Pricing Strategy Lessons From A Tourist Spot
It is not only in business schools that you learn about pricing strategies. Just recently, while visiting a tourist spot and looking for souvenir items to buy, I witnessed a wide variety of pricing techniques from the shops on the strip that is equivalent to a post-graduate course on pricing theory.
While none of the stores carried truly exclusive merchandise, the prices they had for similar looking items varied. It seems only logical to think that people will patronize the one with the lowest price and that the rest of the stores will soon close down. Incredibly, virtually all of the shops seem to have shoppers, although some had more than others.
It is obvious that there are justifiable reasons that enable stores to charge higher. As I went from store to store, I saw the reasons why:
Product differentiation. One of the most popular items in souvenir shops is t-shirts. At first I expected that the prices for these would be the same from shop to shop, given their vicinity to each other. But upon looking, it was a surprise to see that the difference is quite wide. Some stores carried t-shirts made of thicker material, such that the goods almost doubled the average price. Others claim better designs or allegedly better quality of stitching.
Premium brand pricing. There was a store that was priced much higher than the rest. Sometimes there is no better reason to justify the higher price other than the name of the store or brand itself. This is especially true if you are giving a gift that should not come off as cheap. If the store or brand has a prestigious name, then it may add value to the gift as compared to one bought from a flea market. Where you buy does affect the perception of value. Note that this effect is stronger if the item is for somebody else.
Wide assortment or completeness of inventory. There was a store that was larger than the rest, and it drew the most customers even when the prices were far from the lowest. It turns out they had the most complete inventory. You could find almost everything you wanted in this particular store. Most importantly, the items were available in all sizes. It is extremely disappointing to see an item you like so much, only to find out that your size is unavailable. Furthermore, you do not have to go to three or four stores to gather what you like as they have a very wide assortment. It is easy to see why most people go to this kind of store even when it isn’t the cheapest.
Differentiating customers. In all stores where haggling was allowed, prices depended on certain customer qualities. The highest prices were reserved for foreign tourists since they are believed to be universally rich and are unlikely to be repeat buyers. There was also a premium price for local tourists. The last is further divided into different types based on their perceived capacity to pay. This sort of price discrimination is common practice in tourist destinations.
Bottom pricing. There was one store I almost did not enter because it was shoddy-looking. Paint was peeling off from its signage and the inside looked like a mess. Still, there were a lot of people buying. I found out that the prices here were the lowest in the area. There will always be people who will buy only from the lowest priced source, regardless of other factors. In fact, this tendency is so strong that people sometimes forget to check if, in the long run, what they have purchased would still be a considered a bargain—often, low priced products present issues on quality.
Nearby location. The stores on the farthest end had the least traffic despite having prices lower than the average. The nearest stores were the priciest but ended up with better sales. This is because convenience counts a lot, especially for items that do not cost too much. A few steps farther may significantly affect pricing. People also tend to think that better-located stores are more credible.
*Originally published by the Manila Bulletin. CC-2, Sunday, November 17, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.