What Are the Pricing Strategies of Supermarkets?
Supermarkets are in the dubious position of providing products that customers need on an everyday basis, while also needing to offer prices that are low and appealing enough to draw customers inside to buy. Supermarket pricing strategies usually balance price enticements with profitable offsets such as higher-margin items to create an overall money-making mix. The broad selections that most supermarkets offer provide ample opportunity to explore ways of luring customers looking for bargains and then generating additional profit from other items that may be purchased out of impulse or convenience.
Loss leaders are usually staples that a store sells at a lower margin than their typical offerings to encourage one-stop shopping. A natural foods grocery may pay a higher wholesale price for toilet paper than a chain grocery, because it does not sell toilet paper in volume, yet its ability to offer toilet paper for a fair price can encourage customers to make the bulk of their grocery purchases at the natural foods store rather than at a conventional supermarket. This loss leader pricing strategy costs the store extra on its toilet paper sales but will probably be worthwhile, because it brings in enough money on sales of additional items to offset the loss.
Supermarkets that offer everyday low pricing typically buy in volume and negotiate the lowest possible wholesale prices from their suppliers. They also use relatively low markups, earning a lower profit percentage per item. Chains such as Wal-Mart and Target build their reputations and their client bases by consistently selling a broad range of products at cheaper prices than their competitors. Groceries that use everyday low pricing strategies tend to handle large volumes of merchandise -- enough to offset their lower profit margins through sheer number of items sold.
Sale pricing showcases specific items, offering them at enough of a discount to lure customers into the store where, if this pricing strategy is successful, they will purchase additional items. Unlike loss leader pricing, which is ongoing, sale pricing is intermittent and short term. Sales are news, and they attract customer attention because they are out of the ordinary. Grocers who use sale pricing often selectively mark up the cost of other items to offset sale prices. Alternately, they may pass on sale prices offered by manufacturers and distributors.
Because price is such an important variable in grocery consumer purchasing decisions, supermarkets closely observe competitor pricing when determining how much to charge for their own products. However, grocers using this approach must make strategic decisions about when it makes sense to undercut competitor pricing. A study conducted by researchers at Ohio State University found that customers are more likely to choose one store over another based on low prices for bananas rather than low prices for orange juice. In addition, a store that has built its reputation on providing quality goods that are worthy of higher prices won't benefit much by lower its prices to match the competition.