Tag: Web Design & Analytics Osmania University B.com Notes

Retail atmospherics refers to store factors such as display design and fixtures, flooring, smell, store lighting and temperature, music, wall coverings, and other elements of store’s ambience, which can be controlled by a retailer to influence the consumer’s buying mood. It is the environment inside the store that ultimately influences buyer behavior that is why it is very strategic to retailers. The associations due to environmental dispositions in and around the retail store will facilitate the process of positioning and communicating value in terms of Points of Parity and Points of Difference in the consumer memory. The retail store atmospherics is an array of tangible and intangible dispositions interwoven into a web of meaning that touches the social, cultural, economic, psychological and religious life style of consumers, due to current fad, fashion and trends. Retail atmospherics intends to engage all of the customers’ senses into making a purchase. Retail atmospherics are based upon the fundamentals of consumer psychology in terms of using triggers to tell people to make a purchase or to stay more in the store.

The store environment consistently delivers consumer experiences throughout the shopping effort. The environment of a store is designed in order to communicate brand personality and image of the store. The intention is to create a kind of environment which can differentiate the store from competitors and is capable of stimulating purchasing activity by attacking customer’s senses in a very pleasure full manner. Atmosphere is a factor which is present in every buying situation. Atmospherics however, is a conscious planning of atmospheres to contribute to buyer’s propensity to consume. It’s perfect planning is capable of enhancing retailers’ revenues.

For example, a fine dining restaurant play slower paced music to draw in their target crowd and people to stay more and eat more. Similarly, a grocery shop might use the colours red and yellow to trigger the appetite and make people more likely to stop in and make a purchase. Most customers do not consciously notice these subtleties, but they create impact. It focuses on all the environmental elements such as dim or bright light, music which is classical, instrumental, fast, slow or hit number, attractive window dressing, layouts, freshness and fragrance, appropriate temperature to make it comfortable, soothing and trendy, vibrant colours, attractive logos and well managed traffic are ideal conditions that can affect the current and future behavior of consumers.

Features of Atmospherics include:

• A layout of the space including the location of clerks and checkout counters.
• Scents or aromas designed to excite and entice the shopper.
• The overall temperature of the retail space.
• The location of pricing information or other signage.
• Decorations which represent the brand.
• Music to inspire, sooth, or stimulate.

Many retail giants will use elements of atmospherics to help identify their retail brand and set it apart from competitors. One drawback can be an overly aggressive use of atmospherics, which can have the opposite effect, intimidating or driving potential customers away.

Aesthetics in a retail store

The trend of Indian market has changed a lot in the past few decades. Earlier there were a few retail stores and the competition was not very tough amongst them, but the past couple of years were revolutionary for the Indian retail market and now there are hundreds of names involved in retail marketing. Many established brands and new names are trying their luck in retail marketing and companies are trying their best to capture the attention of potential clients and increase the sales.

One of the best ways to connect to your customers is to catch their attention. Provide perfect visual delight to your customers and convince them to at least check your store and products once. Retail stores are spending a good amount of money on visual merchandising; the better you project yourself the more desired attention you will get in return.

Atmospheric and aesthetic are two important elements of store interiors and almost all retail stores try to excel in these two elements. The concept of beauty and aesthetic sense is not only restricted to the display window, but the whole store is designed and organized in such a way that it meets the customers’ expectations and motivates them to explore more and find suitable products for themselves ending in sales. The mantra of success in retail marketing is largely decided by the aesthetic element of a store.

It is human nature to explore things that please the visual sense and retail stores are fully exploring this fact for improving their performance and sales. The atmospheric element includes light, colour, music and scent of the retail store that will stimulate the customer’s response and will influence their buying behavior. Aesthetic element includes factors like size, colour and texture within the store. If you are wondering how to give a perfect look to your retail store follow a few simple steps and make your retail outlet an interesting place for customers.

The mantra of success in retail marketing is to connect to your customers instantly and the window display is your first step to connect to your customers. While working on appearance and design of your retail store remember that if something catches your attention, it will surely catch a passer-by’s attention too. Think from the buyer’s point of view and display items suiting the buyer’s interest.  Improve your storefront; it should look appealing, promising and user-friendly. Make sure that inner section of your store’s interior is the extension of your storefront and it fulfils customer’s expectations.

Once your customer enters into the store make sure that you made the best use of the opportunity and show your best to allure the customer and inspire them to buy from the store. Create the right ambiance with perfect color, size, shape and design, it is very important to display the products at its best. Customers should get a full view of the store, leave enough space between two racks and utilize the connecting path from one section to other to display the best of both sections. Make sure that the products are displayed at appropriate height, there should be enough light so that the customers can get a better view of the product before buying it.  For clothing and accessory store it is essential to have enough number of trial rooms with proper light & air and an attendant to help the customers in choosing the items.

• Be innovative in your approach. While working on the interior of your store make sure that aesthetics and atmosphere of the store is user-friendly and it does not hinder the movement and activities in the store.
• Display your merchandise aesthetically and increase your sales, remember the more interestingly you present your product, the more attention it will gain. It is human tendency to appreciate beauty and attractiveness.
• Being off the indent is good care to be different to gain more footsteps to your store. Ask your employees to suggest innovative and witty ways to promote products in your store. That way you not only get a free creative team, you also keep your employees engaged. Many will pick up cues from what customers say about a product.
• Know what’s in and highlight them. It’s easy to keep a record of what the customers ask for “Where’s the”. These cues are important to know what’s selling these days and once the customer is hooked, he/she will possibly buy more variety of products.

Beyond just creating a good-looking store with aesthetically pleasing displays, retail store design is a well-thought-out strategy to set up a store in a certain way to optimize space and sales. The way a store is set up can help establish brand identity as well as serve a practical purpose, such as protecting against shoplifting.

Retail design is a creative and commercial discipline that combines several different areas of expertise together in the design and construction of retail space. Retail design is primarily a specialized practice of architecture and interior design, however it also incorporates elements of industrial design, graphic design, ergonomics, and advertising.

Retail design is a very specialized discipline due to the heavy demands placed on retail space. Because the primary purpose of retail space is to stock and sell product to consumers, the spaces must be designed in a way that promotes an enjoyable and hassle-free shopping experience for the consumer. For example, research shows that male and female shoppers who were accidentally touched from behind by other shoppers left a store earlier than people who had not been touched and evaluated brands more negatively. The space must be specially-tailored to the kind of product being sold in that space; for example, a bookstore requires many large shelving units to accommodate small products that can be arranged categorically while a clothing store requires more open space to fully display product.

Retail spaces, especially when they form part of a retail chain, must also be designed to draw people into the space to shop. The storefront must act as a billboard for the store, often employing large display windows that allow shoppers to see into the space and the product inside. In the case of a retail chain, the individual spaces must be unified in their design.

Role

A retail designer must create a thematic experience for the consumer, by using spatial cues to entertain as well as entice the consumer to purchase goods and interact with the space. The success of their designs are not measured by design critics but rather the records of the store which compare amount of foot traffic against the overall productivity. Retail designers have an acute awareness that the store and their designs are the background to the merchandise and are only there to represent and create the best possible environment in which to reflect the merchandise to the target consumer group.

There are six basic store layouts and circulation plans that all provide a different experience:

• Pathway plan: Is most suitable for large stores that are single level. In this plan there is a path that is unobstructed by shop fixtures, this smoothly guides the consumer through to the back of the store. This is well suited for apparel department stores, as the clothes will be easily accessible.
• Straight plan: This plan divides transitional areas from one part of the store to the other by using walls to display merchandise. It also leads the consumer to the back of the store. This design can be used for a variety of stores ranging from pharmacies to apparel.
• Diagonal plan: Uses perimeter design which cause angular traffic flow. The cashier is in a central location and easily accessible. This plan is most suited for self-service retail.
• Varied plan: In this plan attention is drawn to special focus areas, as well as having storage areas that line the wall. This is best suited for footwear and jewellery retail stores.
• Curved plan: Aims to create an intimate environment that is inviting. In this plan there is an emphasis on the structure of the space including the walls, corners and ceiling this is achieved by making the structure curved and is enhance by circular floor fixtures. Although this is a more expensive layout it is more suited to smaller spaces like salons and boutiques.
• Geometric plan: Uses the racks and the retail floor fixtures to create a geometric floor plan and circulation movement. By lowering parts of the ceiling certain areas can create defined retail spaces. This is well suited for apparel stores.

Objectives

Customer Experience

Ann walked into the new grocery store that had just opened around the block. Everything looked nice and clean. Her eyes immediately turned towards the sale items displayed prominently at the stores entrance. Here she was excited to find her favourite salt crackers and a box of blueberries.

She then ran to find her favourite drink and there it was in the aisle labelled ‘Juices and Drinks’. She walked around every aisle looking for things she would commonly buy pasta, cookies, mayonnaise and she found them all. The aisles were correctly labelled and easy to navigate.

She found a display with jellies that could taste and pick the one she liked. She went through her shopping list in a much shorter time compared to the time she would otherwise take grocery shopping, and she learned about many new products.

Increased sales per visit

Greg planned to increase sales by strategically placing attractive items at the door to lure the customer in. Other items inside entice them to walk through areas and make more purchases.

For example, a display of organic blueberries on sale can lead them towards the produce section where they’ll find other items not on their shopping list.

Or he could strategically place preferred products next to sale items so that someone browsing through the sales rack would be tempted to purchase another appealing product.

Cost control

Cost control is the process of identifying business costs and reducing expenses. Design should keep future costs down.

Greg’s layout should allow for reorganizing the aisles and displays (say for holiday themes) without too much effort that can increase labor costs. Some other ideas to consider are:

• Automating tasks for payroll, invoicing and shipping.
• Using energy efficient light bulbs and motion detector lights to save on energy.
• Installing technology to reduce freezer glass condensation and other utility costs.
• Using surveillance systems to discourage theft and shop lifting.

Principles

Invite Customer Participation

Good visual communication invites customers to participate actively in their shopping experience for example, by ensuring that staff members are available and clearly visible as such, and providing the opportunity for the customer to have different types of experiences within the store. With the massive shift that online shopping has brought, this part of the store design process is also about offering experiences that the customer can’t get online, whether it’s one-on-one help and advice from staff, or the opportunity to try products out before purchasing.

Offer a Sequential Experience

Successful stores deliberately plan the customer experience, both figuratively and literally. Literally, it’s about planning the store’s layout for the optimal customer experience; figuratively, it’s more about the chronological path a customer takes to get there awareness through advertising that encourages them to stop by (whether print, online or a store-front window), the visit to the store itself, exploring the store and browsing products, and finally, making a purchase.

Define your Space

First things first, defining your space is all about your brand and image, how it gets people into your store, and what they do once they’re there. This is the big picture what are you selling, and who are you selling to? There needs to be a consistency of style and function in your store that reflect all of these different factors, to tie the whole shopping experience together.

A good example of this is Starbucks, a brand that has built its empire by focusing not so much on coffee, but on the experience of drinking it, by providing customers with cosy, comfortable chairs and free wifi, to encourage them to linger for long periods of time, and potentially make multiple purchases in a single visit.

Provide Visual Communication

Visual information includes signage, branding, and other written and graphical information that communicates essential information to customers. It should be clearly legible, and provide only important information that will actually enhance the customer’s experience, and ideally, each element should conform with the store’s visual branding design.

This is a good place to take inspiration from the world of exhibition design, where the focus is on providing information quickly and succinctly, to people whose attention is typically divided between multiple different brands at once. Visual communication needs to be immediately recognizable, and provide information that can be interpreted and used quickly.

Organizing the Space

When a customer shops online, they have an entire store at their fingertips, with the ability to look at multiple different types of products at essentially the same time. This isn’t the case for the in-store shopping experience, so it’s important that the space is well-organized, and as intuitive and easy to use, as possible. A customer who enters a store should have a clear path to follow, with different categories of products clearly sign-posted, logical and clear product groupings, and a means of quickly finding help if they need it. A well-organized store is one that makes customers feel safe and comfortable, and is structured so that they can get what they need without wasting time.

A retail store layout (whether physical or digital) is the strategic use of space to influence the customer experience. How customers interact with your merchandise affects their purchase behavior. This retail principle is one of the many from Paco Underhill, author of Why We Buy.

The interior retail store layout has two important components:

• Store Design: The use of strategic floor plans and space management, including furniture, displays, fixtures, lighting, and signage. Website designers and user experience (UX) researchers use space management techniques and web design principles to optimize e-commerce websites. We’ll further discuss a variety of popular retail floor plans later in this article.
• Customer Flow: This is the pattern of behavior and way that a customer navigates through a store. Understanding customer flow and the common patterns that emerge when customers interact with merchandise based on the store layout is critical to retail management strategy. Physical retailers are able to track this using analytics software and data from in-store video and the wifi signal from smartphones. For example, solution providers like RetailNext provide shopper analytics software for retailers to understand flow and optimize the customer experience based on in-store video recordings. The technology also exists to track the digital customer flow and online shopping behavior. Using “cookies” and other software, online retailers can track customer behavior, including how customers interact with their website.

While the exterior retail store layout includes exterior store design and customer flow, it also includes the following factors:

• Size of the building and length of the walkways accessible from the entrance and exit.
• Geographic location of the retail store. (Real estate)
• Use of furniture and exterior space for people to gather and interact.
• Style of architecture of the retail building.
• Color of paint and choice of exterior building materials.
• Design of the physical entrance and exterior window displays.

Steps:

Decide on a Retail Store Floor Plan

Large or small, most retail stores use one of six basic types of retail store layouts: grid, loop, free-flow, diagonal, forced-path, and angular. The type of layout you use depends on your space, the shopping experience you are trying to create, and the products you sell.

For example, grocery stores usually use grid layouts because they are predictable and efficient to navigate. On the other hand, boutiques typically use more creative layouts that allow businesses to highlight different products.

Put Your Retail Store Layout Down on Paper

Once you have considered all the floor layout options at your disposal, it is time to start taking steps toward arranging one in your space. To begin implementing a store layout, it is best first to put your layout down on paper. This will give you a bird’s-eye view of your store once everything is in place, help you understand your space, and guide your installation process.

Consider Traffic Flow and Customer Behaviors

One of the biggest things that your store layout will impact is customer flow. Your store layout should work with the natural ways that shoppers flow through your space to avoid creating discomfort and evoke a positive customer experience. A layout that works with your customers’ natural shopping habits will help you create a layout that is both comfortable and natural, as well as one that drives your sales.

Position Your Store Checkout Area

A cash wrap, also known as a cash well or checkout counter, is the area that houses your POS system or cash register and where customers pay for their merchandise. In general, the front left of a retail store is a good location for the checkout counter. Shoppers naturally drift to the right when they enter a store, loop around, and then leave on the left side. A checkout counter at the front left of your store puts the last step of the shopping experience on your customers’ natural exit path. Plus, this placement doesn’t distract people from shopping or take up prime product display space.

Position Products for Maximum Exposure

Once you have sketched out your floor plan, it is time to begin product mapping. When placing your products, you should be sure you are doing so in a way that promotes customer engagement, creates a positive experience, and drives your sales.

• Choose fixtures that are versatile and can display a range of products: Your business’s merchandise is constantly changing, and you want to be sure you don’t have to constantly buy new fixtures to display them.
• Carve out a section for displaying sale merchandise: You want to be sure you have a designated area for sale merchandise. I recommend placing your sale section toward the back of the store and keeping it relatively small to draw people through your space and avoid taking attention from full-priced displays.
• Create a space for seasonal and limited availability products: You want to highlight new, limited, or seasonal items so be sure you have a good space for these products that will draw the eye and promote engagement.

Types

Grid Layout

The grid layout is the most common store layout you’re going to find in retail. Used in supermarkets, drug stores, and many big box retail stores, it’s used when stores carry a lot of products (particularly different kinds of products), or when a retail location needs to maximize space.

Advantages

• It’s easy to categorize products.
• Shoppers are used to the grid layout style and shop it easily.

Disadvantages

• It’s boring, and it’s difficult to use this layout to create a “shopping experience” for the customer.
• Customers often can’t take shortcuts to what they need.
• Line of sight is limited, forcing a customer to look up and down aisles.
• Visual “breaks” are needed to keep shoppers engaged.

Strategies:

• Well-placed promotions. Eye level and a little to the left, in fact. If you’re walking through a grid format store counterclockwise, you’re going to notice that which is a little ahead of you. On a turn, that means the promotion will be at eye level and a little off to your left, where you’re looking as you walk. Things don’t get noticed in corners.
• Power walls. Because you can leverage your wall space so well in a grid format store, you can take advantage of this to build power walls. Power walls allow you to display merchandise to draw shoppers into an area they might otherwise skip over in normal traffic patterns. Retailers use repetition by putting a lot of a particular product on the wall, perhaps in different colors or sizes.
• End caps and visual displays. Aisle fixtures have to end, and usually the ends of those aisles are prime real estate to put up a product display. We’ll learn more about these in the next section, but suffice it to say, you have more opportunities to leverage the ends of those aisles with displays and signage in this format than any other.

Racetrack

If you’re selling a product that people want to browse, touch and look at, then the racetrack, or loop, layout is one to consider. Customers follow a prescribed path through the merchandise and experience it the way the retailer wants it to be seen.

Advantages

• Retailers can provide a great “shopping experience” using this layout.
• Promotions are easier to execute, because the layout really controls what the shopper sees.
• Encourages browsing.

Disadvantages

• Customers who want to run in and pick up something quickly are often discouraged when faced with this layout.
• Not a good layout for a high-turnover store, like a pharmacy or a convenience store.

In this kind of layout, the retailer doesn’t really need to influence traffic flow, because traffic can really only move one way. This is what makes the layout so perfect for executing promotions. The retailer knows where the shopper is going to look next, and promotions are arranged accordingly eye level and a little to the right.

Free Form

This layout can be anything the retailer wants it to be, in any shape or place. Customer behavior is the only consistent aspect of this kind of layout: we know they will enter and turn right; we know that they won’t want to go up or down a floor and that they won’t shop in to narrow an aisle.

Advantages

• Ideal for a store offering smaller amounts of merchandise.
• Easy to create a shopping experience in this layout.

Disadvantages

• Less space to display product.
• Easier to confuse the customer.

Traffic flow can easily be disrupted if there isn’t some logic to how items are displayed in the store, and if that logic doesn’t exist, it’ll create shopper confusion. Confused shoppers exit the store nearly immediately and usually without purchasing anything.

Systems

Retailers have some of the largest and most convoluted systems of any type of business. They are second only to government in size and complexity. The systems are large and small, new and old. Some operate from the cloud, others from IBM AS400s. And they are linked manually via developers who keep them talking to each other in scenes reminiscent of mechanics with oily rags in a factory from the industrial revolution of the late 1700s. There is currently no greater strategic, operational or financial challenge for large retailers than bringing all of their legacy systems up to the same level of integration and performance as their newer online retailing competitors who were all birthed on the internet Millennial retailers if you will.

Standards

This refers to ensuring that processes and procedures throughout the company are standard so that there is a common understanding. It also means that people can be moved around and be familiar with their environment.

Stock

Space

Staff

Planograms, also known as planograms, plan-o-grams, schematics and POGs, are visual representations of a store’s products or services on display. They are considered a tool for visual merchandising.

Planograms are predominantly used in retail businesses. A planogram defines the location and quantity of products to be placed on display. The rules and theories for creating planograms are set under the terms of merchandising. For example, given limited shelf space, a vendor may prefer to provide a wide assortment of products, or may limit the assortment but increase the facings of each product to avoid stock-outs. Manufacturers often send planograms to stores ahead of new product shipments. This is useful when a vendor wants retail displays in multiple store locations to have the same look and feel. Often, a consumer goods manufacturer releases a planogram with each new product to show how the product can relate to existing products.

Fast-moving consumer goods organizations and supermarkets mostly use text and box-based planograms to optimize shelf space, inventory turns and profit margins. Apparel brands and retailers are more focused on presentation and use pictorial planograms that illustrate the look and brand identity for each product.

Placement methods

Visual

Visual product placement is supported by different theories including; horizontal, vertical, and block placement. Horizontal product placement increases the concentration of a certain article. Research studies suggest that a product’s relation to customer eye levels directly correlates to its sales. This depends on the customer’s distance from the unit. Vertical product placement puts products on more than one shelf level to achieve 15 centimetres (5.9 in) 30 centimetres (12 in) of placement space. Similar products are placed in blocks. A planogram can be compared to a book. A store is the book and its individual modules represent the pages. The customer gradually “reads” individual modules and automatically proceeds from the left to the right, from the top to the bottom as if he/she read a book. This principle is followed by a majority of rules for goods displaying. The rules say that goods should be arranged on a shelf from the least to the most expensive ones. Goods may also be arranged in the reverse order, depending on the kind of goods that the dealer wishes to promote. This makes the difference between dealers of cheap and luxury goods.

Commercial

Commercial placement is determined by both market share placement and margin placement.[5] Market share research companies like ACNielsen collect sales data for various products and calculate market share of products in various market segments. Margin placement is determined by the profit margin of a specific item. Higher margin places a product closer to the front of the store, where it is most likely to attract attention.

Derivative objectives

• To communicate how to set the merchandise
• To ensure sufficient inventory levels on the shelf or display
• To use space effectively (e.g. floor, page, and screen)
• To facilitate communication of retailer’s brand identity
• To assist in the process of mapping a store
• To improve customer satisfaction by shelves that are organized and visually-appealing

Creation

The planogram concept originated with KMart. Planograms are created with the help of planogramming software by a Planogram Specialist, Space Planning Specialist or Space Planning Manager. The retail industry utilizes software to ensure proper stocking. Retailers turn to planogram software to reflect each store’s particular customer profile and localized demand, while maintaining centralized control and supply chain efficiency.

For example, some software packages focused upon fast-moving consumer goods and hard goods sectors made enhancements to transfer parts of shelving elements to single store measurements, which, according to the producers, should increase efficiency.

Retailers automate the creation of store-specific planograms through use of corporate-level business rules and constraints describing best practices. Such planogramming solutions allow these companies to respond with location and language-specific messaging, pricing, and product placements based on business rules derived from location, campaign and fixture attributes to create localized assortments.

Recent advances in store virtualization and collaboration allow manufacturers, retailers and category management experts from across the globe to work in the same virtual store in real time.

First-degree price discrimination is where a business charges each customer the maximum they are willing to pay. This price can vary from customer to customer as the business charges the very maximum in order for the customer to purchase their goods. As a result, the firm is able to capture all consumer surplus and keep this as economic profit instead.

Exercising first degree (or perfect or primary) price discrimination requires the monopoly seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum price they are willing to pay, and thus transform the consumer surplus into revenues, leading it to be the most profitable form of price discrimination. So the profit is equal to the sum of consumer surplus and producer surplus. The marginal consumer is the one whose reservation price equals the marginal cost of the product. The seller produces more of their product than they would to achieve monopoly profits with no price discrimination, which means that there is no deadweight loss. Examples of this might be observed in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering could reduce the market efficiency.

First-degree price discrimination is more of a theoretical concept than a reality. It is something for businesses to aim towards than their actual ability to achieve. After all, being able to charge each customer the absolute maximum they are willing to pay is near on impossible.

Some firms are able to implement some form of specific pricing strategy – for example, coupons which verges on first-degree price discrimination. Whilst firms will be unable to charge the absolute maximum, they will be able to charge different values which vary depending on their willingness to pay.

Traditionally, sellers would try and maximise their sales through individual observation and negotiation. For example, when most trade was done via markets, sellers would make assumptions based on an individual’s age, gender, and attire – anything that would signal the consumer’s willingness and ability to spend. Often, negotiations would depend on these initial assumptions. For example, individuals who are well-dressed are more likely to be charged higher prices based on their assumed ability and willingness to pay.

The issue with this age-old approach is that it is a time-consuming and a flawed process. Not every individual in a suit is rich, nor is everyone in a tracksuit poor. On top of this, it is a very inefficient method, particularly for big companies that sell millions of goods. It would be impossible to do this for each customer and for each item they buy.

Examples:

Airlines

Most airlines operate a form of price discrimination by using dynamic pricing. This is simply where prices fluctuate depending on current demand. For instance, if tickets are selling quickly, then prices will start to rise. If tickets are hardly selling, then the prices may fall to attract more customers.

Whilst this form of price discrimination doesn’t necessarily maximize revenue from the consumer, it does increase the firm’s profits by taking advantage of some consumer’s higher willingness to pay. For example, those consumers who are price-sensitive are more likely to book when the tickets come out and are at their cheapest. By contrast, those who are not so sensitive to prices may book last minute when prices may be significantly higher.

Therefore, airlines are able to segment between more price-sensitive consumers and those who are not. For instance, those who need to travel for last-minute business will have a higher willingness to pay than a family of four looking for a holiday.

Business to Business Services

It is much easier to use price discrimination in the service industry as the firm has more control over who can access these as opposed to physical goods that can be resold. This is why businesses are freely able to use price discrimination to sell between different clients. Not every business has the same budget for the goods they are selling.

For instance, a big firm like Walmart will have a far bigger budget than a small firm such as Barry’s Bicycles. So, the willingness to pay is going to differ dramatically between businesses.

Some firms will offer different packages based on the size of the organization. For instance, if a company requires 100+ users, then they will pay a higher fee than those who only need 5 users. Even though the set-up cost is the same, they are able to charge different prices in order to attract custom from each business which has different budget constraints.

Utilities

Utility firms usually offer fixed-term contracts over a year or two by which the consumer is offered a lower rate. However, once this term expires, consumers are put onto a higher variable rate. Yet a significant number of consumers will remain on this variable rate, paying a higher fee each month.

More price-sensitive consumers will get in contact and either switch providers, or move onto a cheaper tariff. By contrast, those consumers who are less price-sensitive may stay with the same utility provider and variable rate, thereby paying a higher fee for the same service.

In second-degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy discounts.

Additionally, to second-degree price discrimination, sellers are not able to differentiate between different types of consumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves according to preference, which is done by quantity “discounts”, or non-linear pricing. This allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.

In reality, different pricing may apply to differences in product quality as well as quantity. For example, airlines often offer multiple classes of seats on flights, such as first-class and economy class, with the first-class passengers receiving wine, beer and spirits with their ticket and the economy passengers offered only juice, pop, and water. This is a way to differentiate consumers based on preference, and therefore allows the airline to capture more consumer’s surplus.

Second-degree price discrimination involves charging consumers a different price for the amount or quantity consumed. Examples include:

• A phone plan that charges a higher rate after a determined amount of minutes are used.
• Reward cards that provide frequent shoppers with a discount on future products.
• Quantity discounts for consumers that purchase a specified number of more of a certain good.

Markdowns

Markdowns are technically known as second-degree price discrimination – charging different prices to different people on the basis of the nature of the offering.

Coupons

Coupons offer a discount on the price of specific items when they’re purchased at a store.

Coupons are also considered a form of second-degree price discrimination because price-sensitive consumers are more likely to expend the extra effort to collect and redeem coupons whereas price- insensitive consumers will not.

Coupons are used because they induce customers to try products for the first time, convert those first-time users to regular users, encourage large purchases, increase usage, and protect market share against competition.

Rebates

Rebates provide another form of discounts for consumers off the final selling price. In this case, the manufacturer issues the refund as a portion of the purchase price returned to the buyer in the form of cash.

Manufacturers like rebates because as many as 90% of consumers don’t bother to redeem them (breakage). Retailers like rebates because they increase demand in the same way coupons may, but the retailer has no handling costs.

Price Bundling

Price bundling is the practice of offering two or more different products or services for sale at one price. Price bundling increases both unit and dollar sales.

Multiple-unit Pricing

This strategy is used to increase sales volume. It is similar to price bundling in that the lower total merchandise price increases sales, but the products are similar, rather than different.

The risk is that customers may stockpile for use at a later time, resulting in no long-term gain.

This is the most frequent price discrimination and involves charging different prices for the same product in segments of the market. Third degree discrimination is linked directly to consumers’ willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production.

This is an example of third-degree price discrimination and refers to the practice of charging different prices in different stores, markets, regions, or zones usually in response to different competitive situations in their various markets.

In the real world, third-degree price discrimination is quite common. For a firm to practise price discrimination it requires:

• Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)
• Ability to set prices. Some market power.
• Ability to prevent resale. E.g. stop adults using student tickets.

Direct price discrimination

Third degree price-discrimination is sometimes known as direct price discrimination. Because a firm directly sets different prices depending on distinct groups of consumers (e.g. age)

The alternative is indirect price discrimination where consumers can choose depending on their behaviour, e.g. bulk buying gets lower average cost.

Two Part Pricing Tariffs

• Another pricing policy is to set a two-part tariff for consumers.
• A fixed fee is charged + A supplementary “Variable” charge based on units consumed.
• Examples: taxi fares, amusement park charges
• Price discrimination can come from varying the fixed charge to different segments of the market and in varying the charges on marginal units consumed (e.g. discrimination by time).

Product-line pricing

• This occurs when there are many closely connected complementary products that consumers may be enticed to buy. It is frequently observed that a producer may manufacture many related products.
• They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.
• Examples: manufacturers of cars, cameras, razors and games-consoles
• Discriminatory pricing techniques may take the form of offering the core product as a “loss-leader” (i.e. priced below average cost) to induce consumers to then buy the complementary products once they have been “captured”.

High–low pricing is a type of pricing strategy adopted by companies, usually small and medium-sized retail firms, where a firm initially charges a high price for a product and later, when it has become less desirable, sells it at a discount or through clearance sales.

Prospective customers may be unaware of a product’s typical market price, or have a strong belief that “discount” is synonymous with “low price”, or have strong loyalty to the product, brand or retailer. High–low pricing strategy is effective because of consumer preference and shopping frequency.  Consumers with higher income strongly prefer the high-low pricing and they shop frequently in the brand stores they like.

Usage

There are many big firms using this type of pricing strategy (including, in North America, Reebok, Nike, and Target). Competition in shoemaking and the fashion industry is partly through high–low pricing (for example Macy’s, Nordstrom). But some firms will not provide discounts and work on a fixed rate of earnings following everyday low price strategies to compete in the market.

An alternative way to use high–low pricing is to increase the price for a short time, sometimes as much as 500%, after which it is “discounted” to what its normal selling price. After the price is reduced to the “sale” price, it may often stay at that price for a long time, sometimes longer than two weeks, after which customers may begin to question whether the reduction is genuine. Artificial discounts of this sort are illegal in the United Kingdom.

Advantages of High-Low Pricing

A key advantage of using the high-low pricing method is that, when properly implemented, it can yield substantial profits; but only if customers buy multiple additional items that are fully priced. A further advantage is that the high-low method essentially becomes the marketing method for the business, since it must constantly advertise a selection of low-price items.

Built-in marketing strategy

Because companies that use high-low pricing need to consistently advertise the products they plan to sell at a discounted price, the advantage of having an established marketing strategy accompanies the use of the pricing model. This results from the constant changing of which products a company lowers the prices for, as they can reuse the marketing strategy from one round of promotions or coupons for the next batch of discounted products. Having a marketing strategy ready to use can save a company time and money they might otherwise need to develop one.

Increased profitability

One advantage of high-low pricing is that it can increase a company’s overall profitability. This occurs when customers who are presented with the opportunity to purchase products at a decreased price also purchase full-price items while shopping. Especially in retail businesses that keep their sales floor stocked with inventory, customers might visit a business with the intention of purchasing an item that they see being sold at a discount and end up making additional purchases after browsing the store.

Expanding customer base

Another advantage to high-low pricing is its potential to attract new customers to a business. This is because a company that uses high-low pricing typically offers promotions or coupons that they advertise to the public, which might encourage customers to visit a business even if they have not done so before. Companies that effectively use high-low pricing can also have a greater chance of keeping their existing customers who can return to repeat their usual purchases and explore new discounted items as a company releases them.

Disadvantages of High-Low Pricing

A business using high-low pricing will need to contend with several disadvantages. First, if a business does not place its low-price items properly, or is dealing with price-sensitive shoppers, it may find that it loses money on its low-price promotions. Second, if customers become aware that the bulk of the products offered by a business are higher than the market rate, they will be more likely to shift their spending loyalties elsewhere. And finally, it can be expensive to run a perpetual series of marketing campaigns to tout the latest low prices.

Market comparisons

Another possible disadvantage to high-low pricing is how a company might compare to other similar businesses in terms of how they price their items. This is because if a company sets the prices of its more expensive items too high above market value, there is potential for customers to compare pricing with other stores or companies and choose to shop at a company with lower overall prices. Companies can help this by carefully choosing the prices of their more expensive items and trying to prevent too large of a discrepancy with prices at other similar businesses.

Consumer behavior

One potential disadvantage to high-low pricing is that it relies on the behavior of consumers who visit a business to make purchases. While a company can perform market research and observe what their customers typically purchase, it might not be possible to predict which products customers want to buy with complete accuracy. This might result in fewer customers than anticipated opting to buy more expensively priced products, even if they’re situated close to discounted ones.

Cost of advertising

As high-low pricing typically relies on continuous advertising of discounted products, companies who use it might spend large sums of capital on marketing or advertising campaigns. This is necessary for high-low pricing, as the products offered at a low price change regularly, which means that it can be an ongoing expense for businesses who advertise heavily or change their discounted products more frequently.

Evaluation of High-Low Pricing

The high-low pricing method is widely used, but discerning shoppers in the Internet era are more capable of spotting lower-priced items elsewhere, and so will only buy the low-price items and will avoid the high-price items. Also, a business that persistently offers high prices on the bulk of its products will not garner much customer loyalty. Competitors that use everyday low pricing for all of their products can compete effectively against this strategy.

EDLP, which stands for Every Day Low Prices, is a pricing strategy in which firms promise consumers consistently low prices on products without having to wait for sales events. In such a pricing strategy, a firm sets a low price and maintains it over a long time-horizon (given that product costs remain unchanged).

It is common for competing retailers to segment the market by choosing different pricing strategies. The segments consist of two different sets of customers with different buying patterns, both for purchases and for pre-purchase research. Price-vigilant consumers, often referred to as “cherry pickers,” tend to be attracted to discounts. They are willing to do the research to learn about discounts, and to stockpile products when discounts exist. These consumers are better reached by promotional pricing strategies. In contrast, “expected price shoppers” are unwilling to do as much pre-purchase research and less likely to stockpile discounted items.

EDLP strategies generally result in lower fixed costs, since they require less advertising for promotional prices, less labour to execute price changes, and simpler pricing and inventory management systems with lower overhead. EDLP can also result in more predictable consumer demand and therefore fewer stocking and supply-chain problems. High-low pricing strategies generally result in lower variable costs, since promotional retailers can sell more products by offering discounts. They are able to take advantage of surplus at the wholesale level and also eliminate excess inventory at the retail level. This is particularly useful in markets for perishable goods, such as groceries.

If the market is sharply segmented by cherry pickers and expected price shoppers, then EDLP retailers have no incentive to switch to high-low pricing strategies, and vice versa. However, there are circumstances which motivate some retailers to change. In the last several decades, consumers have been less able and less willing to spend time reading circulars and newspaper ads to find the best prices.

Retailers lose more in case of price decrease than gain on price increase. Price variation in high-low pricing strategies may benefit shoppers who visit stores frequently because they are better able to exploit the fluctuating prices; however, many consumers are shopping less frequently now than in previous decades. These buying trends would predict that many grocers would switch from high-low pricing to EDLP, if the cost to switch was minimal. However, total costs for EDLP are higher in many markets, and it is extremely expensive for retailers to switch strategies. Not only is the initial cost high, but the EDLP strategy must be maintained long enough for consumers to associate lower prices with the brand.

Advantages of Everyday Low Pricing

Marketing costs

Advertising is less expensive as stores do not need to individually promote each sale item and advertise sale events. For example, it was noted that in 1994, Walmart, which used an EDLP strategy, would only need to purchase advertisements in a newspaper on a monthly basis while competitors would advertise every week of the year.

Demand forecasting

EDLP helps stores reduce demand fluctuations that would normally occur during sales promotions. Demand forecasting becomes much easier.

Staffing efforts

Stores save the time and effort in having to individually mark down items during sale events.

Disadvantages

2. If there are sudden fluctuations and prices go high, then there is a risk of losing customer’s trust as they are used to lower prices.
3. It is not practical sometimes to keep offering low prices on a daily basis.
4. It is mostly applicable to large retail stores as compared to small retail brands.

Importance of EDLP pricing strategy

Traditionally, retail stores used to keep regular pricing discounts, coupon clipping promotions, etc. to promote their sales and increase the footfall in their stores. But, this needs a lot of effort in terms of monetary aspects and physical aspects making it difficult to sustain the competitive advantage. The strategy of EDLP helps to convince the consumer that they will get better and low prices than other competitive stores everyday even though the promotions of competitors at regular intervals might provide lowest prices but they will not be available everyday.

EDLP also helps the retail stores to reduce their demand fluctuation that would occur due to promotions on some days, and also reduces the probability of consumers receiving time degraded products. Everyday Low Price strategy cuts advertising costs as well as the customers don’t need to be informed about occasional discounts but they are well aware that they will get the best price whenever they go to the store or retail channel. It also helps building brand image and trust in minds of the customers as they perceive the brand to be trustworthy and economical every time.

It is also assumed that sometimes the sales events and promotions are for stock clearances hence the prices have been dropped but in EDLP, that trust is maintained as products are consistently priced lower but perceived quality is always high.