Payless ShoeSource case study

1. Which of the different product mix pricing strategies applies best to Payless’s new strategy?

To my view they are using mix of different strategies. Firstly, skimming pricing. This is about selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. I see that they have invested a lot of money to hire top notch designers, rebranding effort like remodeling stores etc. There needs to be some mechanism (read, strategy) to recover this cost. For some items they have even employed premium pricing. Interestingly, Payless came up with some really good product like Lela Rose, Abaete etc. On the other hand, they have products which are low as $12.

As best strategy that they are employing; I would say that they are going for Product Line Pricing. They want their customers to get attracted by the big brands in their portfolio. In that way, other products will gain due importance too. So to customers, overall portfolio will look very attractive.

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2. How do concepts such as psychological pricing and reference pricing apply to the Payless strategy? In what ways does Payless’s strategy deviate from these concepts?

By definition, psychological pricing on the theory that certain prices has a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. There is no explicit reference given in the case where we see that they are using this strategy. As a matter of fact, we see that though Payless is increasing the price of their products. So, sudden upward movement of price may come as a shock to customers. This strategy of Psychological pricing can be employed in this scenario. Payless actually did not pay a heed to that and did not come up with any proper plan towards psychological pricing.

As for Reference pricing, it is a strategy in which a product is sold at a price just below its main competing brand. Now, in the case of Payless, they did not stress on setting the price at competitor price level. Instead they just increased the price to a bare optimum level so that customers can afford luxury and trendy items at much lower price. This price is well below the market price.

3. Discuss the benefits and risks of the new Payless strategy for both Payless and the designers. Which of these two stands to lose the most?

There are benefits as well as risks involved in the new strategy of Payless. Benefit is customers can afford the luxurious and trendy items at much lower costs. They will be able to buy the designer product and a range of shoes and other related products at ease. In the process Payless will get a large volume of customers.

Risk is historically designer luxury items and low cost does not gel together. Low cost has two connotations. One, the product is cheap. Second, the product is of inferior quality. Now consumers may be totally confused as to what will be the product quality when they see the cost price is so low than others in the market. If this is the case, sale will dip instead of increase.

4. Consider the scale on which Payless operates. How much of a price increase does Payless need to achieve in order to make this venture worthwhile?

Payless undoubtedly operates at a mass volume of customers. The CEO, Rubel said, in many cases the price increases may be as little as 50 cents per pair of shoes. Payless has a large base of value conscious customers. In that segment a small price increase can sustain profitability. Basically that segment needs to be sustained so that they do not go for other company’s products. That is the key for assured return in terms of margin. They are banking on the fact that “making everyone happy will ring up the sales and profits it needs”. I think, some of the products which are really of very good quality and come from top designer houses can be priced at a bit lower than the markets. It is necessary to recover the huge volume of money spent on remodeling of the business and distribution system.

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