Tuesday, July 14, 2009

Retailers "Fine Tune" Discount Pricing Strategies

U.S. retailers are getting creative in their discount and pricing strategies, according to reports from multiple news outlets this month. In addition to continuing to follow the schedule of sales - preseason, post season, school's out, school's starting, holidays, etc. - retailers are starting to take a more focused approach on how and where they are applying their discounts and price breaks, all the way down to the individual store level. As The Wall Street Journal recently reported:
"At the Banana Republic store in New York's World Financial Center, a white pleated skirt was on sale for $39.99, marked down from $69. The same skirt was discounted to $33.99 at Banana Republic's SoHo store, just two miles away.

"The $6.00 difference wasn't a mistake. It's part of Banana Republic's parent Gap Inc.'s (GPS) very deliberate move to tailor prices to fit local demand and inventory - right down to the individual store level.

"The payoff: Gap's merchandise margins have either matched or topped year-ago levels in each of the past five months through May..."

Smart strategy? Without doubt. Setting prices differently to meet varying demands in diverse geographic areas is an effective strategy if you can properly manage your discounting and accurately predict changing demand patterns.

We have been publishing numerous articles on our blog and in our publications recently that point to this kind of segmentation in numerous industries - strategies all aimed at encouraging consumers to spend their reduced pools of expendable cash. We have seen demand and dynamic pricing strategies at play in air fare, software systems and professional sporting events. One PPS expert recently published an article (which will be in the July 2009 PPS Newsletter) highlighting how further price segmentation could help the ailing concert industry.

Marketwatch goes on to point out that these strategies, in addition to being developed for clearing inventory, are also being put in place to make up for limited expansion capacity in the current economy:
"Gap isn't alone. Other retailers, including Wal-Mart Stores Inc. (WMT 48.11, +0.28, +0.59%) and Home Depot Inc. (HD 23.58, +0.47, +2.03%) , have taken on or expanded some form of "localized markdowns," rather than slash prices the same amount at the same time across all markets. This helps boost profits whenever items selling well in one region offset the need for deeper discounts somewhere else.

"It allows you to be more surgical and dynamic," said No. 1 home-improvement retailer Home Depot Chief Financial Officer Carol Tome in an interview. "Rather than marking down by entire market, you can use your markdown strategy depending on the sell-through in each store."

"As the weak economy forces retailers to close stores or trim expansion plans, they've scrambled for ways to maximize returns from each existing store, analysts said. How much, when and where to slash prices can make a big difference to the bottom line, especially so soon after having to discount merchandise at least 70% off over the holidays to clear excess stock, analysts said."

Many retailers are also looking to implement "market optimization" software systems to further perfect their discounting and segmentation strategies by more closely targeting pricing by market demand(making it a good time for innovative pricing software systems and consulting bodies to make their mark).

Not all companies are slashing prices just yet. Sony is a great example. Despite threats from Activision - the company known for market leading games such as Guitar Hero World Tour - to pull support for the PS3 if Sony refuses to cut prices, Sony CEO Howard Stringer refuses to cut the price below its current level of $399 in order to meet short term capital goals. Another Sony spokesperson further explained the company's position (reported in USAToday):
"We feel that we're sacrificing the short term to pay dividends in the long term. People are having short-term thinking -- the platform is not even three years old. It was $599; it's now $399. The focus on pricing is something we appreciate, but you have to have the conviction and the confidence that you are on the right path for the long term and ultimately you'll get all the consumers you want."

At least some companies feel that they can still hold true to their value proposition instead of engaging in a price war to attract dwindling consumers. More to come. Warmly, EM

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