This time of year the loss leader pricing model is a critical pricing tactic utilized by retailers. As discussed in the Setting Price: Part 2 tutorial, loss leader pricing is a form of promotional pricing that principally is used to attract customers to retail stores. Under this approach, retailers intentionally sell products at prices that are below the cost they pay suppliers (e.g., manufacturers) for obtaining the product. In other words, they lose money on each item they sell. The idea is that, while they lose money on this product, they will easily recoup their loss by selling other products that are profitable.
While a useful pricing tactic, some U.S. states have viewed this as a form of predatory pricing, where the low price is not necessarily intended to attract customers, but is designed to drive competitors off the shelf, or possibly, out of business. One state that did not appreciate loss leader pricing is Oklahoma, which not only considered to be illegal but, back in the 1940s they also said retailers had to sell a product at a price that is 6 percent or more above its cost.
Now, this has changed. According to this story, after 72 years retailers are free to engage in loss leader pricing in the state of Oklahoma. At least for some products. There are still limitations when it comes to drugs, gasoline and groceries. Obviously for retailers, this comes just in time for their Black Friday specials.
It has been 18 years since Amazon.com sold its first book and, as a result, altered the face of retailing. Of course, they did not change things overnight. It took several years before they became a prominent retail player and several more before they reached dominating retailer status. If there is a lesson to be learned from Amazon, and many other online retailers, its that technology can change how business is done and how an industry evolves.
Of course, technology is not the only reason retailers have thrived or withered, but anymore it seems to be at the top of the list for what makes for retail success or failure.
This story from Forbes presents a nice summary of a few technologies retailers, both store-based and online-only, are now using to improve the customer experience, which is a key factor in retail success. Technologies discussed include: streamlined checkout, interactive product displays, and augmented reality mobile apps.
While the discussion of the impact of each technology is nicely presented, the story also offers detailed insights from retailing executives. The executives from store-based retailers Lowes and Ikea, and from online retailer Zappos, offers their take on how technology is being used, and the benefits they are experiencing.
On the heels of our Bitcoin post from a few days ago, here is another post dealing with pricing decisions. As we discuss in the Setting Price: Part 1 and the Setting Price: Part 2 tutorials, marketers often consider many different options when arriving at a final price. One set of options falls under the category of psychological pricing, where marketers take into consideration how customers mentally perceive a product's price. One of these psychological pricing methods is the so-called “odd-even” pricing method, where marketers may intentionally set price at a level where customers may perceive the product as offering a better value compared to a competitor’s product that is set slightly higher but at an even number price. For instance, setting the price at $5.95, compared to a competitor’s product that sells for $6.00. Marketers have been taught for years customers not only see a price difference between these two products, mentally some may believe it to be a sizeable difference.
But marketers may want to take another look at this. According to this story, the effect of odd priced items may be less effective than in the past. This is based on academic research focusing on the evolving “pay-what-you-want” pricing model, where marketers allow customers to determine the price. As the story discusses, the majority of customers who make purchases where they determine the price prefer to set a price that is a round number, such at $20 instead of $19.95. The story offers several examples of purchasing situations where this is the case.
To be realistic, the “pay-what-you-want” pricing model is far from being widely used. So whether the results reported in this story can truly apply to other types of purchase situations remains to be seen. In the mean time, the data presented is intriguing.