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Retail Travel Services (TM 334) Lecture 5 OPERATIONS (Cont.)

Retail Travel Services (TM 334) Lecture 5 OPERATIONS (Cont.). Consumer Price Sensitivity FACTORS AFFECTING PRICE SENSITIVITY. Size of household expenditure per year. Size of item expenditure per trip. Perceived substitutability of products within category.

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Retail Travel Services (TM 334) Lecture 5 OPERATIONS (Cont.)

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  1. Retail Travel Services (TM 334) Lecture 5 OPERATIONS (Cont.)

  2. Consumer Price Sensitivity FACTORS AFFECTING PRICE SENSITIVITY Size of household expenditure per year Size of item expenditure per trip Perceived substitutability of products within category Degree of competition in category between retail Use of category by competitors to generate traffic

  3. Consumer Price Sensitivity MEASUREMENT TOOL This measurement tool is may be augmented with price elasticity information

  4. PricingCONSUMER PRICE AWARENESS • Mindless Shopping for Packaged Goods: • Average time between arriving and departing from product category is 12 seconds • In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size • 21% could not offer a price estimate when asked • Only 50% were able to state correct price • 93% did know relative price (i.e., higher, lower or the same as other brands in category) Source: Dickson and Sawyer (1990)

  5. PricingCONSUMER REFERENCE PRICES Consumers Evaluate the Prices They See Compared to… • External • List prices / sale prices • Other products on the shelf • Retailers use shelf tags to “help” consumers make comparisons • Internal • Prices during recent visits to this and other retailers • Memory of price may not be accurate • If brand is frequently discounted, consumers tend to lower their internal reference Consumers use external and internal information to determine whether they are getting a good deal

  6. PricingPRICE AS A SIGNAL • Price not only exercises its traditional economic role of reducing demand, but also offers the customer information about product quality • When is price used to signal quality? • When there is little information about product quality available • Examples • “Credence” goods • Fashion items

  7. PricingLAWS - PRICE DISCRIMINATION • Occurs when vendor sells same product to two or more customers at different prices. • Generally illegal from vendor to retailer except when: • costs are different • quantity and functional discounts are offered • changing market conditions • Generally legal from retailer to consumer

  8. PricingLAWS – PREDATORY PRICING • Pricing under cost so as to drive competition from the marketplace • Illegal! • Retailers can charge different prices at different locations if costs are different

  9. PricingLAWS – BAIT-AND-SWITCH • Lure customers into store by advertising a product at a lower than usual price (the bait) and then induces customer to switch to higher-priced model (the switch). • Can occur if • Retailer out of advertised model • Retailer has advertised model, but disparages it • Retailers should: • Have sufficient quantities on hand • Give a “rain check” • Don’t disparage merchandise

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