NEW YORK – As large retail chains compete with online retailers to maintain their hold on the market, a Columbia Business School study shows that it’s time to stop trying to meet consumers based on their geography.
For decades, retailers have employed the strategy of adjusting their pricing store-by-store to match local consumers’ willingness to pay. But the new research finds that for some retailers, depending on the competitive landscape they face, following a national pricing strategy may now be more profitable than tailoring prices based on location. By evaluating 11 million digital camera sales Columbia Business School Professor Oded Netzer along with co-authors Professor Yang Li of Cheung Kong Graduate School and Associate Professor Brett Gordon of Northwestern, both formerly of Columbia Business School, drew two major conclusions that could radically change retailers’ pricing strategy.
Netzer and his co-authors found that retailers in competitive markets could see profits increase between 5.3 to 8.4 percent nationwide by employing a national pricing model. However, retailers that have the majority of their stores in less competitive markets will continue to benefit through a local pricing strategy.
“In the ongoing battle between brick and mortar and online sellers, today’s retail chains should be sure that they understand the impact of their pricing strategies,” said Columbia Business School Professor Oded Netzer. “Our findings run counter to the idea that customization is always beneficial for consumers and firms and shows that a one-size-fits all approach can benefit sellers in the right market. Under national pricing, a store in a more competitive market that forgoes the concept of tailoring prices can avoid a bidding war and their consumers in less competitive markets will receive better price.”
Netzer, Li, and Gordon analyzed data including 11 million store-level digital camera sale observations across 1,600 geographic markets. The study monitored the pricing strategies and profits of national and local pricing policies across three different chain stores; two retailers employed national pricing and the third followed a local pricing strategy.
The major findings concluded that: Against Common Thought, National Pricing Boosts Profitability for Large Chain Stores: Large retailers who are more frequently in competitive markets don’t have much to gain from tailoring their prices because switching to a local pricing model can intensify a price competition that will lower prices and hurt profits. A national pricing is optimal as long as the ratio of contested markets to uncontested markets is high.
Pricing Depends on Competitiveness of Geographic Market: Retail chains that face less competition should tailor their prices and focus on customization. National Pricing Can Benefit Consumers: Because the national price would fall between the lower price in competitive markets and the higher price in non-competitive markets, consumers in non-competitive markets, which are often rural, would benefit from lower prices.
The study, An Empirical Study of National vs. Local Pricing by Chain Stores under Competition, is published in Marketing Science. To learn more about the cutting-edge research taking place at Columbia Business School, please visit www.gsb.columbia.edu.
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