Dropping Prices to Gain     Publicity and Market Share

When Wal-Mart announced that it was dramatically reducing many generic drug prices to $4 per 30-day prescription at participating locations in many states, the news understandably garnered a great deal of attention. With the average price of a monthly generic drug prescription close to

Tips for Determining Pricing Structures

A delicate balance is required when it comes to pricing. While pricing goods on the high side increases the profit margin for each unit of goods sold, it leaves room for a competitor to gain increased market share at a lower price point for the same or similar goods. Conversely, pricing goods too low may result in not being able to compensate for the higher volume sold at the lower competitive price.     Ultimately, pricing is not a stand-alone decision but one that must work collaboratively with other goals, including marketing. Competition is another component that should factor into pricing decisions. It is vitally important to think about the competition from the buyer’s point of view because, in the final analysis, the point of view of customers is the only one that really matters since they determine your volume of sales.     The price matrix below demonstrates what can happen when prices are cut. First, look under the column closest to your company's gross profit percentage. Then, look at the yellow row corresponding to the projected price decrease. The percentage computed where the column and the row meet illustrates how much the sales percentage must increase in order to break even.   Gross Profit Percentage                     20% 30% 45% 50% 60% 70% 80% Sales Must Increase by at Least: 5%  33% 20% 13% 11% 9% 8% 7% Price 10% 100% 50% 29% 25% 20% 17% 14% Decrease 15% 300% 100% 50% 43% 33% 27% 23%     20%  n/a 200% 80% 67%  50% 40% 33% Of course, you might decide not to break even on a certain product in order to drive sales to other products.

$29, according to the National Association of Chain Drug stores, offering prices that low was previously unheard of.

A Cornerstone Price Cutting and Marketing Strategy

Yet creating ‘Rollbacks’ — as Wal-Mart calls its price cuts — has long been the giant retailer’s forte and this strategy has undeniably been an essential component in contributing to its considerable success. In fact, on the day Wal-Mart announced the program, Walgreen’s and CVS stock shares dropped sharply based on the assumption that their pharmaceutical businesses would suffer as a result.

And despite unquestionably cutting its profit margin, Wal-Mart gave the green light to expand the test region in Florida ahead of schedule. Expediting the expansion of the program to more than 3,000 pharmacies in 38 states is a signal that Wal-Mart executives believe the risk has been worth the reward in terms of bringing increased market share to their stores.

One-Stop Shopping: One of the major benefits Wal-Mart received was the publicity surrounding the announcement of its prescription price-cutting program. Unlike retailers that publicize sales and price cuts in expensive circulars delivered to your home, Wal-Mart received a free advertising campaign courtesy of the national media. In addition, Wal-Mart benefits from one-stop-shopping when customers pick up other products while in the stores.

The program has its critics, who argue that Wal-Mart offers only a tiny percentage of the generics on the market for the $4 price. Still, the retailer has seized the opportunity to improve its public image with press releases touting its "ongoing commitment to bringing affordable healthcare to America's working families." One included a story about a  participating customer, a Hurricane Katrina evacuee who is now able to afford medication with money left over to "buy diapers and some staple groceries."

With its price cuts, Wal-Mart is poised to transform the prescription drug marketplace as it has done in other industries over the last several years. In doing so, it continues to put pressure on competitors, some of which have decided to match Wal-Mart prices.

Much to the dismay of those competitors, the price-slashing isn't limited to prescriptions. Recently, Wal-Mart announced cuts on the prices of more than 200 popular toys, games and small appliances for the holidays. It can arguably be said that, more than any other company in the 21st Century, Wal-Mart has been masterful at dramatically dropping price points to gain market share.

Another Strategy, Different Technique and Scale

In another story that attracted less initial hoopla, yet nevertheless ended up receiving national attention, a retailer in the Chicago area offered a full rebate on furniture — up to $10,000 per customer — if the Chicago Bears football team shut out the Green Bay Packers in the opening game of the 2006 season. While it was clear, even prior to the start of the season, that the Bears had a great defense, shutting out the Packers seemed to be a long shot since not only had the Packers scored in 233 consecutive games, their quarterback Brett Farve, had never once been shutout in his 16-year NFL career.

So prior to the game, Randy Gonigam — owner of Gonigam’s World Furniture Mall in Plano, Illinois — had reason to feel confident that while he was endorsing the home team, the odds were on his side. Wisely, just in case, Gonigam secured promotional insurance to cover the loss in the event of a shutout.

Promotional insurance is commonly used in charitable events such as golf tournament fundraisers in which a large prize is given to participants who hit a hole-in-one. Similar to other types of insurance, the insured pays the insurer and is covered in the event of a loss. Thus, when a golfer hits a hole-in-one and wins a car at a tournament that is covered by promotional insurance, the insurer pays for the car while the tournament organizers only pay for the cost of the insurance.

A Long Shot that Paid Off: Armed with that security, Gonigam publicized the offer by sending out flyers and drew more than 200 customers to his store during the week of the offering. And that weekend, the Bears shut out the Packers 26-0. While some might have initially considered Gonigam the ‘loser’ in this scenario, he was covered by promotional insurance for $300,000 of furniture that customers bought during the previous week. Additionally, the national media picked up the story and Gonigam’s World Furniture gained more publicity that Gonigam could ever afford to buy.

Gonigam has since become a local celebrity and his store has become a tourist attraction — a scenario that has been good for business. When the dust settled, Gonigam remarked: “This is beyond our wildest dreams.” So while he took a great risk and could have lost the battle in terms of his profit margin if he hadn't purchased insurance, he clearly has been a victor in the larger sense of the publicity "war."

The lesson learned from the example of Gonigam’s World Furniture Mall is that a business does not have to be a conglomerate the size of Wal-Mart to benefit from a clever pricing strategy. These days, when a business can differentiate itself from the competition, it may wind up ahead of the game. It is important, however, to always consider the trade-off — because when prices are slashed, profit margins also dwindle, at least in the micro-sense.

Looking at the macro-scenario, however, the ultimate goal is creating a situation where the loss in profit margins can be more than compensated for by increased business. After all, how many consumers would be enticed by the lure of free furniture or filling a prescription for less than five dollars? Offering such enticements is not a simple challenge but one that may be worth considering. To quote a common consumer cliché that is also applicable to this risk-reward pricing strategy: You’ve got to be in it to win it.