Random Numbers Hedge Price Recall
May/25/2011 09:25 AM
It’s no secret that setting prices that end in “99” give the perception of a lower price. .99 or 99 cents is under a dollar. And $4.99 is under $5. Retailers will often “round” prices up or down to end in 9’s, 5’s or 0’s but this tactic has an undesired consequence. This tactic can be used to improve margin by a few basis points. The downside, however is that this facilitates consumer price recall. If prices all end in these round numbers, well they are easier to remember. In turbulent times when prices are going up due to inflationary price increases, the inability of consumers to remember the price last paid works to a retailer’s advantage. To discourage price recall, retailers are turning to randomized prices. That means a product that sold for $1.49 may now sell for $1.47 or $1.52. By “randomizing” the price, consumers are less likely to remember the price they paid last time. And by changing the prices often by a few pennies, this also helps to discourage price recall. So when there is a price increase, there is less price resistance at the shelf.
Another way to reduce sticker shock is to stair-step price increases gradually over time instead of taking an increase in one fell swoop. For example if there is a $1.00 per unit price increase, the price may increase in small increments over a period of several weeks. This is achievable because manufacturers usually permit a buy in during a price increase. A common buy in quantity is a 1/12 cap. The retailer can purchase up to 1/12 or one month of annual purchases off promotion within a two week order window.
By graduating a price increase, the price increase becomes less apparent. This depends on the category and purchase frequency. If shoppers purchase a category weekly such as milk or eggs price increases will be noticeable even with incremental price changes. In other categories less frequented price recall is diminished since there is a greater time lapse between purchases and the ability to recall prices is reduced.
So if you are a manufacturer and need to take price increases, keep these thoughts in mind. A giant price increase might be better served by two smaller increases spread out over time.
Another way to reduce sticker shock is to stair-step price increases gradually over time instead of taking an increase in one fell swoop. For example if there is a $1.00 per unit price increase, the price may increase in small increments over a period of several weeks. This is achievable because manufacturers usually permit a buy in during a price increase. A common buy in quantity is a 1/12 cap. The retailer can purchase up to 1/12 or one month of annual purchases off promotion within a two week order window.
By graduating a price increase, the price increase becomes less apparent. This depends on the category and purchase frequency. If shoppers purchase a category weekly such as milk or eggs price increases will be noticeable even with incremental price changes. In other categories less frequented price recall is diminished since there is a greater time lapse between purchases and the ability to recall prices is reduced.
So if you are a manufacturer and need to take price increases, keep these thoughts in mind. A giant price increase might be better served by two smaller increases spread out over time.