December 14, 2007
Price Variations: Retail Realism or Rip-Off?
By Bernice Hurst, Managing Director, Fine Food Network
Over the past several years, complaints have reverberated around the UK about so-called clone towns where all the shops are the same as in every other town. According to a recent investigation by the Sunday Telegraph, however, this does not ensure that prices are the same wherever you shop. Apparently shoppers selecting certain popular Christmas presents “are being charged up to double the price for the same goods in different branches of some chain stores,” the newspaper found.
Toys, books, perfume and DVDs were checked in ten branches of each of twelve stores including such well-known names as WH Smith, John Lewis, HMV and Currys. Some stores confirmed that they deliberately varied prices to “compete with local markets.”
Gill Barr, marketing director of John Lewis, described it as “retail realism” although WH Smith said it used the price changes in “trial promotions” that would help it to make pricing decisions “for next Christmas.”
The National Consumer Council said shoppers would be “appalled” to learn that they can pay more for the same present from the same store in a different city. “The only upside of the fact that so many of our High Streets have the same shops is that prices can be consistent, but that is clearly not happening and people are being ripped off.”
A spokesman for Consumer Direct, the Government-funded watchdog, pointed out that it could be unfair or possibly illegal if “they have claimed in national advertisements that the prices will be the same.” He added that complaints would be passed to trading standards officers whose spokesperson, in turn, said the price variations were “fraught with problems” for retailers as “some customers may well feel they are being misled.”
Of course some customers might be pleased to find both products and prices to suit them, seeing more realism than rip-off in the variations.
Discussion Questions: Does it make sense for retailers to sell the same goods for different prices in different areas? Is this good or bad practice? How aware are consumers of this practice?
[Author’s comment] You have to wonder how many consumers know (or care) about this. Many check prices on the internet but even if they discern variations from one branch to another, they are hardly likely to drive lengthy distances to save a few pounds. What it may do is increase even more the incidence of online spend.
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I’m thinking much ado about nothing. A common practice that may net higher profits (in upscale areas) and better sales (in other areas). As long as they are not advertising a price point, it’s the retailers’ job to charge what the market will bear.
Econometric models of retail demand you not only identify differences in price sensitivities across geographical regions but leverage them to ‘fine-tune’ pricing by zones, or even determine ‘price zones’. In fact we presented research that demonstrated how price sensitivities are similar within store groups or ‘clusters’, but also how these price sensitivities can be leveraged to predict how consumers will respond to pricing changes in stores within similar clusters. See: A Three-Stage Model for Forecasting Store-Level Consumer Demand.
But our research indicates that price sensitivity is not overall high or low for different clusters, but certain categories in one cluster would have high sensitivity and others will have a lower sensitivity. This is just saying that consumers in different areas have different consumption preferences and retailers could potentially leverage these differences. That said, usually stores with overlapping trade-areas would belong to the same cluster, so pricing based on this approach would not result in a consumer seeing two different prices in different stores, but that is not saying retailers aren’t doing this, and it is not very advisable!
Zone pricing is a reality, and as margins across all classifications continue to narrow, an increasing necessity. It’s particularly noticeable in the grocery category, where prices can differ within the same chain from store to store based on the level of competition in each market.
In the good old USA, many chains have different pricing zones. At one time, I believe, Kroger had 5 different pricing zones in Atlanta, GA. This was before the ready availability of computing. This was all handled from division headquarters by the “mainframe.”
In today’s environment, I would suspect that each category manager prices “his products” on a store by store basis based upon movement, competitive factors, store operating cost, etc. I would suspect that uniform pricing across all locations has not been a reality since the early days of A&P. Remember, investors expect managers to maximize profit with an eye toward preserving the good name of the business. It’s not a social welfare project!
Rent, real estate taxes, utility costs… these vary widely by region so it makes sense to vary prices in order to keep the same profit margin (regardless of competition). In fact, I’m surprised that any retailer can offer a national price available to all Americans, because whatever “average” price is chosen will always seem more like a bargain to New Yorkers or Californians and more like highway robbery to Kansans. Just look at the price of a Big Mac across the country.
This has been a common practice of retailers for years. Prices for the same items in a wealthy neighborhood in Chicago may be different than a rural area of Illinois. The price mark up depends on the demographic and median income. It’s an interesting practice and almost a science to make sure that the markups are just high enough for the consumer to bear. Too high, they’ll shop elsewhere, too low, profits are lost…kind of sounds like Goldilocks!
Many retail chains use zone pricing software to maximize their gross margins. Why take deep markdowns in a cold weather zone if the sell-through of overcoats is terrific at full price? Why should a store “meet competition” at all locations if one location is 1,000 yards from a loss-leader competitor and another location is 25 miles away? Furthermore, many retailers (J.C. Penney, Staples) price differently on the internet compared to their bricks and mortar locations. The latter uses the customer’s zip code to price its online assortment. And many franchise fast food locations don’t participate in national price point promotions. How many McDonald’s at airport locations sell the dollar meals?
It’s a long term practice that is most notable at the gas pump. How many different prices do you see for the same brand of gas within a two mile area? The public just seems to accept it.
Stores need to have price zones for various reasons. In poor low income areas they need high prices to offset higher operating costs such as shoplifting, security, and insurance.
Sometimes competition such as having a Wal-Mart nearby will require retailers to lower prices a bit. Other times a retailer will intentionally lower prices simply to drive out a competitor. Or raise prices to take advantage of the lack of competition.
One of the only exceptions I’ve seen is Aldi. They seem to have the same prices at every store regardless of its location. Perhaps they have found that is it simply more efficient to do so. However, Aldi is already lower priced than Wal-Mart, they don’t need much extra security, even in difficult areas, and they don’t get into any duels where they are trying to put someone out of business. As long as you can create a protective bubble then you can have consistent pricing.
It is astonishing how many retailers have adopted chain-wide, national pricing as one of their core principles. To my mind, the only things the practice has going for it are:
1. It’s easy;
2. It enables chain-wide, national price promotion.
On the other hand, it places the national-price retailer at a severe disadvantage from many other perspectives. Competitively, the retailer must price against the most aggressive competitor. In markets where that competitor is not active, the retailer is priced unnecessarily low.
The primary reason the practice is wrong-headed is that it costs precious margin dollars. Every chain retailer knows that a garment can do very well in California, but just bomb in Iowa. Why markdown the California stores because the Iowans don’t like it? Similarly, if a garment comes in seven colors, the sell through on the bright colors might be great while the darker colors lag. Why mark down the good selling colors?
Every chain-wide markdown recommendation report should come with a companion report showing the strong selling store and/or colors that shouldn’t be marked down.
Yes, but do it very fast. E-competition and E-ducated consumers can break it down. But…convenience is worth money.
This is basic Retailing 101. You get what the market will bear. This is as it has been since the first general stores were in operation. Sometimes the customer just has to realize that this is the way it is.
To speak to Mr. Kleinman’s comments about gas stations with differing pricing, the public does know, but as far as accepting, I am not so sure.
I have been in the C-store industry for 23 years. A common question that is asked of me by Family, Friends, whoever is Why are the fuel prices different at such and such? My response is that is based on competition, that often the low price is sold at or below cost. The highest price is usually were it “should” be to operate profitably. Or at least that is the way it is in the C-store industry.
Yes it is a common practice but most consumers don’t like or understand a policy of charging different prices in different areas.
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I’m thinking much ado about nothing. A common practice that may net higher profits (in upscale areas) and better sales (in other areas). As long as they are not advertising a price point, it’s the retailers’ job to charge what the market will bear.
Econometric models of retail demand you not only identify differences in price sensitivities across geographical regions but leverage them to ‘fine-tune’ pricing by zones, or even determine ‘price zones’. In fact we presented research that demonstrated how price sensitivities are similar within store groups or ‘clusters’, but also how these price sensitivities can be leveraged to predict how consumers will respond to pricing changes in stores within similar clusters. See: A Three-Stage Model for Forecasting Store-Level Consumer Demand.
But our research indicates that price sensitivity is not overall high or low for different clusters, but certain categories in one cluster would have high sensitivity and others will have a lower sensitivity. This is just saying that consumers in different areas have different consumption preferences and retailers could potentially leverage these differences. That said, usually stores with overlapping trade-areas would belong to the same cluster, so pricing based on this approach would not result in a consumer seeing two different prices in different stores, but that is not saying retailers aren’t doing this, and it is not very advisable!
Zone pricing is a reality, and as margins across all classifications continue to narrow, an increasing necessity. It’s particularly noticeable in the grocery category, where prices can differ within the same chain from store to store based on the level of competition in each market.
In the good old USA, many chains have different pricing zones. At one time, I believe, Kroger had 5 different pricing zones in Atlanta, GA. This was before the ready availability of computing. This was all handled from division headquarters by the “mainframe.”
In today’s environment, I would suspect that each category manager prices “his products” on a store by store basis based upon movement, competitive factors, store operating cost, etc. I would suspect that uniform pricing across all locations has not been a reality since the early days of A&P. Remember, investors expect managers to maximize profit with an eye toward preserving the good name of the business. It’s not a social welfare project!
Rent, real estate taxes, utility costs… these vary widely by region so it makes sense to vary prices in order to keep the same profit margin (regardless of competition). In fact, I’m surprised that any retailer can offer a national price available to all Americans, because whatever “average” price is chosen will always seem more like a bargain to New Yorkers or Californians and more like highway robbery to Kansans. Just look at the price of a Big Mac across the country.
This has been a common practice of retailers for years. Prices for the same items in a wealthy neighborhood in Chicago may be different than a rural area of Illinois. The price mark up depends on the demographic and median income. It’s an interesting practice and almost a science to make sure that the markups are just high enough for the consumer to bear. Too high, they’ll shop elsewhere, too low, profits are lost…kind of sounds like Goldilocks!
Many retail chains use zone pricing software to maximize their gross margins. Why take deep markdowns in a cold weather zone if the sell-through of overcoats is terrific at full price? Why should a store “meet competition” at all locations if one location is 1,000 yards from a loss-leader competitor and another location is 25 miles away? Furthermore, many retailers (J.C. Penney, Staples) price differently on the internet compared to their bricks and mortar locations. The latter uses the customer’s zip code to price its online assortment. And many franchise fast food locations don’t participate in national price point promotions. How many McDonald’s at airport locations sell the dollar meals?
It’s a long term practice that is most notable at the gas pump. How many different prices do you see for the same brand of gas within a two mile area? The public just seems to accept it.
Stores need to have price zones for various reasons. In poor low income areas they need high prices to offset higher operating costs such as shoplifting, security, and insurance.
Sometimes competition such as having a Wal-Mart nearby will require retailers to lower prices a bit. Other times a retailer will intentionally lower prices simply to drive out a competitor. Or raise prices to take advantage of the lack of competition.
One of the only exceptions I’ve seen is Aldi. They seem to have the same prices at every store regardless of its location. Perhaps they have found that is it simply more efficient to do so. However, Aldi is already lower priced than Wal-Mart, they don’t need much extra security, even in difficult areas, and they don’t get into any duels where they are trying to put someone out of business. As long as you can create a protective bubble then you can have consistent pricing.
It is astonishing how many retailers have adopted chain-wide, national pricing as one of their core principles. To my mind, the only things the practice has going for it are:
1. It’s easy;
2. It enables chain-wide, national price promotion.
On the other hand, it places the national-price retailer at a severe disadvantage from many other perspectives. Competitively, the retailer must price against the most aggressive competitor. In markets where that competitor is not active, the retailer is priced unnecessarily low.
The primary reason the practice is wrong-headed is that it costs precious margin dollars. Every chain retailer knows that a garment can do very well in California, but just bomb in Iowa. Why markdown the California stores because the Iowans don’t like it? Similarly, if a garment comes in seven colors, the sell through on the bright colors might be great while the darker colors lag. Why mark down the good selling colors?
Every chain-wide markdown recommendation report should come with a companion report showing the strong selling store and/or colors that shouldn’t be marked down.
Yes, but do it very fast. E-competition and E-ducated consumers can break it down. But…convenience is worth money.
This is basic Retailing 101. You get what the market will bear. This is as it has been since the first general stores were in operation. Sometimes the customer just has to realize that this is the way it is.
To speak to Mr. Kleinman’s comments about gas stations with differing pricing, the public does know, but as far as accepting, I am not so sure.
I have been in the C-store industry for 23 years. A common question that is asked of me by Family, Friends, whoever is Why are the fuel prices different at such and such? My response is that is based on competition, that often the low price is sold at or below cost. The highest price is usually were it “should” be to operate profitably. Or at least that is the way it is in the C-store industry.
Yes it is a common practice but most consumers don’t like or understand a policy of charging different prices in different areas.