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Zone Pricing: How Retailers Can Capture Value and Increase Competitiveness

Like the ancient merchant who haggles with different customers, today's brick-and-mortar retailers can de-average their prices as they invariably have stores located in very different environments.

Every store is different—down to the customers it serves and the other stores it competes against. Fortunately, retailers generate a huge reservoir of rich transactional data from loyalty programs and credit cards. Together with geospatial analytics and competitor price shops, this provides a well of information that can help retailers understand local customer preferences; price sensitivities; and product affinities across stores, categories, and products. Ultimately, this enables the retailer to segment the store footprint into "pricing zones," with different willingness-to-pay levels based on observed shopping behavior rather than artificially set geographical boundaries.

A Four-Step Approach to Zone Pricing

To take advantage of this complex web of information, BCG has developed a four-step approach for retailers to design a sound zone-pricing strategy.

1. DETERMINE WILLINGNESS TO PAY

2. CONSIDER COMPETITOR ALTERNATIVES

3. INCORPORATE CATEGORY AND ITEM-SPECIFIC STRATEGIES

4. Implement Capabilities

Retail
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