Wal Mart Pricing To Maximize Profits

Touro University International

Steve Jones

Module 5 Case

MKT 501

Dr. Wollan

Your paper discussed the importance of pricing to a company's strategic position in the marketplace. The different considerations in the pricing strategies were also explored. You described good value pricing and the concept of loss leader as one of Wal-Mart's strategies.

Your case merits an A.

Dr. Weber

Wal-Mart: Pricing to Maximize Profits

Wal-Mart has lured hundreds of thousands of shoppers into its stores through its discount prices and promotional campaigns. Its aggressive bid toward grabbing a lion's share of the $20 billion toy market threatens to force other well-known toy retailers, such as Toys-R-Us, out of business. Wal-Mart now stands as the number one seller of toys and the industry's price leader in the toy arena as well as various other sectors (Grant, 2004, p. 2). Through deep cuts in every-day prices coupled with "loss leader" pricing, Wal-Mart feels gratified in successfully enticing consumers to commit dollars to their stores. The harsh reality, however, is that they may have been too aggressive in their pricing strategies and left further profits in the pockets of the consumers.

Wal-Mart capitalizes on the use of the good value strategy when pricing their products. "The good value strategy is a way to attack the premium pricer, i.e. Ð''we have high quality, but at a lower price.' If true, and if the quality-sensitive segment believes the good-value pricer, they will sensibly buy the product and save money" (Anderson, 1998, p. 3). This has critical ramifications in today's market as most toys currently being sold, be it G.I. Joe, Barbie, or board-game product lines, are sold by numerous competing retailers but maintain an equitable level of quality in the product as they are identical. A Barbie Doll sold at Toys R Us holds no added quality over one sold at Wal-Mart or FAO Schwarz. Thus, the discriminating factor as to where to buy the product, in many cases, is based off of the consumer's desire to find the lowest price. In 2003, Wal-Mart effectively utilized this strategy gaining a competitive advantage by basing its pricing of items off its competitors and offering consumers as much as $5 less on some items (Grant, 2004, p. 2). This served to bring millions of eager consumers into their store but at a cost of leaving un-tapped dollars on the table.

As is the example here with Wal-Mart, "many companies set their prices without doing anything to manage the pricing environment. They set list prices based on their own needs and then adjust transaction prices based on what customers say they're willing to pay" (Nagle, 2002, p. 1). Ultimately, prices must reflect customers' willingness to pay but the key is for companies to understand the value of an item to the consumer as "pricing strategically involves managing customers' expectations to induce them to pay for the value they receiveÐ'...If managers think about pricing only when they must set a price, then pricing becomes a tactical exercise of matching price to customers' willingness to pay" (Nagle, 2002, p. 2). Managers can manipulate the willingness to pay via the pricing process, price structure, or the value message communicated to the consumer. All can have an effect on establishing a value-based price system where consumers see acceptable prices and companies realize maximum profitability.

Wal-Mart's disregard for the true value of certain toy items and their deep under-cutting of prices as compared to the competition could be considered successful in many ways. "Its aggressive Ð''loss leader' pricing on popular toys last year lured millions of consumers from traditional toy stores" and was beneficial for a company basing its business strategy off of volume sales (Grant, 2004, p. 2). While loss leader pricing holds no regards for the value of an item (obtaining the maximum price), it can be an effective strategy overall. A loss leader is "an item that is sold below cost in an effort to stimulate other profitable sales" (Wikipedia, 2005). A company uses a loss leader to draw customers into a store where they are likely to buy other goods. The vendor anticipates that the typical consumer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor. Typically, a loss leader is placed at the back of a store requiring the consumer to walk past racks and racks of other displayed goods which have a higher profit margin. Additionally, a loss leader is normally a product that customers are willing to purchase; thus they are aware of the usual price and view the offered price as a bargain (Wikipedia, 2005). Wal-Mart effectively utilized loss leader pricing to generate profitability but it was not without its pitfalls.

Wal-Mart's use of loss leader pricing on some of its toys generated two negative effects. First, drastically cutting the price of some items to lure in consumers defaced the notion of creating a value-based pricing system. This direction, now being realized by the company, negated them from extracting the true value of a product and thus the maximum dollars from consumers. While it provided them a short-term competitive advantage and they "recouped some of the margins from sales of other products in its massive selection", it did not maximize their profitability in selling these particular items which indeed held a higher value to consumers (Grant, 2004, p. 2). As a result, Wal-Mart now believes it did not need to cut as much and are opting to offer discounts of $1-2 over the competition. Second, this pricing practice has critically wounded the competition (FAO Schwarz and Toys R Us). While in an open market having competition and an advantage over that competition is good, to void the market of any competition is not always beneficial. The abolishment of all competition leads to a monopolistic arena and current Wal-Mart pricing practices has helped