NASHVILLE, Tenn. -- Product pricing in supermarkets is driven largely by competitive forces and controlled to a great degree at the individual store level by store managers, according to a recent study by researchers at the Owen Graduate School of Management at Vanderbilt University here and the Smith School of Business at the University of Maryland, College Park, Md.
"We were astonished by the extent grocery managers closely monitor competitors' pricing and promotion behavior to see what strategies are being used, and then develop competitive strategies of their own," said Ruth Bolton, professor of marketing at Owen and editor of the Journal of Marketing. The general perception among researchers had been that chains priced consistently throughout a market.
The study, which surveyed 200 stores in 17 chains in five U.S. markets, found that retailers use several factors in determining product pricing and promotions, including "relative price," or the price of a product compared with other products in the category; "price variation," or the consistency of prices over time; "deal intensity," or how much to promote price changes; and "deal support," or how closely to coordinate the price and promotion of a product.
In an interview with SN, Bolton said price competition in supermarkets functions unlike competition in gasoline retailing and in airline ticket sales, where competitors tend to equal each other's offers. Instead, food retailers use a much more complicated formula to approach pricing that incorporates local preferences and the overall image that the store is seeking to project.
"What we actually saw was that retailers are being influenced by competition, but they don't exactly match each other," she said. "They try to be more consistent with their pricing, or they could try to coordinate their pricing and promotion a lot better, so people really notice their price deals when they do have them."
Food retailers are particularly adept at pairing promotions with price, she said.
"Retailers use price and promotion together," she said. "They don't think of them as two separate things, so what retailers are doing is they are taking a coupon or something else and attaching it to a price change to make it something exciting."
Bolton said that only about 55% of the individual product prices the researchers examined could be accounted for by traditional pricing strategies like everyday low pricing and high-low pricing, "which meant that a heck of a lot of the time, retailers were doing something else," she said. "There are some folks out there that are being very aggressive on pricing."