costs, co-op advertising enables a retailer to associate its name with wellknown
national brands and use attractive artwork created by those brands.
Marginal analysis is based on the economic principle that firms should increase
communication expenditures as long as each additional dollar spent generates more than
a dollar of additional contribution. To illustrate marginal analysis, consider Diane West,
the owner and manager of a specialty store selling women’s business clothing. Her
analysis to determine how much she should spend next year on her communication
program.
The objective-and-task method determines the budget required to undertake
specific tasks to accomplish communication objectives. To use this method, the retailer
first establishes a set of communication objectives and then determines the necessary
tasks and their costs. The total of all costs incurred to undertake the tasks is the
communication budget.
In addition to defining her objectives and tasks, West rechecks the financial
implications of the communication mix by projecting the income statement for next year
using the communication budget. This income statement includes an increase of $25,000
in communication expenses compared with last year. But West believes this increase in
the communication budget will boost annual sales from $500,000 to $650,000. According
to West’s projections, the increase in communication expenses will raise store profits.
The results of both the marginal analysis and the objective-andtask methods suggest a
communication budget between $55,000 and $65,000.
The previous two methods set the communication budget by estimating
communication activities’ effects on the firm’s future sales or communication objectives.
The rule-of-thumb methods discussed in this section use the opposite logic. They use past
sales and communication activities to determine the present communication budget.
When using the affordable budgeting method, retailers first forecast their sales
and expenses, excluding communication expenses, during the budgeting period. The
difference between the forecast sales and expenses plus the desired profit is then
budgeted for the communication mix. In other words, the affordable method sets the
communication budget by determining what money is available after operating costs and
profits are subtracted.
The percentage-of-sales method sets the communication budget as a fixed
percentage of forecast sales. Retailers use this method to determine the communication
budget by forecasting sales during the budget period and then applying a predetermined
percentage to set the budget. The percentage may be the retailer’s historical percentage or
the average percentage used by similar retailers.
After determining the size of the communication budget, the third step in the
communication planning process is to allocate the budget. In this step, the retailer decides
how much of its budget to allocate to specific communication elements, merchandise
categories, geographic regions, or long- and short-term objectives. For example, Dillard’s
must decide how much of its communication budget to spend in each area where it has
stores: Southeast, Mid-Atlantic, Southwest, Midwest, and West Coast. Michaels decides
how much to allocate to merchandise associated with different crafts. A sporting goods
store owner-manager must decide how much of the store’s $2,250 communication budget
to spend on promoting the store’s image versus generating sales during the year and how
much to spend on advertising and special promotions.
Hypothetically, imagine Fabulous Fromage is a specialty import cheese shop,
located just outside New York City. The store’s appearance combines the ambience of a
French café with the conveniences of a modern retailer; most of its merchandise is
imported from France and a few other renowned cheese-making regions around the
world.
Fabulous Fromage’s target market is young, welleducated men and women, aged
30 to 40 years, who are interested in food and wine. As noted previously, the owner and
marketing/sales associate believe that personal selling is critical to this sophisticated
target market. Therefore, they have decided to concentrate their limited budget on a
specific segment and use electronic media to generate business through this newly
launched Famous Fromage website.
