Walk down an aisle in Walmart and you’ll be met with blue signs and yellow smiling faces showing off their “everyday low price” items.
It’s a pricing strategy that’s at the core of their brand. They built their entire business around a bargain pricing strategy.
Looking at the Walmart business model alone, it would make sense to assume low prices are what customers want. After all, cheap products have enabled the retailer to open 10,000 retail stores, employ millions of people, and gross $476 billion in sales in 2014.
The strategy, according to Sam Walton, founder of Walmart, was to make up for slim margins through the volume of sales.
This is known as promotional pricing.
What is Promotional Pricing?
Promotional pricing involves selling products at a steeply discounted price. The price reduction is most often unsustainable for business growth. The goal is to use the low prices to allure customers through the door.
Walmart uses the everyday low price options to get people in their stores in the hopes they’ll buy other, higher priced items. They aren’t alone in adopting the promotional pricing strategy.
Costco uses a similar approach by selling bulk items for a reduced price. They inflate the value of each item by selling in large quantities.
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Is This Strategy Right for You?
Not necessarily. Look at one of Walmart’s big competitors for proof; Amazon.
Walmart’s stock prices are starting to take a dip, dropping 30 percent in the last part of 2015. This comes on the heels of an increase for Amazon with a steady growth rate of approximately 20 percent every year.
Although Amazon is known for also having low-priced items, they haven’t built their brand around a bargain pricing strategy. As a result, they’re coming out ahead with new projects in the works (they’re looking at building a retail site in the near future) and higher profits.
If your business is still in a price war with the competition, you are hurting your company. Here are a few reasons why the bargain pricing strategy is starting to fail, and why it could be damaging your brand.
You’re Losing Money
Sure, the everyday low pricing might sound like a smart strategy. It helps you lower inventory costs, coordinate better with supply chains and sell more, more, more. But, even if you’re pushing product off your shelves faster than the competition, you’re still losing money.
Promotional pricing on products yields an average of $6.2 million more per year in revenues than the everyday low price strategy, according to a recent Stanford study. The study also showed that everyday low pricing cost businesses more on the front end with Walmart experiencing a $1.7 million loss in annual revenues compared to the $690,000 loss by companies using a promotional pricing strategy.
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You’re Locking Yourself Into a Particular Market
Once you have a bargain pricing strategy locked in, you’re stuck there for the long haul. Changing from low pricing to mid-level pricing down the road is expensive. You’ll lose your customer base who has come to rely on you for the best deals in town, causing you to have to spend a good chunk of money to promote your business to a new demographic, the type of people who don’t mind spending some extra money for higher quality goods.
Before you get too far into a low-price strategy, think about how you will scale and grow. Are you focusing on moving products off your shelves, or are you bringing in the right type of customers to buy from you long-term?
Loyalty often times means more to long-term revenues. Bargain price shoppers tend to migrate to whomever is offering the best deal.
You’re Diluting Your Brand
If you’ve already locked yourself into a bargain pricing strategy, beware. Keeping that pricing is essential if you want to keep the trust of your customers. Walmart ultimately tried to compete with the promotional pricing models (their competition) and lost. They introduced “rollback” pricing, which caused customers to stop seeing them as the best deal in town.
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What’s Right for You?
The answer is, it depends. If you’re currently using a promotional pricing strategy, you’re much better off sticking to that strategy than trying to cheapen your prices. If you're currently known as the low cost store among your competition, changing your pricing now could mean hurting your brand even further.
Understand what the market perceives your business as and then use that to find out what pricing strategy is right for you.