Market Penetration pricing: Case of Walmart

8/25/2011 Div B

Chandra Tripathi Prateek Batra Pramesh Chand Sanjeev Marwah Pranay Gupta Soumyayan Roy Nihal Satam Yogesh Sharma

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Penetration Pricing Strategy

Definition: A market penetration pricing strategy means setting the price of a product or
service as low as possible to facilitate rapid sales. It is likeliest to succeed in large, growing markets and is most often used in new product introductions. A penetration price is generally chosen when the marketer's goal is to achieve high market share. A company employs penetration pricing with the expectation that eventually the price will be raised once the initial marketing objectives are fulfilled. Its aim is to attract the customers to try the companys product. By keeping the price intentionally lower than established competitors, the business aims to compromise existing brand loyalties of the customers. The ultimate goal of this strategy is not to maximize profits, but to allow a new product or brand to gain a foothold in the marketplace. A B2C example of penetration pricing is a low cost retailer (such as Wal-Mart), who introduces new product categories to their customers, or enters a new geographic market. B2B example of penetration pricing is a new lighting manufacturer who offers their products to hardware stores at competitive prices to gain immediate access to a customer base.

Advantages:
Cuts down the struggle time for a new brand, gains early adopters for it fairly quickly. Makes the organization more cost conscious from the beginning and compels it to achieve higher cost efficiencies than the competitors. Stiff price barriers for new entrants.

Limitations:
Sustainability of low prices in long term. Difficult to increase prices due to customers non-acceptance. Only feasible for organizations with deep pockets. Limited to products that command mass market as economies of scale are essential for survival.

Variants of penetration pricing strategy:

Predatory pricing Hook and bait

Introduction to Wal-Mart and its Economic Significance

Wal-Mart has 8,500 stores in 15 countries, under 55 different names. Wal-Mart's operations are organized into three divisions: Wal-Mart Stores U.S. (including online retail), Sam's Club, and Wal-Mart International. The company does business in nine different retail formats: supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants. In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business.

Pricing Strategy of Wal-Mart

Central Goal Save Money Live Better. This reflects the three main groups into which Wal-Mart categorizes its 200 million customers: "brand aspirationals" (people with low incomes), "price-sensitive affluent"(wealthier shoppers who love deals), and "value-price shoppers" (people who like low prices and cannot afford much more). Experts say At least 15% of saving happens on a typical cart of grocery. Example: 4 packs of GE light bulbs decrease from 2.19$ to 88 cents in 5 years. Global Insight, a consulting firm, found that Wal-Mart's price level reduction resulted in savings for consumers of $287 billion in 2006, which equated to $957 per person or $2,500 per household.

Implementation Strategy:
Wal-Marts everyday low prices were built on leveraging economies of scale, lowprice Chinese suppliers, advanced satellite-based IT systems for inventory and shelf management, and float paying suppliers in 90 days, while selling their goods within 7 days. Year 1987 marked completion of satellite network linking every corporate office to the head office and also tracking inventory and sales and facilitating instant communication with source.

Plus one strategy For each item handles by Wal-Mart, it asks its suppliers to either lower the cost or raise the quality every year.

Internal Cost Cutting Measures:

In 2003, typical grocery worker earn $14.68 per hour, with pension and

family health benefits. Wal-Mart employee earns only $9 an hour. By the company's own admission, a full-time worker might not be able to support a family on a Wal-Mart paycheck.
The company's meticulous management of the flow of goods, from the

factory floor to the store shelf, has shaved shipping and inventory costs to a degree that retailing experts say is unprecedented. One of the significant costs of retailers was shoplifting/pilferage. WalMart addressed the issue by instituting a policy that shared 50% of savings from decreases in a stores pilferage among the stores employees through store incentive plans. Asked truckers to unload their own cargo or pay Wal-Mart to do it. Other big retail chains absorbed that cost themselves. Their price cutting measures extended to the limit that they don't even allow their suppliers/truckers to use the bathrooms.
At every one of the 2,966 Wal-Mart stores in the U.S., thermostats are

kept at a steady 73 degrees in summer, 70 degrees in winter; raising or lowering the temperature is considered a waste of money.
From their first day on the job, Wal-Mart employees are advised to avoid

unions and to report any organizing activities to their supervisors.

Strategically set up the Distribution System at places so that it can serve

150 200 Wal-Mart stores daily, reducing cost. Measures at supplier level:
Reduced prices by trimming down on number of brands, styles and color

schemes allowing Wal-Mart, to consolidate its purchases of raw material and to get steep discount from the suppliers.

 Ensured Wal-Mart did not become dependent on any 1 supplier; no single

vendor constituted more than 4%. Establish its own global procurement divisions to hunt down cheapest raw material, manufacturers and shipping routes. Reducing costs up to 20% by cutting out middlemen and buying directly from foreign factories.

50% - 60% of merchandise is imported from developing (low cost) countries for e.g. Bangladesh. Pitting suppliers (count ~3000) against each other in order to get the lowest prices possible.
Shifting their supplier base to developing countries like China which

provides cheap labor, cheap capital, advanced infrastructure and a very conducive governance system, to business.

Economic Influence of Wal-Mart

4% of the growth in the U.S. economy's productivity from 1995 to 1999 was due to Wal-Mart alone, as researched at the McKinsey Global Institute, in 2002. Wal-Mart also has forced competitors to become more efficient, driving the nation's productivity output per hour of work even higher. Wal-Mart has often blamed for destruction of unorganized retail sector. According to one of the study, it was found that some small towns can lose almost half of their retail trade within ten years of a Wal-Mart store opening. For the concern of jobs, a study commissioned by Wal-Mart, found that its stores' presence saves working families more than US$2,500 per year, while creating more than 210,000 jobs in the U.S. Alternately the Economic Policy Institute estimates that 196,000 jobs were lost between 20012006, and 68% of jobs lost were manufacturing jobs. Another study at the University of Missouri found that a new store increases net retail employment in the county by 100 jobs in the short term, half of which disappear over five years as other retail establishments close.

A 2004 paper by two professors at Pennsylvania State University found that U.S. counties with Wal-Mart stores suffered increased poverty compared with counties without Wal-Marts.