The Accounting Blog

In a recent program, PBS' Frontline examined the inner workings of WalMart. One of the most interesting revelations had to do with the company's pricing strategy, which was pioneered by legendary founder Sam Walton. The strategy is known as "opening price point," and here's how it works.

WalMart goes to great lengths to have an alluring and unbeatable opening price point item in each category- from TV sets to cosmetics to bathing suits. These are the "unbelievable" prices that the company has become famous for (for example, a microwave oven for $14.67). The psychological impact of this opening price point is huge- consumers are led to believe that all of WalMart's prices are this low. However, the reality is quite different. As confirmed in interviews with former store managers, WalMart does not have the lowest price on every item in every category. In fact, the company often has higher prices than other big retailers (i.e. you might get a better deal down the road at Target). However, in most cases the game is already over because consumers believe that WalMart's prices are lower across the board. Furthermore, evidence shows that most shoppers don't even buy the opening price point item. Instead, the low price lures them into the department, where they end up buying a brand name or higher quality item that they are more comfortable with.

So here's the point: as described in another post (Profit Drivers), pricing is one of the single most important factors that determine your company's profitability. In fact, price will always have an impact that is two or three times greater than the other drivers. As a result, this cunningly simple strategy is one of the major reasons that WalMart has become the largest retailer in the world. The moral of the story? Pay close attention to your pricing strategy, it has a huge impact on the bottom line.

Posted by Will K at 05:03 AM November 14, 2005