Retail Market Strategy, Financial Strategy
It is a plan designed by a retail organization on how the business intends to offer its products and services to the customers. There can be various strategies such as merchandise strategy, own-brand strategy, promotion strategy, to name a few.
A retail strategy includes identification of the following −
- The retailer’s target market.
- Retail format the retailer works out to satisfy the target market’s needs.
- Sustainable competitive advantage.
Strategies for Effective Market Segmentation
For effective market segmentation, the following two strategies are used by the marketing force of the organization −
Concentration (Niche) Strategy
Under this strategy, an organization focuses going after large share of only one or very few segment(s). This strategy provides a differential advantage over competing organizations which are not solely concentrating on one segment.
For example, Toyota employs this strategy by offering various models under hybrid vehicles market.
Under this strategy, an organization focuses its marketing efforts on two or more distinct market segments.
For example, Johnson and Johnson offers healthcare products in the range of baby care, skin care, nutritionals, and vision care products segmented for the customers of all ages.
Strategies for Market Penetration
Market penetration strategies include the following −
It is setting the price of the product or service lesser than that of the competitor’s product or service. Due to decreased cost, volume may increase which can help to maintain a decent level of profit.
Increasing product or service promotion on TV, print media, radio channels, e-mails, pulls the customers and drives them to view and avail the product or service. By offering discounts, various buying schemes along with the added benefits can be useful in high market penetration.
High Product Distribution
By distributing the product or service up to the level of saturation helps penetration of market in a better way. For example, Coca Cola has a very high distribution and is available everywhere from small shops to hypermarkets.
If a retail organization conducts SWOT Analysis (Strength, Weakness, Opportunity, Threat) before considering growth strategies, it is helpful for analyzing the organization’s current strategy and planning the growth strategy.
An American planning expert named Igor Ansoff developed a strategic planning tool that presents four alternative growth strategies. On one dimension there are products and on the other is markets.
This matrix provides strategies for market growth. Here is the sequence of these strategies −
- Market Penetration− Company focuses on selling the existing products or services in the existing market for higher market share.
- Market Development− Company focuses on selling existing products or services to new markets or market segments.
- Product Development− Company works on innovations in existing products or developing new products for the existing market.
- Diversification− Company works on developing new products or services for new markets.
The price at which the product is sold to the end customer is called the retail price of the product. Retail price is the summation of the manufacturing cost and all the costs that retailers incur at the time of charging the customer.
Factors Influencing Retail Prices
Retail prices are affected by internal and external factors.
Internal factors that influence retail prices include the following −
- Manufacturing Cost− The retail company considers both, fixed and variable costs of manufacturing the product. The fixed costs does not vary depending upon the production volume. For example, property tax. The variable costs include varying costs of raw material and costs depending upon volume of production. For example, labor.
- The Predetermined Objectives− The objective of the retail company varies with time and market situations. If the objective is to increase return on investment, then the company may charge a higher price. If the objective is to increase market share, then it may charge a lower price.
- Image of the Firm− The retail company may consider its own image in the market. For example, companies with large goodwill such as Procter & Gamble can demand a higher price for their products.
- Product Status− The stage at which the product is in its product life cycle determines its price. At the time of introducing the product in the market, the company may charge lower price for it to attract new customers. When the product is accepted and established in the market, the company increases the price.
- Promotional Activity− If the company is spending high cost on advertising and sales promotion, then it keeps product price high in order to recover the cost of investments.
External prices that influence retail prices include the following −
- Competition− In case of high competition, the prices may be set low to face the competition effectively, and if there is less competition, the prices may be kept high.
- Buying Power of Consumers− The sensitivity of the customer towards price variation and purchasing power of the customer contribute to setting price.
- Government Policies− Government rules and regulation about manufacturing and announcement of administered prices can increase the price of product.
- Market Conditions− If market is under recession, the consumers buying pattern changes. To modify their buying behavior, the product prices are set less.
- Levels of Channels Involved− The retailer has to consider number of channels involved from manufacturing to retail and their expectations. The deeper the level of channels, the higher would be the product prices.
Demand-Oriented Pricing Strategy
The price charged is high if there is high demand for the product and low if the demand is low. The methods employed while pricing the product on the basis of demand are −
- Price Skimming− Initially the product is charged at a high price that the customer is willing to pay and then it decreases gradually with time.
- Odd Even Pricing− The customers perceive prices like 99.99, 11.49 to be cheaper than 100.
- Penetration Pricing− Price is reduced to compete with other similar products to allow more customer penetration.
- Prestige Pricing− Pricing is done to convey quality of the product.
- Price Bundling− The offer of additional product or service is combined with the main product, together with special price.
Cost-Oriented Pricing Strategy
A method of determining prices that takes a retail company’s profit objectives and production costs into account. These methods include the following −
Cost plus Pricing − The company sets prices little above the manufacturing cost. For example, if the cost of a product is Rs. 600 per unit and the marketer expects 10 per cent profit, then the selling price is set to Rs. 660.
Mark-up Pricing − The mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price.
The formula used to determine the selling price is −
Selling Price = Average unit cost/Selling price
Break-even Pricing − The retail company determines the level of sales needed to cover all the relevant fixed and variable costs. They break-even when there is neither profit nor loss.
For example, Fixed cost = Rs. 2, 00,000, Variable cost per unit = Rs. 15, and Selling price = Rs. 20.
In this case, the company needs to sell (2,00, 000 / (20-15)) = 40,000 units to break even the fixed cost. Hence, the company may plan to sell at least 40,000 units to be profitable. If it is not possible, then it has to increase the selling price.
The following formula is used to calculate the break-even point −
Contribution = Selling price – Variable cost per unit
Target Return Pricing − The retail company sets prices in order to achieve a particular Return On Investment (ROI).
This can be calculated using the following formula −
Target return price = Total costs + (Desired % ROI investment)/Total sales in units
For example, Total investment = Rs. 10,000,
Desired ROI = 20 per cent,
Total cost = Rs.5000, and
Total expected sales = 1,000 units
Then the target return price will be Rs. 7 per unit as shown below −
Target Return Price = (5000 + (20% * 10,000))/ 1000 = Rs. 7
This method ensures that the price exceeds all costs and contributes to profit.
Early Cash Recovery Pricing − When market forecasts depict short life, it is essential for the price sensitive product segments such as fashion and technology to recover the investment. Sometimes the company anticipates the entry of a larger company in the market. In these cases, the companies price their products to shorten the risks and maximize short-term profit.
Competition-Oriented Pricing Strategy
When a retail company sets the prices for its product depending on how much the competitor is charging for a similar product, it is competition-oriented pricing.
- Competitor’s Parity− The retail company may set the price as close as the giant competitor in the market.
- Discount Pricing− A product is priced at low cost if it is lacking some feature than the competitor’s product.
Differential Pricing Strategy
The company may charge different prices for the same product or service.
- Customer Segment Pricing− The price is charged differently for customers from different customer segments. For example, customers who purchase online may be charged less as the cost of service is low for the segment of online customers.
- Time Pricing− The retailer charges price depending upon time, season, occasions, etc. For example, many resorts charge more for their vacation packages depending on the time of year.
- Location Pricing− The retailer charges the price depending on where the customer is located. For example, front-row seats of a drama theater are charged high price than rear-row seats.