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Differentiated Pricing and Price Pooling in Supermarket and Cinema Pricing Strategies
There are various marketing strategies utilised by businesses working toward creating profit and customer satisfaction. Deciding how much to charge for each of your products or service requires evaluating how much customers value what they are buying. One of the most important aspects of any business marketing strategy is pricing a product successfully.
A pricing tactic is a strategy implemented by the marketing department of a business to help attract more customers and to maximise profits. There are four main pricing tactics used in marketing and they are discount pricing, differentiated/segmented pricing, psychological pricing and price bundling. Each strategy if utilised correctly can help increase sales, profits and market share. However, if strategies are incorrectly used, they can have a negative effect on the business and can cause serious damage. Setting a price too low in whilst trying to utilise discount pricing, can cause the consumer to believe that the non-discounted price is too high and is taking advantage of them
The product category of choice for my report focus will be pricing tactics in supermarkets with price being a measure of value for buyers and sellers. I will focus, through my observations as a customer, as an employee of a national supermarket chain and through academic research on psychological pricing and discount pricing within supermarkets as these two tactics are predominantly and successfully utilised. When comparing both supermarkets and cinemas for pricing strategies/tactics I will focus on differentiated pricing and price bundling.
Observation and Patterns
There’s a psychology behind the odd value tactic. Pricing a product at, for example $19.95, makes the price seem like a great price because the customer will be focused on the first number, so they will believe it is closer to $19 rather than to $20. Companies that wish to be of ‘good value’, or a ‘discount retailer’, price items using this odd pricing tactic, to appeal to consumers and a target audience. Whereas a company wishing to be seen as a more premium company, may sell their products at a whole number such as $150. In seeking to boost sales, supermarkets will manage the presentation of their products in a variety of ways including price presentation strategies. Therefor a price from $7 to $5.99 is presented with the notion that customers often perceive the first number on the left as the most relevant. Therefore, this gives the idea that the discount is $2, from $7 to $5 when the discount is actually only $1.01. This impact can increase sales substantially.
Psychological pricing is where, for this purpose, supermarkets set prices ‘just below the nearest round figure which produces higher than expected demand at that level’ (Gendall, Holdershaw and Garland, 1997).
This lower price strategy from, for example, $5 to $4.99, tends to suggest to consumers that the supermarket has marked the item at their lowest possible price and therefore the product must be on sale or cannot be reduced further. It may also suggest that consumers have become programmed or conditioned to expect from supermarkets odd prices as opposes to rounded prices (Gendall et al 1997).
Schindler and Wiman through research undertaken by a major US supermarket chain, showed that ‘80% of store prices ended in the digit of 9’ and in New Zealand a study identified that approximately 87% of advertised prices used odd endings and not whole dollar values with around 60% of these prices ending with a 9 (Schindler RM and Wiman AR, 1989).
Another strategy that supermarkets use is through positioning themselves by offering and/or promoting their store as either offering everyday low prices across several items or promoting temporary price reductions on particular items. An example may include the everyday low-price discount strategy which will be favoured by supermarkets in low income or racially diverse markets whereas promotional marketing/discounts tend to target the more affluent. It is also noted through observation and experience in Australia, that larger store chains and vertically integrated chains are more likely to adopt the everyday low-price strategy, for example Coles (Ellickson P, Misra S. 2006).
In 2008, Australian supermarkets were involved in a milk price war where pricing tactics were reported by media as an abuse of market power. The report as cited by Richards and Lawrence (2012) suggested that pricing of groceries was beyond the level of inflation referring to the OECD 2009 report demonstrating Australia’s food prices had increased 40% in the period from 2000 which was greater than any other country. Supermarkets continued to place pressure on their suppliers to lower the price of production which in turn increased their own profits. The milk war created great competition amongst supermarkets and their suppliers. The winners at the time were consumers (Richards C, Lawrence C, Loong M, Burch D. 2012).
Comparing Pricing Strategies
Differentiated pricing is very popular in cinema marketing. Offering students, pensioner, children, and seniors’ cheaper tickets to the same movies compared to adult tickets. Event cinemas has all these pricing options available to their customers which adds appeal to potential customers by attracting them to their cinemas instead of their competitors. Event also offers voucher codes, and a rewards program, where customers can earn points for every movie they see and can save up those points to buy a ticket to another movie once they have acquired enough points. By Event having these offers available to the public, it entices the public to choose them and the rewards program encourages them to be loyal and continue to spend money with Event.
Bundling is based on convenience for customers because customers can save time by buying two or more products packed together instead of having to make decisions on buying them separately. To rise to the challenge of meeting customers’ need for greater convenience, retailers must offer products that provide speed and ease (Grunert, 2017).
This price bundling strategy is used by both cinemas and supermarkets. Although they are selling the products together at a lower price compared individually, profits can still be made and even increased because it promotes the product and purchase of more than one item (Priceintelligently.com, 2019).
Cinemas use this strategy frequently, when purchasing tickets online from a cinema such as Event or Greater Union, they let you pick your seat and then you are offered the snack combos. Prices ranged from $14.90 for a medium combo, up to $25 for a small double combo. A combination offer may include such items as a drink and packet of FruChocs or a drink and ice-cream. They have limited edition deals promoting new films, which entice the customer to buy the more expensive combo because it comes with a collector’s cup (Eventcinemas.com.au, 2019).
Supermarkets use of price bundling rages from deodorant packs and health products to washing detergents and air fresheners. Consumers have been rewarded in the past several years with the on-going price war between top supermarket outlets competing for the lowest prices and win the consumers onto their side. According to Yan, Ruiliang & Bandyopadhyay, Subir. (2011), the bundling strategy works best in supermarkets performance when it combines ‘highly complementary products’ and price them at an attractively low price.
Conclusion
Key conclusions for managers of a supermarket store would be to continue pricing products at prices where the consumer believes they are getting the best value for the product, such a pricing them at odd values, for example $3.99 instead of $4, and to continue having price reductions for a limited amount of time on certain products as it can increase sales and profits and potentially increases item popularity and buyer loyalty after the sale has ended.
Selling products in a price bundling strategy can increase sales of products and can increase profits. Consumers like having the choice to buy different or the same product in a bundle and the price being discounted for it. It makes the buyer think they have gained a good deal, but the cinema/supermarket will still be making profit. If you bundle a popular item with an item that doesn’t sell as well, it could boost the sales of the poorer performed item by reaching a wider market share and may change the buyer’s opinion on the item and increase sales.
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