How do retailers price their products?

In my experience retailers have rather simple pricing methodologies and most of them use variants of cost+ (cost+ = taking your cost and adding a standard margin based on group/category). They manage their pricing in Excel or have built in the pricing calculation into their ERP. Few of them actually uses a price optimization tool, though it’s increasing in popularity in the last few years, especially with the growing competition from online retailers.

To dig deeper, I think a first good step is dividing the retailers into two major sub-groups: own brand sellers (H&M, IKEA, J Crew, Zara) and re-sellers (Media Markt, Bauhaus, Wall-Mart, Home-depot, Carrefour).

Own brand sellers
These companies usually have buckets where they put a price in. They start at the manufacturing or purchasing cost and add the margin they would like to get. Then they see which bucket the price would end up in, i.e. you always see prices for a t-shirt being at either, 4,90 – 7,90 – 9,90 or 14,90 Zara (€). Of course, these type of retailers monitor their competition, but there is rarely a 1–1 match between H&M and Zara. However, there is a general understanding of what the acceptable price range is for a t-shirt. We can call this pricing method: market accepted margin and in some cases competitor adaptation

Re-sellers
These companies have a completely different competitive landscape. The need to spot on when it comes to prices, otherwise they will lose over time. Even though this is the case, it’s rather interesting to see their relative slow adoption of price optimization tools. This industry is generally focusing a lot on campaigns and coupons; getting the customer in the door is half of the job. The tools they use to run the campaign are usually home built Excel models or, that they together with suppliers run campaigns, with an already set end consumer price. To handle the tail pricing, i.e. products that are not among the high-sellers, they usually have some form of automation, but not optimization. Every week or month they usually get competitor data from a supplier on competitor data. Usually, this only ends up in some index analysis to see their market position. We can call this pricing method: campaign pricing, competitor pricing, and market accepted margin

In conclusion, this is a rather simplistic over, however, it’s not far from the truth. The methodologies and supporting tools in use at most retailers are not that sophisticated, they do the job ok and it works. So to answer your question: campaign pricing, competitor pricing, and market accepted margin.

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