Shuba Srinivasan, Koen Pauwels, & Vincent Nijs
Retailers face the complicated task of setting and changing prices for the many items they carry. Recent empirical studies have found that retailers often choose not to adapt prices on the basis of demand conditions leading to past-price dependence and lower category margins. Thus, a key research question is, Under which conditions do retailers rely more heavily on demand-based pricing versus past-price dependence? This article develops and tests a conceptual framework that outlines the cost–benefit trade-off that motivates retailers’ choice of demand-based pricing versus past-price dependence.
The empirical findings support the conceptual framework, implying that customer-driven and firm-driven costs and benefits are the key determinants of a retailer’s reliance on demand-based pricing. Several measures of such costs and benefits are derived from the available data. The authors find that demand-based pricing is more prominent in categories with high penetration and private-label share but less prominent in categories with high product expensiveness and stockkeeping unit proliferation. Moreover, demand-based pricing is more prominent for brands with high market share and with strong demand sensitivity to price.
Managerial implications arise for both manufacturers and retailers. Manufacturers obtain a deeper appreciation of retailers’ benefits versus costs of demand-based pricing and past-price dependence. Specifically, the estimates suggest scenarios in which pass-through of trade deals may be difficult to achieve due to the retailer’s reliance on past-pricing patterns to set current and future prices. The findings also identify areas in which manufacturers can provide pricing support to the retailer to limit the costs or enhance the benefits of demand-based pricing. For example, category captains could support retailer pricing policies for categories with many stockkeeping units in a way that leads to a win–win situation for both parties. For the retailer, the findings offer a way to review systematically the allocation of pricing resources across categories on the basis of expected costs and benefits. The study quantifies the gross margin impact of changing the level of demand-based pricing (past-price dependence) to a higher (lower) level. Using in-house cost information, retailers can now reevaluate the potential to increase gross category margins in each category and the cost-effectiveness of their pricing approaches for different categories and brands.
Finally, the article contributes to the ongoing debate in economics and marketing on the rationality of observed past-price dependence. Whereas previous research points to the negative impact on gross margins of this practice, the authors find that retailers weigh the costs and benefits of demand-based pricing versus adhering to past-pricing patterns.
Shuba Srinivasan is Associate Professor of Marketing at the A. Gary Anderson Graduate School of Management at the University of California, Riverside. She obtained her PhD in Marketing from the University of Texas at Dallas and has been a visiting research scholar at University of California, Los Angeles. Her research estimates return on marketing investment and long-term marketing productivity. Her current research focuses on marketing’s impact on firm valuation and stock returns, marketing metrics, decomposing demand effects of radical innovations, and managing brand equity. Her research won the 2001 EMAC best-paper award and her work has been published in Marketing Science, Management Science, Journal of Marketing, International Journal of Research in Marketing and Harvard Business Review, among others. Recently, the University of California, Riverside, named her a University Scholar for a three-year period.
Koen Pauwels is an associate professor at the Tuck School of Business at Dartmouth College, where he teaches and researches statistics and return on marketing investment. He won the 2007 O’Dell award for the most influential article in Journal of Marketing Research and built his research insights in industries ranging from automobiles and pharmaceuticals to business content sites and fast-moving consumer goods. His current research projects include the predictive power of market dashboard metrics, the impact of brand equity on marketing effectiveness, retailer product assortment, price wars, the dynamics of differentiation, and performance turnaround strategies. Professor Pauwels received his PhD in Management from University of California, Los Angeles, and he won the EMAC 2001 best-paper award. He publishes in Harvard Business Review, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, Management Science, and Marketing Science.
Vincent Nijs is Assistant Professor of Marketing in the Kellogg School of Management at Northwestern University. He holds a master’s degree in Marketing Research from the University of Groningen and a PhD in Marketing from the University of Leuven. He won the John D.C. Little Award (2001) and Frank M. Bass Award (2002) for the article “The Category Demand Effects of Price Promotions,” published in Marketing Science. His current research projects focus on price rigidity, pass-through of trade-deals, and the timing and impact of competitive actions and reactions.
Journal of Marketing, Vol. 72, No. 2, March 2008
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