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Retailers' Pricing Strategies: Profits in an Economic Downturn9 Oct 08Macroeconomic conditions and indicators can guide retailers in selecting the most appropriate pricing strategies. By combining consumer shopping patterns with the prevailing economic conditions, retailers can decide the optimal timing and length of selected pricing strategies. While shopping for frequently purchased categories (e.g., food and household goods), consumers have an intrinsic preference for "one-stop-shopping" supermarkets because of their convenience and plethora of product offerings. Retailers utilize this shopping behavior in their strategy decisions by offering a "sale" price on selected items and charging a higher price on other items. For a select group of product categories, retailers follow a "loss leader" pricing policy in which items are sold below cost. The lower product price, or "loss leader," pricing policy is designed to attract consumers inside a store; once inside, consumers are more inclined to purchase items that are not on sale. Thus, the profit on the sale of high-priced items more than offsets the loss from a "loss leader" pricing policy. However, during an economic downturn, when consumers are very price conscious, such a pricing policy may not work in favor of retailers. Consumers, faced with economic uncertainty, often change their shopping patterns/strategies and search for "bargains" across stores, instead of buying everything under one roof. In other words, their preference for a "bargain" outweighs their preference for a "one-stop-shopping" strategy, and store loyalty fades. The implications for retailers are to change their pricing strategies in response to the change in consumer shopping patterns during an economic downturn, as a "loss leader" policy may result in a net loss. The main objective of the new pricing policy should be to discourage consumers in their selective search for "bargains" across stores, and offer competitive pricing across all categories. An example of such a policy would be to increase the price of previously marked "loss leader" items and reduce the price of other items. The expected length of the economic cycle can help in deciding the term of such a pricing policy. For example, the current financial crisis and weakness in economic growth will reinforce each other in the near future, dragging the economy into a recession. We expect three consecutive quarterly declines in real GDP, starting with the third quarter of 2008 and the steepest being a 1.5% drop expected in the fourth quarter in 2008. We also expect a rise in the unemployment rate by the end of 2009. With that scenario in mind, retailers should adopt pricing strategies away from a "loss leader" policy until the economy stabilizes.
Source: Global Insight, Inc. By keeping track of important macroeconomic indicators—disposable income, consumer spending, etc.—key forecast scenarios (pessimistic versus optimistic), and the corresponding changes in consumer search behavior, retailers can optimally choose the timing and length of "loss leader" versus other pricing policies.
Source: Global Insight, Inc. by Antonia Prlic and Hemant Sangwan
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