The complex world of supermarket pricing

Supermarket pricing in Australia, and in many parts of the world, is a dynamic and intricate system influenced by various factors. 

Understanding the mechanisms behind pricing can provide insight into the cost of everyday goods, and perhaps help you to know when and how to grab a bargain. 

One common strategy employed by supermarkets is the use of “loss leader” products. These are items sold at a price lower than their market cost to attract customers into the store. 

The rationale behind this tactic is that once customers are inside the store, they are likely to purchase other products with higher profit margins. 

For example, a supermarket might sell bread or milk at a significant discount, enticing customers to visit the store and, while there, buy other items such as fresh produce, meats, or snacks that contribute to the store’s overall profitability. 

You may have noticed that the price of the same product can vary from store to store or even week to week. This is due to several reasons: 

• The rules of supply and demand can have an immediate and significant effect on prices. For instance, a bad weather event can disrupt supply chains, causing prices to spike. Conversely, an oversupply can lead to discounts and lower prices. 

• Location is important. Different stores may have different operating costs, such as rent and wages, which can affect pricing. A store in a high-rent urban area might have higher prices compared to one in a suburban location. 

• Prices may vary depending on the level of competition in the area. In regions with many competing supermarkets, prices tend to be lower as each store tries to attract customers. 

• Promotions and discounts can lead to price variations. These sales are typically timed to coincide with pay cycles or holidays when people are more likely to shop.

Sales and promotions are a staple of supermarket pricing strategies. These sales serve multiple purposes: 

• By offering discounts on popular items, supermarkets can draw more customers into the store. 

• They help clear inventory. Stores occasionally need to move products that are nearing their expiration date or are overstocked. 

• Promotional pricing can encourage customers to try new products they might not otherwise consider. 

Supermarkets carefully plan their sales cycles to maximise customer traffic and sales volume. For instance, sales are often more frequent at the end of the week when people are preparing for the weekend. 

The layout of a supermarket plays a crucial role in influencing consumer behaviour and, consequently, pricing strategies. Here’s how: 

• Product placement: High-margin items are often placed at eye level to increase their visibility and likelihood of purchase. Essential items such bread and milk are typically located at the back of the store, requiring customers to pass by many other products, increasing the chances of impulse buys. 

• Flow and design: The store layout is designed to guide customers through a specific path, often leading them past promotional displays and high-margin products. End caps (displays at the end of aisles) are prime real estate for promotions because they catch the shopper’s eye as they navigate the store. 

• Category management: Products are grouped in a way that encourages additional purchases. For example, placing chips near the beer section or sauces next to pasta can lead to increased sales. 

• Checkout area: The checkout area is strategically stocked with small, high-margin items such as lollies and chocolates, magazines, and sugary drinks, targeting impulse purchases as customers wait to pay. 

The upshot of all this is for you to be aware of what’s going on, so you can avoid the temptation to choose expensive items or buy things you don’t need simply because the supermarket has made it easy for you to do so. 

Your best strategy is to have a shopping list and, as far as possible, stick to it.