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Price reductions: What retailers should observe

Price reductions: What happens if a retailer lowers the prices of premium brands of a higher quality and price? Does the retailer of cheap brands lose customers to the competition? And how do sales of the premium brand develop when the low-priced brands are reduced?

We show you which impacts price reductions on premium and cheap brands have on the sales in different price categories (high, medium, low) and what you should consider as a retailer.

Price reductions: Competition between the pricing levels

What happens if a retailer lowers prices for top-tier brands of high quality and high price? Will the retailer steal sales from low-tier brands? And what happens to top-tier brand sales if low-tier brands are marked down? Robert Blattberg and Kenneth Wisniewski from the University of Chicago and AC Nielsen studied these effects and published their results in Marketing Science in 1989.

The researchers looked at data from the leading Chicago-based supermarket chain for four types of products of 28 brands over a period of about one year. They realized that when one top-tier brand (e.g. premium flour of high quality sold at high prices) was marked down, it stole sales from other products in its tier as well as from brands in the tier below (mid class-brands). Looking at low-tier brands (low quality, low price) and markdowns there, these stole sales from brands in the same category but not from top-tier brands. Hence, there is little competition between different tiers of products.

Pricing: What retailers should observe

In our opinion, these results are valuable for price setting under competitor monitoring when it comes to setting prices for similar products. When an online retailer monitors its competition by looking also for price changes of similar products, this retailer should be cautious if a competitor lowers prices for low-tier products. The retailer then has to worry little that this would steal sales from its own top-tier products which were not marked down. The retailer would also have to worry little when selling low-tier products and competitors should reduce prices for top-tier products. Hence, carefully differentiating between product tiers is a must in competitive product monitoring and price setting.

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