Should uniform pricing be the norm for large chains?

Discussion
Photo: @eddieespinal via Twenty20
Apr 08, 2019
Tom Ryan

A new Columbia Business School study found that, depending on the competitive landscape a retailer faces, a national pricing strategy may now be more profitable than a strategy that tailors prices locally.

Researchers analyzed 11 million store-level digital camera sale observations across 1,600 geographic markets. Profits of national and local pricing policies were monitored across two retailers employing a national approach and a third that followed a local strategy.

The findings concluded that:

  • National pricing boosts profitability for large chains: Large retailers that operate in competitive markets don’t have much to gain from switching to a local model because it can intensify competition, which could lead to lower prices and hurt profitability.
  • Pricing depends on local competitiveness: Chains facing less competition should tailor their prices and focus on customization.
  • National pricing can benefit some consumers: Because the national price would fall between the lower price in competitive markets and the higher price in non-competitive markets, consumers in non-competitive markets, which are often rural, would benefit from lower prices.

A working paper written by researchers from UC Berkeley and Stanford updated in March found that most U.S. food, drugstore and mass merchandise chains charge nearly uniform prices across stores. The study found that uniform pricing ends up costing retailers nearly seven percent of profits on average because it prevents them from selling items for higher prices to more affluent consumers. It also results in reduced volume among lower-income shoppers. Uniform pricing also “may significantly increase the prices paid by poorer households relative to the rich.”

Traditionally, pricing has been set by retailers, especially grocers, based on the peculiarities of the local market. Recent research has shown that more stores are using uniform pricing as chains have spread across states and sought to match online and offline prices.

A Harvard research paper that came out last October found that retailers are changing prices more frequently while also employing more uniform pricing online and offline. Amazon.com was found likely to benefit from increased uniform pricing since shoppers would have less reason to comparison shop.

DISCUSSION QUESTIONS: What do you see as the relative strengths and weaknesses of adopting uniform pricing vs. localized strategies? Do you think one — uniform or local — is generally more effective than the other when it comes to creating the right mix of volume and profits?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Any time there is a variability in price for no reason other than the location, you will get consumers who will try to game it. "
"And how do you set that, “national price?” Is it keyed off New York City or Owlnest, Wyoming?"
"I have been saying for about six years that zone pricing is dead. It’s irritating for consumers and costs more money to execute in stores."

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27 Comments on "Should uniform pricing be the norm for large chains?"


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Mark Ryski
BrainTrust

While both approaches have merit – uniform pricing is much easier to manage and localized pricing should deliver the optimal price – ultimately, optimal pricing will more likely be achieved by setting prices specific to market which accounts for local market variations. Price optimization tools and the availability of data make this easier to accomplish today than ever before. That said, price setting is still challenging. While it has become more scientific, there’s still an element of art involved.

Nikki Baird
BrainTrust
You can’t really have this discussion without knowing two things: what is the overall inventory availability of the item? And how much does it cost to ship it? Looking at digital cameras – that is a high-value item that costs relatively little to ship. So it’s easy for that to be something that ought to be priced nationally because if someone finds a lower price somewhere else, it doesn’t cost that much to get it shipped. Any time there is a variability in price for no reason other than the location, you will get consumers who will try to game it. I agree that uniform pricing can stifle some consumers who get priced out of the market and also leaves money on the table with more affluent consumers who would pay more. However, there’s something to be said for a third way here, which is yes, a high uniform national price, and then “your price” – offering discounts to consumers based on who they are, how they behave, and what their expected lifetime value is.… Read more »
Bob Amster
BrainTrust

If merchandise assortment and even the size footprint need to be localized – and they do – then so should pricing. Having a presence directly across the street from one’s biggest competitor may call for store pricing within the low-limit gross margins set by the retailer.

David Weinand
BrainTrust

I agree Bob – and another example – in high cost markets like NY or SFO, it’s really difficult to offer uniform pricing as margins would be hurt considerably.

Min-Jee Hwang
Guest

In most cases, a one-size-fits-all approach doesn’t work too well. For pricing, it’s likely more beneficial to be able to customize pricing depending on the market, the consumers, and the business needs. Uniformed pricing can remove some of the power from staff on the ground to set prices based on what conditions are around them.

Ed Rosenbaum
BrainTrust

Uniform pricing should be the norm as long as the pricing is based on an average rather than the highest acceptable. I went into an office supply chain that is closing that particular location. They were closing out everything on the shelves. Yet I was in the same store in a different location (15 miles apart) during the same week and found pricing to be lower. Ask a manager and they shrug their shoulders. I do not think the economic statistics of an area should determine the pricing.

Shep Hyken
BrainTrust

A consistent price across channels and stores can create confidence. Anything that is inconsistent erodes confidence. Will the customer wonder, “Could I get it less expensive online or at another store?” A price-matching strategy allows for flexibility.

Mark Heckman
BrainTrust
Most savvy retailers have aggressively deployed multiple “price zones” even within the confines of the smallest of geographic areas in order to “optimize” margin. In other words, be cheap only where you must and take margin wherever else you can as long as you are not impairing sales. In fact, the essence of major investments that retailers have made in price optimization tools is to do just that. Enter the world of online pricing, where every customer can compare every price, not only among competing retailers, but also within the retailer itself. Nothing will alienate a shopper more quickly than paying more for something at one store and then finding out that another store, even within the same retail chain is offering it at a lower price than you paid. Further, in an omni-channel environment, pricing is more transparent and accordingly so are a retailer’s pricing inconsistencies. While it may still be possible to differentiate pricing between online and bricks and between brick’s pricing zones, retailers now must exercise extreme caution when doing so. It… Read more »
Gib Bassett
BrainTrust

I liked Bob Amster’s comment. He’s talking about the elephant in the room here which is peronsalization of the CX, which consists of numerous elements including price. It’s the optimization of the personalized experience that is the challenge – which isn’t easy, but obviously worth exploring. You can look at price in a silo and all the related factors (competitors, demand), but I think future retail winners are going to balance price with other CX elements like as Bob suggests assortment, store size/format, online/offline fulfillment, loyalty, offers and content.

Rich Kizer
BrainTrust

Uniform pricing is a scary place to be. I have seen our “everyday low prices” strategies bloom and bust, or at a minimum, flex. It’s a competitive market with customers exposed in seconds to pricing on their devices. In my long range of time in retail, I have seen this uniform strategy emerge and then forced to change in markets where competitors got aggressive. And competitors do! And today, that’s every market. So what do those retailers employing uniform pricing do when competition gets tough? Not many choices here. In a free market environment, I don’t think there will ever be long-term uniform pricing implementations.

Dick Seesel
BrainTrust

Most large chains have the IT capacity for localized pricing based on competitive and other market conditions — but does that make it right? The downside is that consumers have to work harder to verify that they are getting “the best price” from one physical location to another, and (more importantly) compared to the company’s e-commerce site. The margin benefit of localized pricing may be offset by the erosion of trust and credibility between retailer and shopper.

Paula Rosenblum
BrainTrust

I have been saying for about six years that zone pricing is dead. It’s irritating for consumers and costs more money to execute in stores.

Once mobile commerce came along, it marked the death knell for zone, or even channel pricing. This is not rocket science. It’s a retail reality.

Steve Montgomery
BrainTrust

In brick-and-mortar retailing one store size does not fit all markets nor does one pricing strategy. As other have pointed out localized pricing used to be far more difficult to implement and maintain. Today there are price optimization software companies that can provide the backbone to handle this function.

Jeff Sward
BrainTrust

I think there are way too many variables to say one rule is better than the other. Type of retailer and type of product all play a role. As the article says, branded apparel available in the mall and on the internet pretty much demands uniform pricing. (Even if Target gets mischievous if it knows you’re in the parking lot…not cool.) What I do thinks makes sense is variable pricing at the end of the season based on locale and weeks of supply. Its September 1st in Boston and Summer inventory has to be cleared asap to make room for Fall/Winter. Deep markdowns are necessary. The stores in Miami shouldn’t have to cut as deep. Weeks of supply drives the decision, not some macro rule.

Anne Howe
BrainTrust

Local market pricing strategies are almost a must in the grocery business, and make sense to shoppers. What does NOT make sense to shoppers is online pricing that’s way off base versus in-store pricing, especially in non-foods and especially at national retailers. Retail today cannot live profitably when shoppers are confused and develop a level of distrust. More effort toward customized “by shopper behavior” pricing strategies need to be implemented with the help of technology. Personalization is a path to more profitable sales.

Ryan Mathews
BrainTrust

Are they serious? Of course it is more profitable … but is it more competitive? How can they advocate a national price AND suggest customization in less competitive markets? And while we are at it, how many companies lower prices in the absence of competition? And how do you set that, “national price?” Is it keyed off New York City or Owlnest, Wyoming? Good theory, I’m just not sure it would work out in practice.

Gene Detroyer
BrainTrust

Dynamic pricing works for airlines and hotels and is a great model for profitability. But it is easier when you are selling one seat or hotel room rather than a myriad of goods.

In today’s connected world, where a large national chain has a national website with prices, local prices should reflect the online price, which negates the “local” pricing.

Rob Gallo
BrainTrust

It really depends on the category, the competition and whether your organization has the ability to support a localized or situation-based pricing strategy. Even though we have the tools and the data to drive localized pricing, many retailers (depending on the channel) don’t have the organizational structure to execute. Convenience stores would never price fuel nationally, but have long considered localized pricing for merchandise to not be worth the effort.

Rob Gallo
BrainTrust

To add to my comments above. We’ve implemented price optimization tools along with the org structure and change management plan. The ROI is definitely there. Consumer backlash is minimal as long as the pricing strategies make sense and do not insult. Having tools that can manage all of the business rules (think alcohol and tobacco pricing/taxes) can be a huge win by itself.

Jasmine Glasheen
Staff

Pricing is one of the primary ways that big box stores compete. Amazon changes prices on its products every 10 minutes. So how can other chains remain competitive without similar capabilities?

Peter Charness
BrainTrust

Pricing is so transparent these days, easily discovered with a web check. Pricing needs to be seen as “fair” and trustworthy. No one minds a bargain, but everyone hates overpaying. I think uniform pricing will prevail, but eventually consumer specific pricing will become routine, especially for non-grocery, non-HBA locations and products.

Ken Morris
BrainTrust

Uniform pricing across the enterprise is definitely the easiest to execute for retailers, but it may not result in the most profitable outcome. There are a lot of variables that impact product profitably: shipping costs by location (e.g., it costs a lot more to ship to Alaska and Hawaii), supply and demand, and customer loyalty and lifetime value of the customer. Consumers are getting accustomed to variable/dynamic pricing with experiences with airlines, hotels, Uber and ballpark ticket pricing that fluctuates based on supply and demand. While it requires much more sophisticated pricing models to execute variable pricing, it is getting easier with artificial intelligence-based applications that and analyze and predict the right price based on multiple factors.

Eventually, for many higher priced products, we will see a move to personalized pricing.

Ralph Jacobson
BrainTrust

I was a part of a local retailer whose 150+ stores comprised 21 price zones. 21 zones … in the same city! This was in the ’70s and ’80s. I think today’s smaller world, due to ubiquitous access to product info via multiple channels including pricing, lends itself to uniform pricing at least locally, if not nationally. I also think there are many other ways to maximize the revenue and margin curves, rather than sending confusing messages to the target audience.

Doug Garnett
BrainTrust

It makes sense that national pricing would generally be a smart strategy. Included in our equation needs to be the costs merely executing a localized strategy — costs for data, IT, merchants, and at the store level.

I am quite cautious about the Stanford study — it’s pretty shallow to just say “well, you might be able to charge more to more affluent customers.” At what cost? What complexities impede doing that? There are not “absolute” ways to determine who those customers are — so we need to hedge the profit potential with missing most of them and alienating the accidental non-affluent who shops in those stores.

There are places where clever local pricing will help. But we need to be cautious. Localized pricing is a complicated answer unlikely to deliver enough return for the complicated effort.

Sterling Hawkins
BrainTrust

As soon as we all pay the same for airline tickets and credit card interest rates we should look at generalized pricing. Different customers have different economic value and personalization customizes that. There are technological and operational kinks at some retailers that reduce benefits, but that doesn’t mean scrap the program. We should be looking at how to improve it or use technology differently.

Ananda Chakravarty
BrainTrust

Unfortunately, this study, though I’m sure has been well developed, has just too small a sample size to apply to the retail industry, and moreover is tied to an outdated product that has been trending downward since the smartphone (digital cameras).

This product hardly reflects the massive variety of products in today’s market. They looked at three chain stores and two used uniform pricing while the third was localized. The issues in pricing deficiency may have arisen from so many factors including branding and management of the single chain that was examined that used localized pricing. Just not enough data to project this to any part of the retail market except these three chains and digital cameras. Uniform pricing value is dependent on the savings in complexity it eliminates at the risk of potential profits, which I haven’t seen any researchers delve deep enough into — yet.

Ricardo Belmar
BrainTrust

The more easily a consumer can research a price for an item, and have it shipped easily at little or no cost, the more reason that item should have uniform pricing. Certain segments are more immune to this than others, particularly grocery which can be more local in pricing and inventory availability. It comes down to perception by the consumer — once a consumer perceives that pricing is inconsistent from a brand, they will take their shopping elsewhere as they will perceive the brand as untrustworthy.

wpDiscuz
Braintrust
"Any time there is a variability in price for no reason other than the location, you will get consumers who will try to game it. "
"And how do you set that, “national price?” Is it keyed off New York City or Owlnest, Wyoming?"
"I have been saying for about six years that zone pricing is dead. It’s irritating for consumers and costs more money to execute in stores."

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