By Chron Contributor Updated February 19, 2021
Business owners in the supermarket industry can draw on many price strategies to maximize profits. The obvious choice is to offer lower prices than every other store, but the equally obvious result is that this strategy keeps profits permanently low. For this reason, many supermarkets opt for more complex strategies to ensure profitability while still appealing to price-conscious consumers.
Loss-Leader Pricing
Loss-leader pricing is a common supermarket strategy and occurs when the retailer sells high-demand items at atypically low prices, even if those supermarket prices require taking a loss on that particular item, explains food website Culinary Lore. For example, supermarkets often have temporary discounts on coffee or other household essentials. The goal is to attract consumers in search of the bargain. Those bargain hunters are likely to buy other items if only out of convenience, which is how the store remains profitable.
In addition, when grocery stores can lure shoppers in with low prices on a staple good like eggs or milk, they raise the prices of other staple goods like bread or rice to even things out, and make money on other purchases the shopper makes while she's in the store.
Everyday Low Pricing
Supermarkets often use loss-leader pricing on a limited basis as part of a temporary sale. One problem with this approach is consumers begin to mistrust advertisem*nts. For instance, a customer might hear about a bargain but worry that the promotion will end before he has time to get to the store, or believe there is a hidden catch, like a requirement to buy a large quantity of items.
To avoid these problems, some supermarkets are taking a cue from large discount department stores by aiming to keep prices permanently low on high-demand items, which is an initiative called everyday low pricing, as noted by the book “Foundations of Marketing,” by William M. Pride and O. C Ferrell. The theory is similar to that of leader pricing. Once the customer is in the store, they are likely to supplement the purchase of high-demand items with other products that offer a better profit margin.
Zone Pricing Strategy
Large supermarket chains have volumes of data on consumer buying habits. Some use this to construct pricing profiles for different stores, which is called zone pricing, according to Boston Consulting Group. Establishing different grocery store pricing profiles, or zones, allows the supermarket to optimize its prices by region. Customers in high-income regions, for example, might be willing to pay more for bathroom tissue than customers located elsewhere. The supermarket chain can tailor the prices found at different stores to maximize profits across regions.
Loyalty Discount Programs
One way supermarkets can collect valuable customer data is to create a loyalty program. This requires customers to opt in to a data-collection program, which tracks their purchases. Such programs offer several price strategy enhancements. First, joining the program qualifies customers to receive lower prices.
Second, the supermarket can use the data to create pricing profiles, predict buying habits and otherwise optimize their pricing strategies. Finally, knowing what customers buy habitually allows supermarkets to offer coupons and promotional discounts in a targeted manner, lowering the cost of promotions while increasing their effectiveness. When grocery stores offer promotions like fuel points, they can tie purchases of higher-margin products to extra fuel points to get customers to by the high-margin products.
