Pricing for Profit

Discussion
Oct 23, 2003
George Anderson

By George Anderson

A study conducted by University of Pennsylvania’s Wharton School of Business professor Marshall Fisher and Vishal Gaur of NYU’s Stern School of Business points out the need for retailers to conduct in-store price optimization tests.

The problem, according to a report on the Knowledge@Wharton Web site, is that many retailers are not systematic enough in carrying
out the tests to receive much benefit from them.

Professor Fisher said, “One retailer I worked with found that half the time the products it tested sold better at the higher price, an illogical result that led the company to conclude that the test was invalid.”

In some cases, however, the higher price is the right price, say the researchers.

The two studied how the sales of three products sold in 18 Zany Brainy stores were affected at various price points. The three items tested were a board game, a Phonics traveler and a headset walkie-talkie.

Two of the products, the board game and Phonics traveler, saw sales increase as price points were lowered. The walkie-talkie, however, was purchased more frequently as the shelf price went up.

Professors Fisher and Gaur offer a couple of possible explanations for the walkie-talkie selling better at higher points. Part of it may be lack of familiarity consumers have with the price of these items leading to the assumption that a higher price means a superior product.

Moderator’s Comment: What do retailers need to do to achieve price and profit optimization?

The researchers in this study believe that stores need to engage in more in-store testing, even if there is an inherent conflict in taking this approach.
Professor Fisher said, “Retailers are so action oriented that they often have a bias against testing. It’s not going to help you make this quarter’s numbers; it takes time and
energy; and you know that if you are testing three different prices, two of the prices will be wrong. That will hurt your numbers a little. So there is a cost to testing.”

[George
Anderson – Moderator
]

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