To be successful in today’s highly competitive, global economy, a business must consider the psychological elements of consumer sales when determining how to price their products and services. Studies have continued to demonstrate that buyers are more likely to buy on emotion first, then justify the purchase through more logical analysis. Because of this, consumers are often quite irrational in making their purchasing decisions, so it is necessary to capitalize on those things that do make a difference to the consumer’s emotional response. Consumers make their purchasing decisions within the context of numerous decisions, distractions, and activities which make up their lives. Although they typically buy on emotion, additional research suggests that people do follow a definite logic when they make their purchasing choices. First, they look for cues within the marketplace to help simplify their decision making. This typically takes on the form of simple rules of thumb (Morris, Morris, 1990). To entice buyers into stores such as Walmart, the company must understand the customer’s perception of price and work on that through techniques such as positioning, price points, and value bundling.
One way in which pricing can be used to establish a business’s place in the market is through the use or disuse of loss leaders. Walmart, positioning itself as the low-cost leader of the marketplace, frequently attempts to set the lowest possible price on the products it sells within the market, thus undercutting the cost of similar or same products elsewhere. To accomplish this goal, Walmart depends on loss leaders to get consumers in the door. Loss leaders are exactly what they sound like. They are products that are sold at or below cost in order to entice people into the store. They may be only offered at that price for a limited time, may be products that are about to expire, or they could be highly popular and new products to the general marketplace, but priced in a way that encourages customers to come to Walmart rather than other local stores planning to introduce the same product. The theory behind loss leaders is that “they make up for the losses they incur by enticing customers to make further purchases of profitable goods while they are in the shop … Since many customers browse and end up purchasing more than they had initially planned, this is a smart strategy” (Griffin, 2015). Because they are saving money on the loss leaders, customers will frequently use that ‘saved’ money to purchase other, related items in the store that may be artificially marked up as a means of recovering the small loss. Loss leaders can be used to reduce inventory on soon-to-expire goods or to undercut the local competition, but the loss they represent can be easily made up, especially when they are used in conjunction with some of the other pricing strategies available.
In addition to loss leaders to attract people into the store, there are certain specific prices (price-points) at which people become more willing to buy. For example, anything under $100 is a popular price point because it is an amount that many people feel constitutes a minor purchase. Any amount below $20, including sales tax, is almost not considered a risk at all as a $20 bill is typically carried around as mere pocket change. Dropping the price of a particular product to a popular price point might reduce the overall profit margin for the individual item slightly, but often makes up the difference in sheer volume of sales (Teton, Allan, 2005). Walking through any given Walmart on any given day presents shoppers with a dizzying array of these price points as seeing something on sale for $4.99 sounds so much less expensive to many consumers than $5. Again, people buy on emotion first, and rational thought second usually as a means of justifying the original emotional response.
To enhance the perception of savings, Walmart also engages in the value-bundling strategy of pricing. The idea here is that the store will offer something of value in exchange for doing what you were going to do anyway which is purchasing at least one of those things – whether it is a washcloth or a video game. Value-bundling involves grouping same or similar products and setting one price for the arrangement. Not surprisingly, this strategy works best when the grouped products have a logical association with one another. This works because people will assign value to the bundle based on the cost of each individual item within it. According to research, the most effective value bundling strategies will offer the whole package for the same price customers will place on the highest priced individual item within the bundle (Evoy, 1999). As an example, if the customer was already planning to spend $12.99 for a book and sees the same book offered in a value bundle of three books for $12.99, they are more likely to purchase the bundle because they have a perception that they are getting more value for their money – even when the bundled books are printed on cheap paper and poorly bound in paperback as compared to the hardcover edition they were originally considering.
When used in conjunction with each other, these pricing strategies can have a powerful effect on the average consumer and have contributed to Walmart’s huge success in the globalized world. However, these strategies must be used carefully in order to retain their effectiveness. Consumers are becoming more and more educated regarding these pricing strategies and are thus more aware of any unethical or blatant attempts to cheat them of their hard-earned money. To maintain strong relationships with customers and avoid heavy fallout from rumors of unfair practices, stores such as Walmart must work hard to ensure customers’ purchases satisfy their needs while still working to maximize profits. There are almost endless factors that can influence the pricing decisions of retailers such as Walmart and therefore a simple analysis of some of their more obvious tactics will not explain everything that went into each pricing decition. However, it remains true that no matter how educated they are or how conscientious they attempt to be while shopping, consumers continue to be influenced by these pricing strategies at the subconscious level.
- Evoy, Ken. (1999). Make Your Site Sell. Goodbytes Information Products, 1999.
- Griffin, Dana. (2015). “Loss Leader Pricing Strategy.” Chron. http://smallbusiness.chron.com/loss-leader-pricing-strategy-2729.html
- Morris, Gene and Michael H. Morris. (1990). “Market-Oriented Pricing: Strategies for Management.” Quorum Books, p. 55. http://www.questia.com/PM.qst?a=o&d=100604789
- Teten, David and Scott Allen. (2005). “The Virtual Handshake: Four models for calculating your pricing.” Amazon Books. http://entrepreneurs.about.com/od/salesmarketing/a/pricingstrategy_2.htm