Term Paper on "Pricing in the Marketing Mix"

Term Paper 4 pages (1392 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

Pricing in Marketing

In 2003, Wal-Mart used a controversial retail pricing strategy known as "loss leaders" for toy sales during the Christmas holiday season (Fox, 501). As a result, according to some analysts, profits for major toy retailers such as Toys R' Us, KB Toys, and F.A.O. Schwartz were seriously damaged, due to an inability to compete with the low pricing for the year's hottest toys and games (Grant, B8). Despite what critics might say, however, Wal-Mart's pricing strategy in 2003 was an acceptable solution in a competitive market economy.

Loss leaders" is a term commonly used in retail pricing, and refers to the deep discounting of popular items in an effort to draw customers into a store. The concept relies on the consumer purchasing not only the loss leader item, but also additional items at regular or marked-up prices. In this way, the store can increase traffic and overall sales, thereby recouping any losses from the loss leader products (Gillooley, 129). In 2003, Wal-Mart employed this pricing strategy in their toy department near the holiday season in an effort to increase overall traffic. As the largest retailer of groceries, toys, and furniture in that year, the retailer relied on customers to enter the store for loss leader pricing, and to purchase additional items at regular prices (Lohr, C5).

To understand the importance and impact of Wal-Mart's use of loss leaders, it is important to understand the various retail pricing strategies commonly used, and the reasons each are used in a competitive market. Mark-ups are the most common pricing strategies, since this form can be used in a variety of circumstances. Mark-ups apply a profit margin to the cost of items to calculate retail. The use of a vendor suggested retail price can also be effective for smaller companies who choose not to participate in price wars, but still wish to maintain a profit margin (Gillooley, 130). Competitive pricing, either below or above competition, can be used by discount retailers wishing to undercut other stores, or by specialty stores whose goods are uncommon and thus, more costly. Psychological pricing, a tactic used by retailers to imply a bargain to consumers, uses pricing ending in $.99, such as $19.99, to cause consumers to think of the pricing as less than $20.00. Finally, discount pricing, such as loss leaders, are used to draw customers into a store from competitors in the hopes the consumer will purchase other items, as well (Gillooley, 131).

In 2003, Wal-Mart, competing with such mainstays of toy retail as F.A.O. Schwartz, KB Toys, and Toys R' U.S., saw a need to increase traffic to their stores while simultaneously decreasing traffic at high end retail outlets competitively. Additionally, Target and other discount retailers in direct competition with Wal-Mart had begun aggressively advertising their own low prices. In response, Wal-Mart elected to use loss leaders as a way to achieve both goals (Grant, B8). In using loss leaders, Wal-Mart had an opportunity to increase customer traffic through lower prices on popular toys, and could then conceivably sell other merchandise to those consumers at regular prices, thus recouping any losses on the popular merchandise sold for far less than desired margin.

In December of 2003, the corporate owner of F.A.O. Schwartz stores announced the company would be filing for bankruptcy, and shortly thereafter liquidated all assets. Analysts criticized Wal-Mart, claiming F.A.O. Schwartz's use of a mark-up pricing method could not compete with such deep discounts, even with the added attraction of a larger selection and more upscale surroundings (Lohr, C5). During the following fiscal year, Toys R' Us announced closure of the Kids R' Us stores, as well as their educational toy chain of Imaginarium. Further, the remaining stores used sharp discounts to thin extra stock within the stores. KB Toys closed numerous locations, and the remaining stores operated at the time under bankruptcy protection (Grant, B8).

Critics of Wal-Mart's strategy during the 2003 holiday season claimed the loss leader price promotion was the cause of these, and other toy-based retailer's massive losses, as well as for losses in the toy market altogether (Hotten, 46). Ben Green, chairman for the Toy Retailer Association, noted the price reductions… READ MORE

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