syndicate 2 walmart pricing

8/4/2019 Syndicate 2 Walmart Pricing

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Symbiosis Institute of Telecom Management

Systems and Finance

2011 – 13

Market Penetration Pricing: Case of Wal - Mart

Syndicate 2

Name PRN No.

Ankita Agarwal 11020541008

Anshul Joon 11020541009

Antrix Shah 11020541010

Arunava Chatterjee 11020541011

Ashwini Nagotia 11020541012

Ayush Asthana 11020541013

Atish Nair 11020541014



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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 behindadopting 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 afoothold 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 andcan penetrate into market quickly. Companies have to forego the initial profit (block B) togain 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 toelastic demand.

Substantial economies of scale should be available.

This model is more suitable when there is a sufficient demand for the product (massmarkets).

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. Itdiscourages entry of a new competitor in a market and creates pressure on existingcompetitors. It creates cost control and cost reduction pressures from the start, leading togreater efficiency.

The major disadvantage of this model is that company might lose its customer base if it isn‟t 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.



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Wal-Mart :

When Sam Walton created Wal-Mart in 1962, he declared that three policy goals woulddefine his business: respect for the individual, service to customers, and striving forexcellence.

Wal-Mart is an American public multinational corporation that runs chains of large discountdepartment stores and warehouse stores. Today it serves customers and members more than200 million times per week at more than 9667 retail units under 60 different banners in 28countries. With fiscal year 2010 sales of $405 billion, Wal-Mart employs 2.1 millionassociates worldwide. Wal-Mart climbed to the top position in the Fortune 500 list byRevenue 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 pricingbehaviour in the supermarket industry. The USP of Wal-Mart is creating value for money forthe 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 thatconsumers from Texas to Tokyo are driven by the same obsession to purchase products at thelowest possible prices. Wal-Mart has single-handedly raised the standard of living forconsumers 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-Mart‟s 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 variesby geography and by proximity to competitors.

Wal-Mart’s Pursuit of Value:

1. Buying at lowest prices2. Controlling their own expenses

3. Get suppliers to lower expenses

4. Pass savings along to customers

Wal-Mart’s Pricing Strategies:

1. Every Day Low Prices

2. Roll-Back

3. Special Buy Merchandise

Sam Walton’s 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 ½ the profit

per item He generated a greater profit overall.

“Walmart saves its customers US$3100 per year on groceries!”



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How Wal-Mart sustains its low price base:

Wal-Mart has adopted a strategy of MarketPenetration pricing to eliminate competitionand gain market share.

Wal-Mart‟s „always low prices‟ can be attributed to multiple factors discussed below.

In its early years, Wal-Mart„s 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 bya policy that shared 50 % of the savings from decreases in a store‟s pilferage among

that store‟s employees through store incentive plans.

In January 2005, Wal-Mart required its top 100 suppliers to apply RFID labels to allshipments. 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 andpallets that require EPC tags for Wal-Mart. These smart labels are produced byembedding RFID inlays inside the label material, and then printing bar code and othervisible information on the surface of the label. Wal-Mart expects that RFID tags willcut down on employee thefts as it will be easier to see if something‟s 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, calledcross docking (or flow through), and transloading. These methods are made practicalthrough well-positioned distribution centres, warehouses and terminals. They are coretools in a company‟s aim toward zero inventory, or as close as possible to zero.

Wal-Mart implemented a superior information technology (IT) system that linked thevendor supply operations with Wal-Mart‟s distribution network (ref figure below) andestablished a centralized automated distribution system that connected itself with itssupplier through Electronic Data Interchange (EDI) system. The EDI system gaveWal-Mart an access to information on the entire value chain and allowed maintainingconstant cost-cutting. This enabled Wal-Mart to have superior productivity,

significant reduction of operational costs and overall lean business model. Thisintegrated supply chain of network enabled Wal-Mart to have access to the supplieroperational process and the costs, and to negotiate the vendor prices. Informationadvantage 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 retailprices. 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‟.



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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-Mart‟s efficient cost – cutting hasled 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 Wal – Mart.

Another instance of Penetration Pricing :

Lexus used a penetration pricing strategy to bring Mercedes, Audi, BMW and Porsche to itsknees 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.

Superior Inputs

Su erior Technolo Superior Operations

Su erior Offerin

Su erior Access

Superior Segments

Su erior Customers

Enable a firm to create and capture value



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References :

Wal-Mart: Staying on Top of the Fortune 500, The Graduate School of PoliticalManagement, George Washington University.

How to exploit Wal – Mart‟s 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 YouDon‟t Know,” Fast Company, 12/1/03)











syndicate 2 walmart pricing

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