Is customized pricing more effective than a national strategy?
Thursday, May 02, 2019
Pricing can vary as much as opinions. Sometimes, companies sell identical goods at different prices in different parts of the country.
But is this the best approach, or should retailers follow a national pricing strategy? And what factors should be considered when determining a pricing strategy?
Location-based pricing is profitable
"In theory, it is always more profitable to implement price differentiation strategies if possible," according to Fei Gao, an assistant professor of operations and decision technologies at Indiana University’s Kelley School of Business.
Gao says that location-based pricing makes sense because people in different locations may have different preferences and/or buying power. "For example, people who live in Manhattan clearly can afford a much higher product price than many Americans who live in midsize cities or even rural areas," he says.
However, just because you can implement price differentiation strategies doesn’t necessarily mean that you should. Gao says companies need to carefully consider a consumer’s reaction to this type of strategy. "People may get confused — and even upset — after finding out that the firm is charging them a different (especially higher) price for the same product."
Profits vs. perception
Gao notes that the pricing issue has become even more important now that consumers can turn to the internet and social networking sites to research prices and share pricing information.
To avoid potential negative public reaction, he recommends setting the same list price everywhere. "The loss of some profit margin is much less harmful to a firm compared to a potential PR crisis, especially given that social networking websites/apps have made the dissemination of (bad) word of mouth much easier."
A 2017 study by economists at the University of California, Berkeley and Stanford found that food, drug, and mass retail stores were using a national pricing strategy that resulted in poorer households paying 0.7% more than they would with customized pricing.
This national strategy also resulted in wealthier households paying 9% less — which obviously reduces profits. The study’s authors speculate that store managers may be hesitant to change prices because of potential backlash and competition from Amazon.
Creative location-based solutions
However, Gao notes that that are clever ways to exploit the consumer heterogeneity in different locations. For example, he says companies can vary their product assortments depending on location. "For instance, they can put higher-end products in the Manhattan store while selling ‘regular’ products in other places."
Another option is to run special promotions at different locations while keeping the list price the same. "People will be less upset about the price difference when there is a legitimate reason behind it," Gao says.
Other pricing strategy factors to consider
Retail industry is in an omnichannel era, and Gao explains that companies have many different channels (for example: desktop, stores, mobile) that they can use to reach their customers. "A lot of research — including ours — has shown that customers behave differently in different channels, even if they are in the same geographical location."
However, Gao is also against charging different prices on different channels, since consumers do have access to these various channels. "For example, a shopper in a store can pull out her phone and check the price online easily," he says. A loyal customer who sees a higher price for the same product may turn into a former customer.
Creative channel-based solutions
On the other hand, there are also ways to take advantage of customer heterogeneity on different channels without causing negative reactions.
"Special channel-specific coupons may work," Gao says. "For example, Macy’s used to have coupons that can only be redeemed in-store."
Another option is to consider geotargeting. "An example of this would be sending coupons to consumers’ smartphones based on their geolocation," Gao explains.
Yet another option is to provide different services in different channels. "For example, many online retailers offer free shipping if a customer’s order size exceeds a certain threshold — like $25 on Amazon.com."
Research by Gao and his peers reveals that customers on desktop and mobile channels respond differently given the same free shipping threshold. "This implies that firms can offer different free shipping services on desktop and mobile channels," Gao says.
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