Competition-based price setting in stationary retailing

The path to the perfect price can often prove difficult for retailers. There are various approaches to finding the optimal price for yourself. Here, for example, cost-based price setting can be drawn upon, or competition-based price setting or even value pricing. In today’s article, we will be looking into competitive price setting in retail using a practical example.

What influence do competitor prices have on price setting in retail?

Venkatesh Shankar (University of Maryland) and Ruth Bolton (Vanderbild University) investigated the effect of competitor price settings for consumer packaged goods throughout a range of US supermarkets and found that – even when considering several complementary activities – competitive pricing activities had, by far, the largest impact.

In their research which was published in Marketing Science in 2004 , they looked at stationary retailers and 1,364 brand-store combinations (e.g. a Coca Cola 12.5-ounce bottle, sold at Safeway, San Francisco, versus Coca Cola 12.5-ounce bottle, sold at Safeway, Boston) in five US markets over a two-year period.

They looked how far prices were fluctuating, how far the brands were associated with deals (price-promotion intensity), and at the price level of the brand in comparison to the price level of other brands within the same product category (relative brand price).

The researchers not only took competitive activities into account, they also considered:

  • storability and necessity of the products (category factors),
  • supermarket chain factors such as positioning and company size,
  • store factors such as store size and assortment,
  • brand factors like brand preference and advertising,
  • and customer factors (own price and susceptibility to deals).

Price setting: Price as the most flexible of elements

They find that competitor deal frequency explains about ¼ of price fluctuations, 70 percent of the price-promotion intensity, and 15 percent of the relative brand price. Competitor deal frequency explained about 1/3 of all price changes, 20 percent of the price-promotion intensity, and 40 percent of the relative brand price. Overall, this means that the impact of competitive activities is huge in comparison to all the other influence factors on the store, chain, category, brand, and customer level.

We consider these observations to clearly advocate that retailers have to monitor competitive activities closely in order to be able to react to change in the marketplace in an appropriate manner. Ever more retailers here are relying upon automated solutions such as blackbee technology to further expand their advantage.

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