Markdowns & Retail Pricing Strategies

Strategic pricing and markdown policies help retailers deliver value.
Strategic pricing and markdown policies help retailers deliver value. (Image: Stockbyte/Stockbyte/Getty Images)

For retailers, markdowns and retail pricing strategies must always begin with the customer in mind, because customers use price as a reference to make inferences about a product’s quality and value. If markdowns and pricing strategies are only cost-based, then retailers are at risk of losing revenue and brand reputation. Strategic markdown policies and pricing can help retailers provide consumers with value, without incurring drastic price reductions.

Value-Based Pricing

The value-based pricing strategy considers consumer perception. Regardless of the cost of goods, retailers must adjust prices to fit what consumers are willing to pay. For example, if a high-end dress was sold at the same price as a generic label dress in a discount store, then the brand name dress might lose its high value in the minds of consumers. Value-based pricing in retail considers premiums and perceived consumer value.

Everyday Low Price

The merchandising strategy known as everyday low price, or EDLP, uses consistent base prices rather than resorting to price hikes, storewide sales and deeply discounted promotions. Thus, EDLP offers more stability to consumers and retailers. Most retailers that use EDLP as their primary markdown tool compete based on price; premium service is usually not offered in an EDLP retail environment. Retailers must not use EDLP exclusively; timely promotions and sales incentivize the customer experience.

EDLP strategies are consistently competitive on price.
EDLP strategies are consistently competitive on price. (Image: Digital Vision./Digital Vision/Getty Images)

Operational Efficiency and Customer Service

Some retailers are focused on positioning themselves as leaders in operational efficiency or customer service. In this case, a retailer must consider if markdowns and pricing strategies will produce a conflict with excellent service. On the other hand, great customer service can justify employing a higher than average pricing structure, if the customer believes in its value. If operational efficiency or customer service has the potential to reduce the depth or frequency of markdowns, then this could lead to increased profits.

Frequent Shopper Loyalty Programs

Several frequent shopper loyalty programs include exclusive markdowns, coupons, promotions and rebates. The benefits of these programs include generating repeat customers, word of mouth, awareness, expectations and positive emotions. Some programs rely on customers accumulating points, whereas others give incentives just for registering. Retailers that use frequent shopper loyalty programs can build brand equity and take fewer markdowns in price, but only if customers perceive value.

Types of Promotions

Retailers have hundreds of markdown techniques and retail pricing strategies to pick from for a promotion. The most frequently used are percentage markdowns, dollar markdowns and bundles. These three promotional markdown strategies have several variations. Regardless of the pricing strategy, the reailer must consider customer perception, demand and revenue goals when making pricing decisions.

Percentage-based markdowns are used in retail pricing strategies.
Percentage-based markdowns are used in retail pricing strategies. (Image: Martin Poole/Photodisc/Getty Images)

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  • “Strategic Brand Management: Building, Measuring and Managing Brand Equity”; Kevin Lane Keller; 2008
  • “Total Integrated Marketing: Breaking the Bounds of the Function”; James Mac Hulbert, et al; 2003
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