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How a Simple Change in Pricing Changed the Supermarket Game

By July 10, 2019January 27th, 2021No Comments
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In this video, Tim Ouimet, President and Co-founder of Engage3, discusses the beginnings of modern pricing strategy and the rise of the supermarket in America. By rethinking how prices were structured, grocery stores changed how consumers everywhere shopped. The following is a transcript of Tim’s explanation:

In any shopper survey that asks shoppers about why they value a retailer, price is always one of the top attributes that’s mentioned as to why they shop at a specific store. So, part of a retailer’s offering is price. Price is really important in any market economy. It’s always the dominant driver of sales – not across every product, but overall it is the dominant driver. It’s the dominant form of communication for a retailer to understand what the shoppers value.

I want to talk about the evolution of competitive shop programs, and to do that I want to take you back to the days of cost-plus pricing. Back when there were general stores, retailers had static markups on products within their store. And around the 1930s, a Kroger executive by the name of Michael Cullen came up with a new innovation for a supermarket.

The strongest part of the innovation was a new pricing model that Michael Cullen had introduced into the market. He’s credited as being the world’s greatest price wrecker, and with that innovation he created the loss-leader pricing model–where, as he put it in a letter to Kroger executives, he would sell a small portion of his assortment, the most important items, not at 30% as was usual but at a 10% markup. And then another small trench of items he’d have at a 15% markup, and then a 20% markup, and through the range of markups he’d overall achieve the 30% markup goal of the company. But in doing so he’d be pricing the most important items to their shoppers well below market price, and in doing that he’d create a halo around the products, what they called a “Price Image.” It’s really how they were going to brand themselves on price. They would create a perception that their prices were well below market average in order to bring shoppers into the store for those important weekly purchases, and in doing that they’d pick up the higher margin products on the outside.

In our research at Engage3, we’ve seen that if we compare a static cost-plus markup against an idealized, perfect loss-leader strategy, it would transfer about 6% of sales into net profits. And seeing it against that backdrop, you can understand why the store count went from 94 supermarkets in 1934 to over 1,200 in 1936. So this is across the backdrop of the Great Depression, people were really concerned about price, and the store growth of these new supermarkets was phenomenal.

The only retailers that survived that era were those that adopted a loss-leader pricing model.

As we look at that time period and why that was so important, it really comes down to trust. So, for a retailer the most important thing that they can do is generate trust with their shoppers, trust that they are looking out for the shoppers’ best interest, and price is an important part of that.

The loss-leader pricing model was important because it allowed a retailer to capture trust in a way that no one had ever done before. And it allowed the retailer to project a very low Price Image without altering their cost structure, they didn’t have to lower price or lower margins overall to achieve that.

For more information on Price Image, you can visit our blog on the topic here or view the capabilities of Price Image Optimization (PIO) here. To learn more about trends in retail technology, you can also watch Tim’s previous video on dynamic KVIs here.