Retail Strategy Secret #19: Basket Pricing

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Welcome to the nineteenth post in our series of “Retail Strategy Secrets”!  Here you will learn the angles, approaches, and tactics retailers are using every day to try and separate you from your hard-earned cash.  Understanding these unlocks the door to spotting great deals, and you never want to pass up a Dealicacy…

Basket Pricing

If you have ever walked out of a store having purchased more than one item you have likely experienced, contributed, or fallen prey to the “basket pricing” strategy in some way. There are many angles from which retailers approach this, but most ultimately seek to capitalize on pattern behavior and mass-consumer tendencies.

As we talk about a few examples of basket pricing in today’s article, please keep in mind this is not meant to be an exhaustive list. In fact, feel free to offer up more examples to everyone reading by adding a comment below!
A few of the wide array of basket pricing strategies include:

  • Bundling products. Sure, each individual Microsoft Office program is available as a stand-alone product, but buy the entire Office suite at the same time and receive a significant “discount” off what the total would be otherwise.
  • Offering a “Complete Solution”.  Best Buy is keen to “remind” you of stuff like the “fact” that not just any DVD player or a/v cables will bring out the best in your new HDTV.
  • Targeting Meal Time.  Grocery store rotisserie chickens are cooked to be hot and ready (and likely discounted) just before dinner for a reason.

Let’s take a look at the Microsoft bundling strategy.  You may disagree, but I’m going to go out on a limb here and say that the two most frequently used programs in the Office suite are Word (word processing) and Excel (spreadsheet software).  Sold separately, they might fetch $100 each. Then there’s PowerPoint, which is also pretty useful.  But for – ouch – another $100, most people would likely be able to survive without it.

Now consider the whole bundled version of Microsoft Office – the package deal includes all of the above mentioned programs, plus Access, One Note, Outlook, Money, and maybe some other stuff too.  And the price point is… wow… slightly less than three of the programs purchased separately (ex: $272)!  You’ve just completed a basket, and added $72 more to Microsoft’s revenue than they might have otherwise pulled out of your pocket.

Take a look now at the “dinner basket.”  Most people are busy, and many are in a time crunch when stopping in to the grocery store.  Just the same, they are interested in trying to put well-rounded (and healthy) meals on the table for their families.  A rotisserie chicken is a great starter item, and conveniently enough they can usually be found in a display right next to the store entrance.  Naturally, with chicken in hand, the focus then becomes completing the meal.

One could run to the produce or frozen food sections (spending extra time while the chicken gets cold), but why when there are other already-prepared items straight from the nearby deli counter. They not only have the veggies, but also a few side items like mashed potatoes, pasta salads, and dessert – all ready to serve!  “Bonus”: there is a rack of fresh-baked bread right by the checkout lanes…

Regardless of which example you look at, the similarities between them tend to involve a “hook” to get the consumer interested (such as a Loss Leader or the promise of greater overall shopping value (EDLP).  The retailer’s ultimate goal is met when a shopper opts to add more items to their cart than they originally intended to buy. If properly executed, the additional items provide much more profitability to the retailer than there otherwise would have been should they have left the customer’s shopping to chance.

So how do retailers determine which items to feature in their baskets?  Basically, the contents of each receipt (unique purchase event) are analyzed for similarities and then grouped together (“sliced”) in different ways.  Analysis groupings are virtually limitless, ranging from items that are typically bought with a common product partner and/or in multiples to time of day. Then, complementary planning and merchandising is applied to the findings, with the “basket” items potentially carrying a higher markup.

This is why free-standing racks of bananas, milk coolers, and even batteries displays can be spotted outside of their normal sections in the store.  It is easier to target and “remind” individuals by placing grab and go items on end caps, right before checkout, etc. Even if the item(s) are obviously not on sale.

Recall back when we discussed loyalty programs?  Purchase tendencies can be analyzed to the point of targeting individuals for additional, and sometimes unique promotions.  On the other end, they can also be scrutinized for avoidance of unprofitable “demon” customers (e.g. those who only shop when applying coupons to sale items or abuse store return policies).  More frequently, however, the data is simply used in aggregate, much like the receipt example above.

Going back again to the last post and how not to lose your Dealicacy when dealing with loss leaders, this post shows why.  Basket pricing is just one way retailers up the ante by figuring our what “you” are after.  However, remember that you don’t have to give in to the tendencies of the average consumer.  In fact, make sure you are *much* more in the know than them by taking advantage of the FREE Dealicacy newsletter.  Suddenly the guy who you spotted last week buying only beer and broccoli doesn’t seem so weird, does he? 🙂

Wow, only one more topic left in our series on “Retail Strategy Secrets.”  We don’t want to forget about Rebates!

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One Response to “Retail Strategy Secret #19: Basket Pricing”

  1. Debrie says:

    You mention such a great things here and it is always pleasure to read. Hope to hear more and learn from you.