Wednesday, March 2, 2005

Pricing a la Wal-Mart

I'll admit to a strange fascination for how Wal-Mart does business. As one of the world's largest companies (they added about 50 million square feet of store space around the world last year, opening 50 - 70 new stores a month), the company is a machine of terrifying efficiency. And their sales volume offers them an interesting perspective on how consumers make choices, perceive value, and compare options.

Avid readers of Public Management magazine (all three of you) already know about a great overview of the Wal-Mart phenomenon -- and its implications for communities where stores are being built or planned.

One particularly fascinating section describes the mega-store's pricing strategy, which doesn't work toward the lowest prices on all items, but only those items that people can consciously compare:

A mid-size Wal-Mart supercenter may offer for sale 100,000 separate items, or stock-keeping units (skus). Wal-Mart and other major retailers believe that the general public knows the going price of only 1 to 2 percent of these items. Therefore, each Wal-Mart store shops for the prices of only about 1,500 items in their competitors' stores. If it is ever found that a competitor has a lower price on one of these items than Wal-Mart, the store manager will immediately lower his or her price to be the lowest in the area.

Price-sensitive merchandise is displayed in prominent places such as the kiosk at the entrance to the store, as well as on end caps, in dump bins, and in gondolas down the main aisles. Consequently, when Wal-Mart customers see the items of which they know the price, the ones always priced lower in Wal-Mart, they start assuming that everything else is also priced lower than at competing stores. This assumption is simply not true.

While I'm not suggesting an arts organization has the volume or scope of product to approach such a strategy, it is interesting to consider what elements of price are in the minds of our audiences, and how we can scale our pricing (both up and down) to shape their on-going dance of cost and value.

In a bizarre side note: Wal-Mart is also continually connected to actual sales through its main data center. The discoveries they make through this meta-worldview are often strange and compelling. For example, after tracking sales at their Florida stores surrounding hurricane Charlie, they discovered that consumers weren't only buying batteries and water, but also strawberry Pop-Tarts and beer. So, as a second hurricane approached the region, they bumped up the local stock of strawberry Pop-Tarts and beer.

According to this panel discussion, that commitment to feedback and strategic response is another key power of the Wal-Mart machine:

[So] you have a company that is deeply committed to understanding the nature of its customers, integrating that data closely with its operations; and the managers are willing to react strategically in a way that allows them to outdo the competition in terms of their ability to react. The lesson is that a proactive orientation where the managers are committed, where the systems are capable of delivering value, where the customers are going to react positively to that value when it's delivered and the company is able to efficiently deliver and earn a profit associated with that relationship, seems to be the hallmark of success.

There's lots in that statement of direct value to arts and cultural managers. We don't have to become Wal-Mart, but we can learn from it.

posted on Wednesday, March 2, 2005 | permalink