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How did they do that?

Professor Steve Carter, Professor of Marketing

Faculty Blog

The UK 2012 Christmas grocery retail sales results are in! And they don’t make happy reading for Morrisons, one of the so called retailing ‘Big Four’. Whilst Tesco, Asda and Sainsburys have some reasons to be cheerful, Morrisons are looking at a gloomy 2.5% downturn in like-for-like sales. How come? They cut prices and offer ‘two-for-ones’ like the others don’t they? Why did it work for their rivals?

Well there are many factors in consumer choice (see course on Consumer Behaviour), but one often neglected is the ‘IRP’, the Internal Reference Price (see module 12 ‘Pricing’ of the Marketing course). Consumers have an internal price ‘benchmark’, that is, a price in mind which they compare to a product’s shelf price. Get it wrong, Mr Grocery Retailer, in a world where margins are paper thin, and the results can be disastrous. In a famous study back in 1996, and still current, Dolan and Simon showed that a 7% reduction in price, based on average grocery margins, required a massive 39% improvement in volume just to break even! Conversely, and some would say perversely for the big boy grocery discounters, a 10% increase in price resulted in a massive 33% improvement in profit! So how can you get it wrong? You only have to make sure that you take IRP into account don’t you? Or do you? Ask not just Morrisons, but Comet as well!