Pricing and Promotion Strategies in a Retail Store

Industry Vertical and the Company:
FMCG Retailer

The Challenge:
Retailers earn higher margins when prices are high. But this also drives away customers and pushes the revenue down. Conversely, drop in prices attracts customers but erodes margin. Therefore, retailers want to manage this tension and maximize profit. Moreover, retailers can use different communication strategies to inform potential customers about prices in their store and manage their expectations.

Our Approach:
Working with an online grocery store, we examined the impact of different pricing and promotion strategies for a retailer. We found that customers’ expectation of store prices were as important as the actual prices in deciding the sales volume. For example, if the store price for a can of orange juice was $5 then someone who walked in expecting the price to be $6 is more likely to buy the product compared to someone else who expected the price to be $4. Customers’ experiences with prices influence their price expectations.

Apply advanced analytics to model the interrelationship between prices, price expectations and purchase decisions we disentangled the different effects.

The Outcome:
We worked out a pricing scheme for the retailer that balanced the depth and duration of price promotions as well as managed customers’ price expectations. Keeping the cost constant this strategy significantly boosted the sales.

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