What is the best price a retailer can charge for their product?

One of the most difficult, but important, aspects that a retailer must decide as an entrepreneur is how much to charge for a product. While there is no single correct way to determine your pricing strategy, fortunately there are some guidelines that will help you make this crucial decision.

There are certain pricing guidelines, such as competition-based pricing, cost plus cost pricing, marginal cost pricing, demand-based pricing, supply-based pricing, etc., that establish a rule for decide the price. These principles are specific to the characteristics of the product and the prevailing market conditions.

Retailers face the difficult task of setting and changing the prices of many of the items they sell. A typical grocery store in the United States now sells about 31,000 items in hundreds of product categories (Kahn and McAlister 1997). Each week, a retailer changes the prices of more than 4,500 items (Levy et al. 1998). In addition to the large number of price change possibilities, the considerations that go into retailers’ pricing decisions have become very complex.

Sophisticated demand forecasts based on scanner data, a wide variety of manufacturer discounts, the drive toward category management, and marketing intelligence on competing retailers’ prices can be important and have been incorporated into recent analytical research (eg, Basuroy et al. 2001, Kim and Staelin 1999, Wedel et al. 2004). More recently, Nijs, Srinivasan, and Pauwels (2006) found that when retailers rely on past prices to set future prices (i.e., past price dependence, price stickiness, or price inertia), category margins are observed. lower, while based on demand. price is associated with higher category margins.

We often see many articles that talk about different pricing strategies related to the advantages, the reasons behind the use of specific strategies, etc. Out of all these, the debatable demand-based pricing suits retailers with the goal of increasing their profits.

Let’s look at some of the advantages of demand-based pricing for a retailer:

1. In the setting of retail prices of brands in categories with greater frequency of purchase.
2. In setting retail prices for brands in categories with a greater number of SKUs.
3. In the retail pricing of brands in high-growth categories.
4. In setting retail prices for brands in storable categories.
5. In the retail pricing of brands with the largest involvement of the retailer’s private label.
6. In setting retail prices for brands with a broader range of product lines.
7. In the setting of retail prices of large participation brands.
8. In setting retail prices for brands with greater sensitivity to demand.
9. In the retail pricing of brands in expensive categories.
10. In retail pricing of products at deep manufacturer discounts.

Companies that are well-informed and have a strong understanding of these principles rank the conditions under which retailers rely the most on demand-based pricing. Our insights provide a great opportunity for retailers to assess their pricing structure and help them make quick logical decisions.

References:
1. Basuroy S., Murali K Mantrala, and Rockney G Walters. 2001. The impact of the category
Retailer Price and Performance Management: Theory and Evidence. J. Marketing 65
(October), 16-32 Benkwitz, Alexander,
2. HelmutKahn, Barbara E., Leigh McAlister. 1997. Grocery Revolution: The New Focus on the Consumer, Addison-Wesley Pub. Co, Reading, MA.
3. Levy, Daniel, Mark Bergen, Shantanu Dutta, Robert Venable. 1998. Price adjustment in
Multi-product retailers. Management and decision economics. 19 81-120.
4. Nijs, Vincent, Shuba Srinivasan, Koen Pauwels 2006. Drivers of Retail Prices and Retail Profits. Marketing Sci., Forthcoming.