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Inside Merchandising: How Do You Know When the Price is Right?

June 23, 2011 IADT San Antonio, Internet Marketing 0 Comments

Price ElasticityOver the past few years, consumers worldwide have felt the brunt of the drastic increase in gasoline prices. For businesses, this means the cost of transporting goods from wholesalers to warehouses and then to storefronts has also increased. As a result, the rising transportation costs have forced retailers to raise prices on many goods. In addition, many retailers also have gained increased profits by determining the price sensitivity of their customers and exercising price elasticity.

Price elasticity of demand involves marketers determining exactly how much they can stretch (increase) the price of item before consumers reach a point in which they decide to do without. An example of this concept would be the rise in the price of item such as fast-food value-menu chicken nuggets from $.99 to $1.10. To most consumers, the price increase is minimal. For the fast-food giants, charging $.10 more per item can add to up to a major increase in profit.

On the other hand, if the price of the same item were increased from $.99 to $2.50, many consumers would feel that the price of the item had been stretched too far and simply not make the purchase. This would result in lost profits for the retailer. Thus, it is imperative that retailers determine the degree of price sensitivity of their shoppers in order to successfully remain in operation.

Generally speaking, the higher the demand for an item, the less price sensitive consumers will be. Consider the rising cost of gasoline. Gasoline is an example of a product that is, for the most part, price inelastic. This means that retailers can raise gas prices and most consumers will continue to “stretch” their wallets to purchase gas.  Determining the price sensitivity of consumers requires marketing research on the part of the retailer.

One way to determine this is by examining consumer behavior in response to price fluctuations in order to determine the elasticity of an item. Retailers often monitor consumer-price sensitivity by reviewing sales data obtained from point-of-sale (POS) systems. POS computer systems track the purchase history of consumers and store sales, often via a scanner and barcode or SKU system. Retailers pay close attention to sales numbers, and take note of sales increases and decreases as a result of pricing changes.

Marketers often tend to encourage price-sensitive shoppers to purchase items through sales promotions, such as coupo- rebate programs. However, the drawback to frequent promotional campaigns is that consumers become accustomed to the promotions and simply refrain from purchasing items unless they are on sale.¹ Research has also shown certain ethnic groups have proven to be more price sensitive than others.¹

The study of price sensitivity and elasticity represents only one of many areas of retailer and marketer interest under the umbrella of consumer behavioral science. Through their course of study, students in IADT San Antonio’s Advertising Design and Merchandising Management programs are prepared to notice such pricing trends and understand the impact they have on retail establishments.

- Jennifer Burrell, Merchandising Management and Advertising Design Program Chair, IADT-San Antonio

¹Mulhern, Frances, J., Williams, Jerome D. & Leone, Robert, P. (1998). Variability of brand price elasticities across retail stores: Ethnic, income, and brand determinants. Journal of Retailing, 74(3), 427-446.


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