5 Valid Reasons For Retailers To Price Differentiate By Geography

A recent Wall Street Journal article, "Online Retailers Vary Prices Based on a User's Location" (December 24, 2012) reported that several large retailers including Home Depot, Lowe's, Rosetta Stone, and a renowned office-supply company varied their web-based pricing based largely on a customer's location (a procedure called price differentiation). In all cases, these retailers determined the customer's location from his/her IP address, a number assigned to the modem that connects a consumer's computer to the Internet.

Some sites like Orbitz and CheapTickets gave significant discounts to mobile phone users with iPhones or Android phones. According to a vice president of Orbitz, "Many hotels have proven willing to provide discounts for mobile sites." These mobile sites also offer discounts "that might target shoppers in a specific geographic region."

This article addresses the popular notion that a major role of the Internet is to equalize pricing in all areas, including both rural areas and areas with little competition.

And, while charging different prices to different customers is legal, a recent Annenberg Public Policy Center poll found that 76 percent of American adults stated that it would bother them if other consumers paid a lower price for the same product. In 2000, Amazon suffered adverse publicity when it was accused on charging lower prices to new buyers of DVDs, and higher prices to its loyal DVD buyers. Amazon refunded the price difference after this practice was publicized.

There are a number of valid reasons for a retailer to price differentiate:

1. One useful reason to vary prices is to determine consumers' price sensitivity for a given product as part of a field experiment. The data could determine how consumer demand responds to changes in price. This data is especially useful in determining a retailer's response to a lower price from a major competitor or what markdown percentage is most appropriate.

2. A major advantage of the Web is that it enables retailers to change prices instantaneously. This enables a retailer to very quickly match a competitor's price levels.

3. Some retailers charge the same prices in their stores as on the Web. Web prices, therefore, need to reflect differences in competition and in cost of doing business across market areas.

4. Different price levels may reflect differences in delivery costs due to distance from a firm's distribution centers. As an example, the price of a 250-foot spool of electrical wiring at Home Depot varied from 70.80 to $77.87. This $7.07 difference could reflect differences in shipping costs from the retailer's distribution center.

5. In geographic areas where a retailer has a limited store presence, it may seek to use the Web to enhance its sales. Reducing prices in these markets is a justifiable strategy.

It should be emphasized that, in the current practice, no personal data on individual customers was collected or used. And all buyers in the same geographic area were offered the same prices. 

What do you think??? Thanks. Barry.

Editor's Note: Be sure to get a copy of Barry R. Berman and Joel R. Evans' latest book, Retail Management: A Strategic Approach, Published by Prentice Hall.       

 

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Barry Berman

About Author

Barry Berman, Ph.D is the Walter H. ‘Bud’ Miller Distinguished Professor of Business at Hofstra University’s Zarb School of Business. Barry's authored or co-authored books on Retail Management: A Strategic Approach; Competing in Tough Times; Marketing in the 21st Century; and Marketing Channels. Barry has published in the Journal of Marketing Education, the International Journal of Retail and Distribution Management, and Industrial Marketing Management, on subjects that include customer loyalty programs, product proliferation, customer delight, mass customization, yield management pricing, and data mining. Barry is President of the American Collegiate Retailing Association. Follow Barry on Twitter and www.BermanEvansRetail.com>
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