It’s All in the Price: Understanding the Impact on Shopping Behavior

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Feb 10, 2004
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By Bill Bishop


The growth of value retailers shows what happens when some retailers establish a much stronger price reputation than others. This is an important learning, but it’s certainly
not new, i.e., warehouse stores did it in the 1970s, clubs in the 1980s, supercenters in the 1990s, and now dollar stores are demonstrating the power of price reputation.


What is new is that price reputation seems to be even more impactful than it has been in the past. Why?


One answer can be found in the way economists look at the impact of price on buyers, i.e., there are two different effects:




    • Substitution effect that makes one product cheaper than another.

    • Income effect where the savings increase the income of the buyer.



The grocery business has traditionally focused the most attention on the substitution effect, e.g., matching prices, to keep the competition from using a better price to build
traffic. This, however, is no longer enough.


Today, many consumers are making store choice decisions based on the “total dollars” they can save by shopping a particular store. This is evident when a consumer says, “I just
can’t afford not to shop there.”


This means retailers who want to neutralize their competitive vulnerability to value retailers need to consider the income effect and help consumers see that they can shop their
stores, if they want, in a way that helps them significantly reduce what they spend on the groceries they need.


This can be done by:




    • Narrowing the price gap for popular products so there is no obvious price penalty.

    • Making available low-price choices across all categories so each shopper always has a true, low-cost option for a specific purchase in any category.

    • Communicating these prices in a way that lets shoppers know that they can save a lot of money if they want to.



When a retailer does this, they can reduce/neutralize the income effect of the value retailer and do a better job of holding on to their own business. We know this can work based
on more than a decade of helping retailers manage their price image.


Moderator’s Comment: Is price more important to consumers in making the decision where
to shop than it has been in the past? How can a retailer effectively communicate consumers “can’t afford not to shop” in its stores when the competition is sending a similar message?


We recently got a retail reality check courtesy of the resident fourth grader when looking at a Wegman’s flyer that compared the chain’s prices with those
of local competitors.


To paraphrase our darling’s ‘out of the mouth of babes’ comment: “Dad, couldn’t Pathmark take a bunch of products that it sells for less than Wegman’s and
put them in a paper too? Wegman’s isn’t really cheaper than Pathmark, is it?”
George
Anderson – Moderator

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