Category: Management Notes

The right pricing strategy can help you attract more customers, encourage larger orders on average, and create repeat purchases. Use this guide to determine which of these 7 common approaches to pricing is best for your business.

1. Keystone Pricing

Keystone pricing is one of the most common pricing strategies, thanks to its simplicity. The final selling price is 2X the item’s cost.

Keystone pricing is the best place to start whenever possible. However, the likelihood that it remains your only pricing strategy is low. Many of today’s products simply cannot be set at keystone due to high product costs versus the general market rate.

Consider another pricing strategy if your business competes at either ends of the spectrum from discount competitors to high-end luxury brands. Adopting keystone pricing at either end nearly guarantees a loss.

Summary: Keystone pricing is a simple and straightforward approach to pricing. However, it doesn’t account for supply and demand, a critical component of maximizing revenue

2. Multiple Unit Pricing

Multiple unit pricing, multiple pricing, or bundle pricing offers shoppers a lower price per unit for the purchase of two or more products of the same type.

Multiple pricing is particularly useful for clearing excess inventory or introducing new products. Use this strategy sparingly or customers may think your regular items are overpriced and will eventually be discounted.

Summary: The ideal time to use multiple pricing is at the end of a season for products that have not sold well or when you need to introduce new products that customers may be hesitant to try.

TIP: Read up on your state’s regulations when considering these strategies. For example, some states will not allow you to sell products below cost or giving products away for free.

3. Discount Pricing

Discount pricing offers price reductions to customers through sales events or special offers.

Lowering the price of a product to encourage purchases is a conventional strategy employed in every area of sales, but simply announcing your latest price drop may not be enough. It can even have adverse effects if your customers perceive the discounted price as the product’s true value. Effective discounting dispels this idea and creates a sense of urgency.

Discount offers are not a one-size-fits-all. Let your product influence your strategy specifically, gauge its relevance to the market and its sales history.

Summary: Discount pricing is an easy way to attract new customers and works best when timed for special events or holidays.

Tip: Provide a reason for every discount. Otherwise, customers will think less of your brand and product value.

4. Loss Leader

A loss leader is a product is priced below its market cost to stimulate the sales of more profitable goods or services.

Loss leader strategies are great for traffic generation and product introduction. For example:

Magazine publishers can attract more long-term subscribers by offering the first few editions at little to no cost.

Cable service providers can offer lower pricing on a competitive feature to recruit new annual contract signups.

Hardware stores often sell larger tools for cost or below, expecting customers to buy accessories along with the new tool. Accessory items tend to have a much higher profit margin, and are often impulse buys.

The past success of loss leader pricing has led to many states passing laws that severely limit or explicitly forbid selling products below cost. For some, these limitations may actually be a blessing. Loss leader strategies can backfire, with customers purchasing only products that are priced near or below acquisition cost. Such purchasing patterns effectively foil the strategy underlying loss leader pricing.

Summary: The loss leader strategy is great for marketing efforts and acquiring new customers. However, carefully consider your loss leader product and how you intend to promote other offerings in parallel so that your loss is actually a gain. Most importantly, be aware of your state’s laws on loss leaders.

5. Psychological Pricing

Psychological pricing relies on the nature of human psychology to make prices appear more attractive to consumers.

There are several types of psychological pricing: odd-even pricing, prestige pricing, anchor pricing, and price lining.

Odd-Even Pricing: The practice of setting prices in odd numbers just below an even price. For example, marking an item $19.99 rather than the even price of $20.00. This strategy makes the price appear considerably lower than it is.

• Prestige Pricing: On the opposite end, prestige pricing inflates prices in order to create a sense of greater value. For example, a “limited edition” canvas print might be priced at $70 rather than $30 to give the impression that it is a better and rare product.
• Anchor Pricing: Anchoring refers to the consumer’s tendency to heavily rely on the first piece of information offered when making decisions. To apply, place premium products and services near standard options to help create a clearer sense of value for potential customers. They will perceive the less expensive option as a bargain in comparison.
• Price Lining: Better suited for businesses with an extensive product line, this tactic involves creating a price range for a particular line. For example, Brandless.com has built an entire business on this strategy with all items priced at $3.

Summary: Psychological pricing allows business owners to influence how consumers perceive a product’s value without actually changing the product. This makes it a cost effective way to influence consumer purchase decisions.

TIP: Research shows prices ending in “9” are more likely to drive sales.

6. Below Competition

This pricing strategy requires retailers to list competing products at prices lower than the competition’s.

Pricing below competition can help businesses carve out a market niche, appealing to every consumer’s love for low prices. However, by guaranteeing lower prices and therefore lower profit margins, you will not make a significant return on this strategy until you can realize a large sales volume. Additionally, even with low overhead costs secured, you remain subject to your competitors’ actions, i.e. price wars.

One of the worst outcomes of below competition pricing is a “price war,” where competing businesses race to cut costs and ultimately hurt their bottom line and their brand perception. Some companies have resolved price wars while still maintaining below competition prices by redesigning their products for fast and easy manufacturing.

Summary: Pricing below the competition is a common pricing strategy because it’s easy, but it’s also dangerous if you don’t have a clear understanding of your business’s financials.

7. Above Competition

Retailers price above the competition when they have a clear advantage on non-priced elements of their products, services, and reputation.

In order to charge an amount above the competition, you must differentiate your brand and products. For example, Apple can consistently charge consumers more because they’ve established a reputation as makers of high-quality products, ensuring the market sees its offerings as unique or innovative.

Price sensitivity can be defined as the degree to which consumers’ behaviors are affected by the price of the product or service. Price sensitivity is also known as price elasticity of demand and this means the extent to which sale of a particular product or service is affected. Another way of explaining price sensitivity is, “the consumer demand for a product is changed by the cost of the product. It basically helps the manufacturers study the consumer behavior and assists them in making good decisions about the products. The level of price sensitivity varies depending on various products and consumers. Price sensitivity, in economics, is generally quantified through the price elasticity of demand.

Price sensitivity is the degree to which the price of a product affects consumers’ purchasing behaviors. Generally speaking, it’s how demand changes with the change in the cost of products.

In economics, price sensitivity is commonly measured using the price elasticity of demand, or the measure of the change in demand based on its price change. For example, some consumers are not willing to pay a few extra cents per gallon for gasoline, especially if a lower-priced station is nearby.

Price sensitivity can basically be defined as being the extent to which demand changes when the price of a product or service changes.

The price sensitivity of a product varies with the level of importance consumers place on price relative to other purchasing criteria. Some people may value quality over price, making them less susceptible to price sensitivity. For example, customers seeking top-quality goods are typically less price-sensitive than bargain hunters; so, they’re willing to pay more for a high-quality product.

By contrast, people who are more sensitive to price may be willing to sacrifice quality. These individuals will not spend more for something like a brand name, even if it has a higher quality over a generic store brand product.

Price sensitivity also varies from person to person, or from one consumer to the next. Some people are able and willing to pay more for goods and services than others. Companies and governments are also able to pay more compared to individuals.

Price Sensitivity and Elasticity of Demand

The law of demand states that if all other market factors remain constant, a relative price increase leads to a drop in the quantity demanded. High elasticity means consumers are more willing to buy a product even after price increases. Inelastic demand means even small price increases may significantly lower demand.

In a perfect world, businesses would set prices at the exact point where supply and demand produce as much revenue as possible. This is referred to as the equilibrium price. Although this is difficult, computer software models and real-time analysis of sales volume at given price points can help determine equilibrium prices. Even if a small price rise diminishes sales volume, the relative gains in revenue may overcome a proportionally smaller decline in consumer purchases.

Influences on Price Sensitivity

Price sensitivity places a premium on understanding the competition, the buying process, and the uniqueness of products or services in the marketplace. For example, consumers have lower price sensitivity if a product or service is unique or has few substitutes.

Consumers are less sensitive to price when the total cost is low compared to their total income. Likewise, the total expenditure compared to the total cost of the end product affects price sensitivity. For example, if registration costs for a convention are low compared to the total cost of travel, hotel, and food expenses, attendees may be less sensitive to the registration fee.

When the expense is shared, consumers have less price sensitivity. People attending the same conference may share one hotel room, making them less sensitive to the hotel room rate.

Consumers also have less price sensitivity when a product or service is used along with something they already own. For instance, once members pay to join an association, they are typically less sensitive to paying for other association services.

Consumers also have less price sensitivity when the product or service is viewed as prestigious, exclusive, or possessing high quality. For example, an association may have a premium feature of its membership delivered through its programs and services, making members less price-sensitive to changes in dues.

Pricing Strategy

There are a number of different factors that businesses use to come up with pricing strategies. These factors will separate consumers based on their sensitivity to prices. Businesses may use marketing and advertising techniques to get consumers to shift their focus from price to other factors, such as product offerings, benefits, and other values.

This is common in the travel, tourism, and hospitality industries. Airlines will generally charge more for certain flights especially on weekends or for different classes of flights. Many business travelers are less sensitive to price changes.

Formula

The standardized formula for measuring price sensitivity is:

Price Sensitivity = (Change in Quantity Purchased / Change in Price)*%

Example:

In order to observe the price sensitivity, let us consider that, when Nestle apple nectar prices increase by 60%, the juice purchases fall with the figure of 25%. Using the mentioned formula we can easily calculate the price sensitivity for nestle apple nectar:

Price Sensitivity = -25% / 60% = -0.42

Therefore, we can conclude that for every of the percentage with which the Nestle apple nectar price increases; it affects the purchase by almost more than half percentage. Likewise, all the products can be studied by taking into account the changes in price and increase or decrease in the demand.

Those products are said to be price sensitive in which the change in price is not much but the demand is affected on the large scale. This is the case usually with the convenience products or the products which have a huge range of alternatives. Those products which are not much reactive to change in price are called price inelastic. Such products are usually daily used products and are a necessity of life and consumers do not have any other option other than purchasing them. 

Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service. Value pricing is customer-focused pricing, meaning companies base their pricing on how much the customer believes a product is worth.

Value-based pricing is different than “cost-plus” pricing, which factors the costs of production into the pricing calculation. Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value pricing model than companies which chiefly sell commoditized items.

The value-based pricing principle mainly applies to markets where possessing an item enhances a customer’s self-image or facilitates unparalleled life experiences. To that end, this perceived value reflects the worth of an item that consumers are willing to assign to it, and consequently directly affects the price the consumer ultimately pays.

Although pricing value is an inexact science, the price can be determined with marketing techniques. For example, luxury automakers solicit customer feedback, that effectively quantifies customers’ perceived value of their experiences driving a particular car model. As a result, sellers can use the value-based pricing approach to establish a vehicle’s price, going forward.

Characteristics Needed for Value-based Pricing

Any company engaged in value pricing must have a product or service that differentiates itself from the competition. The product must be customer-focused, meaning any improvements and added features should be based on the customer’s wants and needs. Of course, the product or service must be of high quality if the company’s executives are looking to have a value-added pricing strategy.

The company must also have open communication channels and strong relationships with its customers. In doing so, companies can obtain feedback from its customers regarding the features they’re looking for as well as how much they’re willing to pay.

 For companies to develop a successful value-based pricing strategy, they must invest a significant amount of time with their customers to determine their wants.

Examples of Value-Based Markets

The fashion industry is one of the most heavily influenced by value-based pricing, where value price determination is standard practice. Typically, popular name-brand designers command higher prices based on consumers’ perceptions of how the brand affects their image. Also, if a designer can persuade an A-list celebrity to wear his or her look to a red-carpet event, the perceived value of the associated brand can suddenly skyrocket. On the other hand, when a brand’s image diminishes for any reason, the pricing strategy tends to re-conform to a cost-based pricing principle.

Other industries subject to value-based pricing models include name-brand pharmaceuticals, cosmetics, and personal care.

Pros of value based pricing

1. It provides real willingness to pay data

Most companies shy away from diving into pricing, because they’re afraid of the process and end up rushing to solve other problems facing the business, because they at least know how to test different landing pages. Yet, even though there’s work involved, value based pricing provides real data that forces you into a profit generating price within your pricing strategy.

Simply put, if done correctly, value based pricing helps you generate the most profit.

2. It helps you develop higher quality products

Value based pricing not only determines a more accurate price for the end product, but the process will also benefit your business.

Exploring your competition will help you understand the advantages of your product, which is where marketing should focus on, and its disadvantages, the parts that should be altered. Taking on a consumer perspective will also help you discover what clients are really looking for in your solution. Products and features will be driven by consumer demand, which raises perceived value, thereby resulting in a higher price.

3. It allows you to provide phenomenal customer service

Much of the customer data in value based pricing is collected through customer surveys or interviews. The responses we’ve seen to simply bringing customers into the discussion of value have been extraordinarily positive and appreciated.

This attention to consumer opinions and wants will result in more personable and considerate services. This can be the difference between one time customers and loyal clients who develop a bond with the company and always come back, because they trust you’re providing the value you continue to claim you are in your price.

Cons of value based pricing

1. It takes time and resources

The method can be simplified and quickened, but it’s not necessarily as quick as Googling your competitors or calculating your costs and pulling a margin number out of thin air. You can also be a bit intimidated by the method, because pricing isn’t something they teach us Businesses 101.

For this reason, many businesses shy away from the most important aspect of their business. Businesses also think only extremely large and wealthy businesses can afford to do things this way. However, there are in fact ways to find perceived value without breaking the bank.

2. It’s a science, just not an exact science

The secret is out: Unless you’re dealing with a very saturated product where market based pricing works, there is no silver bullet for pricing. Thus, value based pricing is more of a process that requires consistent dedication, not just a “set it and forget it” mentality.

Think about it, willingness to pay differs between different customer personas, regions, and even offer. A 100% accurate prediction is impossible, but we can get pretty darn close.

Markdown pricing is a strategic approach used by retailers to adjust the original selling price of a product, usually by reducing it, to achieve specific business objectives. This pricing strategy involves temporary price reductions, often implemented through promotions, discounts, or sales events. The primary goal of markdown pricing is to stimulate sales, attract customers, manage inventory, and respond to market dynamics.

Markdown pricing is a dynamic and versatile strategy that requires a nuanced approach. When implemented thoughtfully, markdowns can be a powerful tool for achieving specific business objectives, whether it’s boosting sales, managing inventory, or staying competitive in the market. However, businesses must carefully consider the timing, communication, and overall impact on profitability to ensure the long-term success of their markdown pricing strategies. By aligning markdowns with broader business goals and customer expectations, retailers can leverage this pricing strategy to navigate the complexities of the retail landscape and enhance overall business performance.

Objectives of Markdown Pricing:

• Stimulating Sales:

Markdown pricing is frequently employed to encourage customers to make purchases by offering products at a lower price point. This is particularly effective for boosting sales during specific periods or events.

• Inventory Management:

Retailers use markdowns to clear excess inventory, especially for seasonal or perishable goods. By reducing prices, they can expedite the movement of products and avoid carrying over inventory to the next season.

• Attracting Customers:

Lower prices can attract price-sensitive customers and those who are on the lookout for deals. Markdowns serve as a powerful tool to draw attention to a store or product and increase foot traffic.

• Competitive Positioning:

In a competitive market, markdowns can be employed strategically to position a retailer favorably against competitors. Offering compelling discounts can influence customers to choose one retailer over another.

Strategies for Implementing Markdown Pricing:

• Percentage Discounts:

Applying a percentage reduction to the original price, such as offering 20% off or buy-one-get-one-free promotions. This approach is straightforward and easily understood by consumers.

• Dollar Amount Discounts:

Providing a specific dollar amount reduction, like $10 off the regular price. This can be effective for high-ticket items or when retailers want to emphasize the exact savings.

• Seasonal Sales:

Introducing markdowns during specific seasons or holidays to capitalize on increased consumer spending. Seasonal sales events, such as back-to-school or Black Friday sales, are common examples.

• Clearance Sales:

Offering significant markdowns on products that need to be cleared from inventory. Clearance sales are often used to make room for new merchandise or to liquidate slow-moving items.

• Bundle Promotions:

Combining multiple products into a bundle and offering a discounted price for the bundle. This encourages customers to purchase more items while enjoying overall cost savings.

• Flash Sales:

Introducing limited-time promotions or flash sales where products are discounted for a short duration. This creates a sense of urgency, prompting customers to make quick purchasing decisions.

Pros of Markdown Pricing:

• Stimulates Sales:

Markdown pricing is a powerful tool to stimulate sales by offering customers the perception of getting a good deal. This can attract price-sensitive consumers and drive higher sales volumes.

• Inventory Management:

Markdowns help in managing inventory by clearing out excess or slow-moving stock. This is particularly beneficial for retailers dealing with seasonal products or perishable goods.

• Attracts Customers:

Lower prices attract customers, especially those actively seeking discounts or deals. Markdowns can increase foot traffic to stores and improve brand visibility.

• Competitive Positioning:

Markdowns can be strategically used to position a retailer favorably in a competitive market. Offering attractive discounts can influence customers to choose one retailer over another.

• Market Response:

Well-timed markdowns in response to market conditions, seasonal changes, or competitor activities can enhance a retailer’s responsiveness to dynamic market trends.

• Customer Loyalty:

Offering discounts can build customer loyalty, especially if customers perceive that they are getting good value for their money. Satisfied customers are more likely to become repeat buyers.

• Clearance of Outdated Stock:

Markdown pricing is effective for clearing out outdated or obsolete stock, preventing inventory obsolescence and freeing up space for new products.

• Promotional Events:

Markdown pricing is a key element of promotional events such as seasonal sales, Black Friday, or clearance events, contributing to the success of these marketing strategies.

Cons of Markdown Pricing:

• Impact on Profit Margins:

Markdowns can significantly impact profit margins, especially if the original price was already slim. Businesses must carefully balance the need to stimulate sales with maintaining profitability.

• Brand Perception:

Frequent or excessive use of markdowns might impact the perceived value of a brand. Consumers may become conditioned to expect discounts, potentially devaluing the brand image.

• Timing and Duration Challenges:

Incorrect timing or prolonged durations of markdowns may lead to diminished returns. Understanding the market and consumer behavior is crucial for maximizing the impact of markdown pricing.

• Communication Complexity:

Communicating the value of markdowns effectively can be challenging. If not communicated clearly, customers may not fully understand the savings, impacting the success of the strategy.

• Inventory Analysis Demands:

Successful implementation of markdown pricing requires continuous analysis of inventory levels and product performance. This demands resources and sophisticated data analytics tools.

• Potential for Cannibalization:

Markdowns on one product may lead to cannibalization, where customers opt for the discounted item instead of purchasing a higher-margin product, impacting overall revenue.

• Competitor Reaction:

Competitors may react to markdowns, leading to price wars that can erode profit margins for all players in the market. It requires careful monitoring and strategic planning.

• Consumer Expectations:

Regular use of markdowns can set consumer expectations, and customers may delay purchases, anticipating future discounts. This can impact regular pricing strategies.

Considerations for Businesses:

• Profit Margins:

While markdowns can stimulate sales, businesses must carefully evaluate the impact on profit margins. It’s essential to strike a balance between boosting sales and maintaining profitability.

• Brand Perception:

Regular and excessive use of markdowns might impact the perceived value of a brand. Businesses should consider how markdowns align with their overall brand image and positioning.

• Timing and Duration:

Timing is crucial in markdown pricing. Understanding the market and consumer behavior allows businesses to implement markdowns at times when they are likely to have the most significant impact.

• Communication:

Clear and effective communication is essential to convey the value of markdowns to customers. Providing transparent information about the duration of the promotion and the actual savings helps build trust.

• Inventory Analysis:

Regularly analyzing inventory levels and product performance helps businesses identify opportunities for markdowns. This proactive approach ensures that markdowns are strategically applied to address specific needs.

• Technology and Data Analytics:

Leveraging technology and data analytics can enhance the effectiveness of markdown pricing. Retailers can use tools to analyze customer behavior, monitor competitors, and make data-driven decisions.

Case Study: Zara’s Fast Fashion Model:

Zara, a prominent fashion retailer, is known for its agile markdown strategy. By frequently introducing new collections and having a rapid production cycle, Zara minimizes the need for drastic markdowns. The scarcity created by limited stock and the constant arrival of new items encourages customers to make purchases without waiting for discounts.

Advantages

• The Logic of the Markdown

Deciding which products to carry is never an exact science in any business, and even an experienced buyer will sometimes stock too much of a product that turns out not to be as popular as she thought it would be. Some businesses hang on to such products for a long time, because they don’t want to lower the price and make less money, but this isn’t always the best decision. If a buyer spends $1,000 on merchandise hoping to sell it for $1,500, it may be better to lower the price to $1,200 and reinvest that money in products that will have a better chance of selling for full price.

• Early Markdowns

Some stores use an early markdown policy designed to keep all products moving through the store as quickly as possible. For instance, the store can have a policy that all unsold items will be marked down by 25 percent after three weeks on the shelf, 50 percent after seven weeks and 75 percent after eleven weeks. This strategy is most effective for stores whose customers visit frequently, because the store needs to maintain an image of always having exciting new products available. Customers will be motivated to visit often both for the new products and the prospect of bargains.

• Late Markdowns

Some stores try to avoid selling items on markdown by using a late markdown policy. The idea of this policy is to give the products a little more time to attract the interest of customers, but then to mark them down steeply if they fail to do so. Late markdowns are usually handled through a scheduled clearance sale once or twice a year, and items are marked down at least 37 percent. The advantage of this policy is that shoppers interested in bargains are likely to plan for the clearance sale and buy a number of items at once, clearing out all unpopular items in a single sale.

7 Principles of Supply Chain Management

1. Adapt Supply Chain to Customer’s Needs

Both business people and supply chain professionals are trained to focus on the customer’s needs. In order to understand the customer better, we divide customers into a different group and we call it “segmentation”. The most primitive way to segment customers is ABC analysis (as in inventory management) that groups customers based on the sales volume or profitability. Segmentation can also be done by product, industry and trade channel.

2. Customize Logistics Network

When you segment a customer based on the service needs, you may have to tailor the different logistics networks to serve a different segment. However, this principle doesn’t hold true in all situations.

For example, if you were a contract manufacturer in China, you might already have different logistics networks for different customers. Each customer in the US or EU might already control the source of raw materials, ask you to provide dedicated production lines, nominate 3pl companies and air/sea carriers. So, logistics network design is a kind of initiative driven mainly by the customer.

3. Align Demand Planning Across Supply Chain

Supply chain practitioners are taught to share the demand data with trading partners so nobody has to keep the unnecessary inventory. In general, this principle holds true. But in reality, only Walmart is actively sharing the demand data with trading partners.

There is a very interesting paper “Top-Down Versus Bottom-Up Demand Forecasts: The Value of Shared Point-of-Sale Data in the Retail Supply Chain” by Williams and Waller 2011, the result of research found that,

• If you make the demand forecast based on SKU/Customer level, using your own historical order data is more accurate than using the POS data you get from retailers.
• If you make the demand forecast based on the SKU/Store level, using the POS data you get from retailers is more accurate than using your own historical order data.

The implication is that the absence of demand sharing is not necessarily bad. But when you got the demand data from trading partners, you MUST use it the right way.

4. Differentiate Products Close to Customer

Dell keeps components and assembles them only after a customer places the order in order to increase the product variety. This principle is still true, but, there is another principle that you should consider.

“Standardization” is in the opposite polarity of “Differentiation”. For example, some cosmetics manufacturers formulate products and choose packaging and labeling that complies with the regulations of multiple countries in Asia. So they only make one SKU that can be sold in 15 countries instead of 1 SKU/Country. By standardizing product appropriately, they can drive the purchasing cost down drastically due to the economy of scale and improve international business operations. So standardization is something that you should also consider.

5. Outsource Strategically

This is the principle that stands the test of time. In short, don’t ever outsource your core competency.

6. Develop IT that Support Multilevel Decision Making

If you search Google for the term “critical success factor ERP”, you’ll find lots of information about how to implement ERP successfully. My opinion is that IT project management shouldn’t be done in the isolation, business process re-engineering is something that you have to do before implementing an IT project. This will equip you with the full understanding of process deficiencies, then you can determine what kind of technology you really need.

7. Adopt both Service and Financial Metrics

Anderson et al. suggested that the activity-based costing (ABC) be implemented so you can determine customer’s profitability. However, there is an interesting twist on the ABC concept.

In 1987, Robert Kaplan and W Bruns defined the activity-based costing concept in his book “Accounting and Management: A Field Study Perspective”. However, in 2003 Robert Kaplan said that it’s difficult to maintain an ABC costing model to reflect the changes in activities, processes, products, and customers. Then, he introduced the refined concept called “Time Driven Activity Based Costing.”

From my understanding, practitioners are still using the traditional ABC and supply chain researchers are still citing the traditional ABC articles. My question is, does the traditional ABC really work?

Anyway, supply chain practitioners can adapt service and financial metrics from initiatives like lean manufacturing and six sigma.

The word logistics is derived from the french word “loger” which means “to quarter and supply troops”. When large number of troops and their equipment move, meticulous planning is required to move volumes of goods and ammunition in that direction. From a marketing point of view, customers are satisfied when they get right product at the right place, at the right time and in the right quantity. Retail logistics system ensures smooth flow of goods to customers through efficient movement of logistics.

Meaning of retail logistics

‘Retail logistics’ is the organist process of managing the flow of merchandise from the source of supply to the customer.

Large retailers deal in a wide variety of products. This has created a need for a systematic planning of movement of numerous goods until they are delivered to the customer. Retail logistics ensures that everything is in place to offer better delivery and service at lower prices by way of efficient logistics and added value.

Functions of retail logistics system

1. The increased product variety in stores has forced the retailer to follow an effective logistics system. It takes care of the

• Flow of merchandise from the producer or intermediary to the warehouse,
• Arrangement of transport to the retail units till the merchandise is sold and delivered to the customers.

2. The system satisfies the customer by taking the right product to the right customer, at the right place and at the right time. This requires a planned approach right from the starting point till the point of delivery.
3. Profitability of the present and future are maximized by the logistics system by means of fulfillment of orders in a cost effective way.
4. It ensures the availability of infrastructure such as warehousing, transport, inventory and administration. The inter relationship that exists between these elements are effectively coordinated.
5. Retail logistics system strives to add value for the customer. For this purpose, the cost elements in the supply chain are brought under the direct control of the retailer. Depending on sales volume, retailers create central or regional distribution centres. They decide on major investment in property, plant and equipment with associated overheads.
6. The functions incorporated in the retail logistics are summarized.

• The physical movement of goods
• The holding of the goods in stock holding points
• The holding of goods in quantities required to meet demand from the consumers
• The management and administration of the process in modern complex distribution system.

The Future of Retail Logistics

Retailers are facing a new reality where delivery logistics once a stable part of retail business can now be the difference between success and failure. Much of the disruption in logistics can be attributed to the ‘Amazon effect’ of consumers being able to select the products they want, at competitive prices, and receive them promptly to their doorstep, office, a nearby locker or even the trunk of their car.

The network required to support this level of service requires breadth, scale and velocity. With consumer demand for same-day or next-day delivery becoming the norm, retailers must now work out how they can optimize costs in order to better serve customers. 

Digital commerce is now a vital part of all retailers’ businesses, and speed is critical to their success. Walmart last year announced that it would soon begin offering free same-day shipping in New York and its surrounding areas. Other big box retailers are likely to have the infrastructure necessary to support increasing consumer shipping demands in urban areas, but they must find a way to balance the costs of doing so to succeed in the long run.

Larger retailers typically have two to three regional distribution centers (DCs) in locations chosen to optimize delivery times and costs, and can access nearly 80 percent of the United States in two days. However, many struggle with inventory and labor management. Increasing customer demand highlights the need for more nodes and sophisticated distribution networks.

Logistics companies are reshaping their core businesses to meet the industry’s needs. As major logistics companies invest in growing the breadth and depth of their networks, final mile delivery efficiency plagues their abilities to scale efficiently. This is essentially the last section of the delivery chain from where goods leave the warehouse, to where they arrive at a customer’s doorstep.

As logistics providers seek to increase efficiency and reduce costs, they will implement more strategic operations. For instance, goods will be delivered in a batched manner, once per day, rather than in separate deliveries; items will be delivered in reusable, sustainable containers; and products in some urban areas may even be delivered by automated robots.

Market forces are also creating opportunities for third-party logistics providers (3PLs), who are well positioned to support these emerging fulfillment capabilities. 3PLs can support multiple purchasing channels with multi-node networks and urban hubs; provide ‘final mile’ order delivery alternatives; and can support made-to-order and specialty packaging. They can also support AI, automation and analytics.

As retailers look to the future of fulfillment, there are three potential scenarios we expect to see evolve over the next few years:

1. Free two-day standard shipping

Free two-day shipping will become the norm nationwide. Amazon Prime has already set the standard for free two-day shipping now retailers are fighting to achieve the same offering. They will ideally need two to three regional DCs in strategic locations around populated regions. Optimal locations are driven by service-level window rather than proximity to inbound freight locations.

2. Next-day shipping standardization

Consumers will begin to expect next-day shipping in many urban areas, with two-day shipping in all other areas. Next-day shipping will be available in all key markets and digital commerce sales will increase as a percent of total retail sales. Retailers will require a more robust fulfillment network with more localized distribution centers. Optimal DC locations are close to urban areas where retailers will be able to fulfill both retail stores and online orders.

3. Next-day-plus shipping standardization

Next-day-plus shipping will become the standard for most of the U.S., with same-day shipping available in most major metropolitan areas. For some key verticals, such as grocery and B2B home improvement, standard same-day shipping in large metropolitan areas may soon become a reality, with next-day shipping for the majority of the United States outside of major metropolitan areas. This type of wide-reaching network will require large-scale infrastructure investment from retailers, limiting the feasibility of this network for many.

A bright future for retail

The future of retail logistics is dynamic, fast, and integrated across channels and platforms. Both retailers and logistics companies will succeed in the new retail logistics marketplace by enhancing customer experience and increasing speed of delivery. To do so, they must lead with novel approaches to cost optimization and renewed investment in new services to deliver value for customers. This new mindset, called zero-based supply chain (ZBSC), drives profitability by emphasizing the future over the past, and will help retailers capture supply chain value in the rapidly changing world around them, and their customers.

Corporate Replenishment policies are guidelines and strategies implemented by organizations to manage the replenishment of inventory efficiently. These policies aim to strike a balance between maintaining optimal stock levels, reducing carrying costs, and meeting customer demand. While specific policies may vary based on the industry, business model, and product characteristics, there are common principles and considerations that organizations incorporate into their corporate replenishment strategies.

Corporate replenishment policies play a vital role in optimizing inventory management, ensuring product availability, and controlling costs. These policies provide a framework for organizations to navigate the complexities of supply chain management, build efficient relationships with suppliers, and enhance overall operational effectiveness. By aligning replenishment policies with organizational goals and industry best practices, businesses can achieve a balance between meeting customer demand and maintaining a cost-effective and sustainable supply chain.

Formalized logistics policies permit the head office of a retail organization to be responsive to operational needs. Companies have invested an enormous amount of fixed capital on warehousing, vehicles and other equipment. Apart from fixed assets, the current assets in the form of inventory, accounts receivable and cash also form a substantial part of investment.

Thus, corporate replenishment has become an integral part of the corporate strategy. It is instrumental to the achievement of financial and strategic objectives.

Components

1. Reorder Point:

Organizations set a reorder point for each product, which represents the inventory level at which a new order should be placed. The reorder point is typically determined by considering factors such as lead time, demand variability, and desired service levels.

2. Safety Stock:

Safety stock is a buffer of inventory held to protect against uncertainties such as unexpected demand spikes or supply chain disruptions. Corporate replenishment policies define how safety stock levels are calculated and maintained.

3. Lead Time Management:

Considering the time it takes for suppliers to deliver orders, organizations establish lead time targets. Policies may include measures to reduce lead times, such as optimizing supplier relationships or using expedited shipping options.

4. Order Quantity (EOQ):

The Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs. Corporate replenishment policies may specify the calculation and application of EOQ to determine the most cost-effective order quantities.

5. ABC Analysis:

Organizations often categorize products into groups based on their importance or value. The ABC analysis classifies items as A (high-value, low-quantity), B (medium-value, medium-quantity), and C (low-value, high-quantity). Replenishment policies may then be tailored to the specific needs of each category.

6. Supplier Collaboration:

Collaborative relationships with suppliers are crucial for effective replenishment. Policies may include guidelines on communication, performance monitoring, and joint efforts to reduce lead times and improve order accuracy.

7. Dynamic Replenishment Strategies:

Some organizations adopt dynamic replenishment strategies, adjusting reorder points and order quantities based on real-time demand fluctuations, promotions, or seasonal variations.

8. Technology Integration:

Replenishment policies often involve the use of advanced technologies, such as inventory management systems, demand forecasting tools, and automated order generation systems. Integration with Enterprise Resource Planning (ERP) systems may also be part of the strategy.

9. Cross-Functional Collaboration:

Collaboration between different departments, including sales, marketing, and logistics, is essential for effective replenishment. Policies may encourage cross-functional teams to share information and align strategies.

10. Continuous Improvement:

Replenishment policies should include mechanisms for continuous improvement. Regular reviews, performance evaluations, and adjustments based on lessons learned contribute to an adaptive and responsive replenishment strategy.

11. Sustainability Considerations:

Some organizations incorporate sustainability into their replenishment policies, considering environmentally friendly practices, such as optimizing transportation routes, reducing packaging waste, and sourcing from eco-friendly suppliers.

12. Compliance and Governance:

Policies may include guidelines to ensure compliance with regulatory requirements and governance standards. This includes adherence to industry regulations, ethical sourcing practices, and responsible inventory management.

13. Demand Forecasting:

Accurate demand forecasting is a key element of replenishment policies. Policies may define the methodologies used for forecasting and the frequency of updates.

14. Financial Considerations:

Replenishment policies should align with financial goals, considering budget constraints, cost control measures, and overall financial performance.

15. Risk Management:

Policies may include strategies for mitigating risks related to supply chain disruptions, geopolitical factors, and other external variables that can impact replenishment processes.

Corporate replenishment policy is broader in its application. It is based on the organization’s replenishment ethos related to a systems approach.

Advantages of Corporate replenishment to customers

1. Goods are available at the point of sales where and when the customer needs them.
2. An item advertised in the media is certainly available in stock as stock is assured through the system. This adds to customer goodwill.
3. The economies of scale and inventory savings available to retailers are passed on to the customer. The retailer is able to forecast bulk buying requirements more accurately. Hence, the retailer is able to obtain greater discounts from suppliers. A part of the savings can be passed on to customers.

Advantages of Corporate replenishment to store management

1. With well designed corporate replenishment, the management is relieved from the botheration of stock checking and ordering. Use of automatic stock replenishment has completely freed the store management from stock ordering worries.
2. Store management has more time to manage resources and implement company policies. Computerized goods receipt system has saved the time spent on inventory management.
3. With the use of automated systems, managers will not worry about stock position. But they should ensure that stock counting is accurately recorded. Stock outs occur for reasons such as unpredictable shifts in demand, product unavailability, poor data capture control, loss of information, computer failure etc. In these situations, managers should communicate major stock outs immediately to the head office.

The automatic stock replenishment system merely removes the task of physically ordering stock. It does not relieve the manager from the responsibility to ensure maximum customer satisfaction through product availability.

Advantages of Corporate replenishment to Company

1. The company benefits from maximizing service and minimizing costs. Inventory replenishment is managed to keep the amount of stock to an acceptable level, it avoids dead stock in which capital is locked up unnecessarily.
2. Minimum stock holding prevents capital from being locked up. Capital may be employed for the expansion and development of the business.
3. Due to effective control over stock holding, floor space required for warehousing is reduced. This enables the store manager to divert floor space for selling activities. In a self service environment, products are displayed by making effective use of floor space.
4. Stock will be allocated and received into stores to coincide with advertising and other sales promotional activities. If advertising products are not available in stores, it is a major fault on the part of the retailer.

Advantages of Corporate replenishment to suppliers

1. It is easier for a supplier to cope with one order for all stores of a chain than order for each store independently.
2. The supplier can affect delivery of goods in the most economical way.
3. Using traditional forms of ordering is both time consuming and inaccurate. Processing orders for central distribution warehousing is quite easy for the supplier.
4. Only expert buyers place orders on behalf of store management. From the supplier’s point of view, it is preferable to deal with buyers who have expertise in the field of buying.

Promotion is a type of communication between the buyer and the seller. The seller tries to persuade the buyer to purchase their goods or services through promotions. It helps in making the people aware of a product, service or a company. It also helps to improve the public image of a company. This method of marketing may also create interest in the minds of buyers and can also generate loyal customers.

It is one of the basic elements of the market mix, which includes the four P’s: price, product, promotion, and place. It is also one of the elements in the promotional mix or promotional mix or promotional plan. These are personal selling, advertising, sales promotion, direct marketing publicity and may also include event marketing, exhibitions, and trade shows.

Types of Promotion

1. Advertising

Advertising means to advertise a product, service or a company with the help of television, radio or social media. It helps in spreading awareness about the company, product or service. Advertising is communicated through various mass media, including traditional media such as newspapers, magazines, television, radio, outdoor advertising or direct mail; and new media such as search results, blogs, social media, websites or text messages.

2. Direct Marketing

Direct marketing is a form of advertising where organizations communicate directly to customers through a variety of media including cell phone text messaging, email, websites, online adverts, database marketing, fliers, catalog distribution, promotional letters and targeted television, newspaper and magazine advertisements as well as outdoor advertising. Among practitioners, it is also known as a direct response.

3. Sales Promotion

Sales promotion uses both media and non-media marketing communications for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability.

4. Personal Selling

The sale of a product depends on the selling of a product. Personal Selling is a method where companies send their agents to the consumer to sell the products personally. Here, the feedback is immediate and they also build a trust with the customer which is very important.

5. Public Relation

Public relation or PR is the practice of managing the spread of information between an individual or an organization (such as a business, government agency, or a nonprofit organization) and the public. A successful PR campaign can be really beneficial to the brand of the organization.

Promotions: Setting your objectives

New and growing businesses are, in marketing terms, growth brands. Promotion acts as an investment activity for future growth and profits.

Any promotional activity will pivot around trial, although it is important to remember that trial is only temporary and repurchase, or loyalty, will depend on how the consumer perceives the product.

Repurchase levels and the consequent success of the product or service will depend on how effectively the trial is carried out as well as the customer’s perception, through trial, of the product.

If your business is an entirely new or re-launched product, it is important to manage your expectations before committing enormous budgets to promotional activity.

For example, however innovative your product is, the first into the market tends to get the biggest market share. Do not expect too much, particularly in the short-term.

Another fundamental factor is the environment in which you wish to promote. When putting together a promotional strategy, objectives can only be established in the context of the market. Foremost here are customer dynamics.

• Who do you want to promote to?
• What do they want?
• Why do they buy competitors’ products or services?
• Similarly, where do you want to pitch your product or service?
• What about your competitors?

Other considerations may include any supply limitations, distribution issues, and the possibility of micro marketing: perhaps it is worth testing the activity on a regional basis.

Matching Techniques to objectives

Broadly speaking there are four promotional techniques that attract target customers to participate:

• Price
• Free Gifts
• Prizes
• Emotional Benefits

Each of these devices acts to entice the consumer in a slightly different manner and can be implemented in a number of ways.

Price Promotions

Price promotions are an excellent means of generating trial and loyalty as well as increasing volume of purchase and getting consumers of competitor brands to change to yours brand switch.

A word of warning prize promotions are legally complex and you should always seek professional advice. The main difference between competitions and free prize draws is that competitions may request a proof of purchase and free prize draws have to be no purchase necessary.

By definition, a competition has to incorporate an element of skill such as questions and a tiebreaker to complete. Instant win promotions are technically free prize draws, which is why the small print will always offer customers the chance to participate without purchasing the product in question.

Despite these complexities, instant win promotions are an excellent call to action and proven drivers of trial, brand switch and often, awareness. Equally competitions and free prize draws are tried and tested ways of encouraging customers to pick you product.

Emotional benefits

Promotions using emotional benefits or image are harder to define. Key emotional techniques include sponsoring an event such as the Olympics, linking up with a charity and character licensing activity.

The promoter will benefit from the transfer of the qualities associated with the chosen partner and may well gain additional media coverage.

This sort of activity is best suited to image building and brand awareness, which is why it will often run alongside another of the techniques described above such as including a competition prize linked with the promotional partner.