03 Feb Demand Based Pricing
What is the best price a retailer can charge for his product?
One of the most difficult, yet important aspect, a retailer must decide as an entrepreneur is how much to charge a product. While there is no one single right way to determine pricing strategy, fortunately there are some guidelines that will help to take this crucial decision.
There are certain pricing guidelines such as competition-based pricing, cost-plus pricing, marginal-cost pricing, demand based pricing, supply based pricing, etc which sets thumb rule to decide price. These principles are specific to the characteristics of the product and the prevailing market condition.
Retailers face the complicated task of setting and changing prices for many items they carry. A typical grocery store in the United States now carries around 31,000 items in hundreds of product categories (Kahn and McAlister 1997). Each week, a retailer changes prices on over 4500 items (Levy et al. 1998). Besides the sheer number of price change possibilities, the considerations that enter the retailer pricing decisions have become very complex.
Sophisticated demand forecasts based on scanner data, a wide variety of manufacturer discounts, the push towards category management, and marketing intelligence on competing retailers’ prices may all matter, and have been incorporated in recent analytical research (e.g., Basuroy et al. 2001, Kim and Staelin 1999, Wedel et al. 2004). Most recently, Nijs, Srinivasan, and Pauwels (2006) find that when retailers rely on past prices to set future prices (i.e., past-price dependence, price stickiness, or price inertia), lower category margins are observed, while demand-based pricing is associated with higher category margins.
Often we see many articles speaking about different pricing strategies related to advantages, reasons behind using specific strategies and so on. Out of all these, the arguable demand based pricing, suites retailers with the aim of increasing his profit.
Let us see some of the advantages of demand based pricing for a retailer:
1. In setting retail prices of brands in categories with higher purchase frequency.
2. In setting retail prices of brands in categories with larger number of SKUs.
3. In setting retail prices of brands in high-growth categories.
4. In setting retail prices of brands in storable categories.
5. In setting retail prices of brands with greater share of the retailer private label.
6. In setting retail prices of brands with greater product-line breadth.
7. In setting retail prices of high-share brands.
8. In setting retail prices of brands with higher demand sensitivity.
9. In setting retail prices of brands in expensive categories.
10. In setting retail prices for products with deep discounts from the manufacturer.
Companies who are well versed and have strong understanding on these principles classify the conditions under which retailers rely more on demand-based pricing. Our insights offer great opportunity for retailers to evaluate their pricing structure and help them to arrive at quick logical decisions.
1. Basuroy S., Murali K Mantrala and Rockney G Walters. 2001. The Impact of Category
Management on Retailer Prices and Performance: Theory and Evidence. J. Marketing 65
(October), 16-32.Benkwitz, Alexander,
2. HelmutKahn, Barbara E., Leigh McAlister. 1997. Grocery Revolution: The New Focus on theConsumer, Addison-Wesley Pub. Co, Reading, MA.
3. Levy, Daniel, Mark Bergen, Shantanu Dutta, Robert Venable. 1998. Price Adjustment at
Multiproduct Retailers. Managerial and Decision Economics. 19 81-120.
4. Nijs, Vincent, Shuba Srinivasan, Koen Pauwels 2006. Retail-price drivers and retailer profits. Marketing Sci., forthcoming.