Thursday, January 14, 2010

Steadily Decreasing Discounting is Huge Win for Retail in the Dollar Column

(Excerpt from RST, 1/14/10)

Can Non-Traditional Pricing Strategies Boost Sales?

According to research performed by the University of Miami School of Business Administration, retailers can significantly increase profits simply by altering their pricing strategies.

The research, which included a 30-week field study performed by the school's marketing department, concluded that when the price of a sale item was increased back to its original cost in gradual steps, as opposed to one large jump, overall sales and profits rose dramatically.

Just how much? Some might be surprised. The school is reporting the field study showed a 200% increase in sales and a 55% increase in profits when the strategy (referred to as Steadily Decreasing Discounting or SDD) was used.

In the field study, SDD was tested against two of the most traditional pricing strategies: Everyday Low Pricing (EDLP), which is most commonly used by Wal-Mart and focuses on marketing consistently low prices instead of weekly sales; and Hi-Lo Pricing, which refers to the trend of offering significant discounts on certain items for a short period of time.

Michael Tsiros, chair of marketing at University of Miami and lead author of the study, explained a slight but significant difference between two of the strategies. "SDD starts like Hi-Lo pricing in that you have a big sale but the main difference comes after the initial sale when you progressively increase the price back to its regular level versus in one shot," Tsiros said. "By doing so, SDD avoids a key problem of the Hi-Lo strategy -- the big dive in sales at the end of the promotion that results from people stocking up on the item during the promotion or because they perceive the price to be too high because it was recently much lower.

"Essentially, the study concluded that SDD is an effective pricing strategy because of two reasons. When consumers are shopping, they think about past and future prices as well as current prices, so if they see an upward trend (such as the one that would be apparent with SDD), they assume prices will continue to rise in the future, and as a result, they're more likely to purchase an item at that time. The second conclusion Tsiros and his team drew was that because consumers often anticipate feeling regret after missing a sale, they are more likely to purchase an item if they expect prices to increase in the near future, to avoid experiencing that regret.

Of course, there is no one-size-fits-all model for pricing strategies in the retail sector, but after a volatile 2009, retailers are looking anywhere and everywhere for new revenue-generating methods. Recently, Microsoft announced its plan to roll out its Office 2010 software via a new pricing platform. The company's new approach is a flexi-pricing strategy that, ideally, will make its products more accessible to a larger group of consumers. The product won't be available until later this year, but the report states Microsoft plans to offer a range of options for consumers purchasing the software. Prices will depend on each consumer's selection but are expected to range from $99 to $499.For more information on the University of Miami's retail strategy of "Steadily Decreasing Discounting," click here.

(Source: Retail Merchandiser, 01/06/10)

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