Symbiosis Institute of Telecom Management

Systems and Finance 2011 13

Market Penetration Pricing: Case of Wal - Mart

Syndicate 2

Name Ankita Agarwal Anshul Joon Antrix Shah Arunava Chatterjee Ashwini Nagotia Ayush Asthana Atish Nair

PRN No. 11020541008 11020541009 11020541010 11020541011 11020541012 11020541013 11020541014

Market Penetration pricing: Market Penetration pricing is the pricing model of setting a relatively low initial entry price, often lower than the competitive market price, to attract new customers. The idea behind adopting this pricing model is that customer will switch to a product due to low price. Objective is to increase the market share or sales volume rather than increasing sales value. The ultimate goal is not to maximize profits, but to allow a new product or brand to gain a foothold in the marketplace. The conceptual essence of Market Penetration pricing model is illustrated below.

As shown, companies decrease the prices so that they can sell more number of products and can penetrate into market quickly. Companies have to forego the initial profit (block B) to gain more sales volume. Market Penetration pricing model tends to be effective only in certain circumstances. It will work in a price sensitive market where prices decline more rapidly due to elastic demand. Substantial economies of scale should be available. This model is more suitable when there is a sufficient demand for the product (mass markets). There should not be enough demand so that price skimming can work. The product is going to face stiff competition soon after introduction.

The main advantage of this model is that it achieves market penetration very quickly. It discourages entry of a new competitor in a market and creates pressure on existing competitors. It creates cost control and cost reduction pressures from the start, leading to greater efficiency. The major disadvantage of this model is that company might lose its customer base if it isnt able to maintain low prices over a longer period of time. Penetration pricing cannot create strong customer relationships and only attracts customers on the lookout for a profitable deal.

Wal-Mart : When Sam Walton created Wal-Mart in 1962, he declared that three policy goals would define his business: respect for the individual, service to customers, and striving for excellence. Wal-Mart is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. Today it serves customers and members more than 200 million times per week at more than 9667 retail units under 60 different banners in 28 countries. With fiscal year 2010 sales of $405 billion, Wal-Mart employs 2.1 million associates worldwide. Wal-Mart climbed to the top position in the Fortune 500 list by Revenue in 2002, and with the exception of 2006 and 2009, has remained there since. The success of Wal-Mart suggests that it is likely to have a growing influence on pricing behaviour in the supermarket industry. The USP of Wal-Mart is creating value for money for the average consumer by focusing on low prices. Wal-Mart has turned everyday low prices into a sustainable competitive advantage in the marketplace. Sam Walton figured out that consumers from Texas to Tokyo are driven by the same obsession to purchase products at the lowest possible prices. Wal-Mart has single-handedly raised the standard of living for consumers around the world. Sam Walton's low price strategy has forever changed the retail, manufacturing/supplier paradigm and he has forced competitors to think like discounters. Wal-Marts pricing strategy allows more local control again based on geographic demand. Store managers can price to meet local demand and to maximize sales volume. Pricing varies by geography and by proximity to competitors. Wal-Marts Pursuit of Value: 1. Buying at lowest prices 2. Controlling their own expenses 3. Get suppliers to lower expenses 4. Pass savings along to customers Wal-Marts Pricing Strategies: 1. Every Day Low Prices 2. Roll-Back 3. Special Buy Merchandise Sam Waltons Discounting Principle: Buy an item for 80 & price it at $1.00 Sold 3 times as much as he could at $1.20, though he made the profit per item He generated a greater profit overall. Walmart saves its customers US$3100 per year on groceries!

How Wal-Mart sustains its low price base: Wal-Mart has adopted a strategy of Market Penetration pricing to eliminate competition and gain market share. Wal-Marts always low prices can be attributed to multiple factors discussed below. In its early years, Wal-Marts strategy was to build large discount stores in small rural towns. By contrast, its competitors focused on large population towns. Cutting costs of Pilferage: Also, one of the significant costs for retailers is pilferage. Wal-Mart addressed this by a policy that shared 50 % of the savings from decreases in a stores pilferage among that stores employees through store incentive plans. In January 2005, Wal-Mart required its top 100 suppliers to apply RFID labels to all shipments. RFID uses radio waves to transfer data from an electronic tag on an object, for identifying and tracking the object. Vendors use RFID encoders to label cases and pallets that require EPC tags for Wal-Mart. These smart labels are produced by embedding RFID inlays inside the label material, and then printing bar code and other visible information on the surface of the label. Wal-Mart expects that RFID tags will cut down on employee thefts as it will be easier to see if somethings gone missing. Wal-Mart Store's competitive advantage through increased inventory turns has been to a great extent accomplished through a combination of logistics techniques, called cross docking (or flow through), and transloading. These methods are made practical through well-positioned distribution centres, warehouses and terminals. They are core tools in a companys aim toward zero inventory, or as close as possible to zero. Wal-Mart implemented a superior information technology (IT) system that linked the vendor supply operations with Wal-Marts distribution network (ref figure below) and established a centralized automated distribution system that connected itself with its supplier through Electronic Data Interchange (EDI) system. The EDI system gave Wal-Mart an access to information on the entire value chain and allowed maintaining constant cost-cutting. This enabled Wal-Mart to have superior productivity, significant reduction of operational costs and overall lean business model. This integrated supply chain of network enabled Wal-Mart to have access to the supplier operational process and the costs, and to negotiate the vendor prices. Information advantage let Wal-Mart to be the toughest negotiator in the world and to have a superior input by purchasing its supply at the lowest prices, driving down the retail prices. Wal-Mart had superior access to American consumer market and was able to capture the value that was created with superior input, superior operation, superior technology and superior offering.

Wal-Mart has climbed to the top of the retailing world by continuously squeezing costs out of its operations and passing on the savings to shoppers. Wal-Marts efficient cost cutting has led to elimination of competition, and it has been called as Merchant of Death. For instance, Sears Roebuck and Kmart had to unite in an effort to survive against WalMart.
Superior Inputs

Superior Technology

Superior Operations

Superior Offering

Superior Access

Superior Segments

Superior Customers

Enable a firm to create and capture value

Another instance of Penetration Pricing : Lexus used a penetration pricing strategy to bring Mercedes, Audi, BMW and Porsche to its knees when it launched its LS (Luxury Sedan) 400 in early 1989 at $35000, 40% less than BMW, Mercedes and the same as Cadillac. The Lexus was relatively inexpensive compared to its value, and it was also less expensive relative to its competitors and thus perceived to offer a higher value.

References : Wal-Mart: Staying on Top of the Fortune 500, The Graduate School of Political Management, George Washington University. How to exploit Wal Marts Weaknesses , Zenith Management Consulting Wal Mart Stores Inc. , Tuck School of Business at Dartmouth http://en.wikipedia.org/wiki/Walmart http://en.wikipedia.org/wiki/Criticism_of_Walmart#Allegations_of_predatory_pricing _and_supplier_issues http ://www.walmart.com (Is Wal-Mart Good for America?, Frontline, PBS 10/20/04; The Wal-Mart You Dont Know, Fast Company, 12/1/03)