Question

A local supermarket decides to sell a premium brand of meats and cheeses in its deli department. This brand is priced about \(\$ 2\) more per pound than the store brand. About 80 percent of the space in the deli display cases is devoted to the premium brand and 20 percent to the store brand. a. How did price serve as an incentive to the supermarket? b. What kind of signals is the supermarket sending to its customers with this pricing strategy?

Short answer

Price serves as an incentive by increasing potential profits for the supermarket. The pricing strategy signals exclusivity and higher quality to customers.

Step-by-step solution

Understanding the Problem

To address the questions, we need to identify the role of pricing in incentives and the signals conveyed by such pricing. The supermarket allocates 80% of display space to the premium brand, which is priced higher by $2 per pound compared to the store brand.

Analyzing Price as an Incentive

Prices can serve as an incentive if they offer the potential for higher profits. By pricing the premium brand $2 more, the supermarket likely sees an opportunity for increased revenue through higher margins, encouraging them to promote and sell more of the premium brand.

Identifying Signals to Customers

The significant space allocation and higher price suggest exclusivity and higher quality. By devoting 80% of the space to the premium brand, the supermarket signals to customers that it values the premium products more, potentially hinting at better quality or a better formulation compared to the store brand.

Key concepts

Consumer Signaling

Imagine walking into a supermarket and seeing the majority of the deli section filled with one specific brand. This setup isn't accidental; it's meant to communicate something to you as a shopper. This is what we call consumer signaling.
It's all about the messages a company sends to its buyers to shape their perceptions.
Here's how it works with supermarkets:

• **Exclusivity and Prestige:** When a product is given more space and a higher price, it signals that the product is special or superior in some way.
• **Quality Assurance:** The supermarket sends a subliminal message that you are buying quality, justifying the higher price.
• **Preference Indication:** By dedicating more space to the premium brand, the store suggests a preference for this product, potentially influencing customer choice.

So, the next time you see a special shelf filled with a high-priced product, remember it's the store's way of signaling you towards what they consider their star product.

Product Differentiation

When you see different sections in a store for various products, what you're experiencing is product differentiation. The supermarket sets apart its premium and store brands as distinct choices.
But why bother doing this? First of all, it helps customers make better decisions. If you're looking for high-quality, luxurious options, the premium brand might be what you are directed to. Product differentiation reduces competition between similar products by offering different qualities, attracting various customer preferences.
Secondly, it allows supermarkets to target different audiences:

• **Premium Buyers:** Customers who are willing to pay more for better quality would opt for the premium brand.
• **Budget Shoppers:** Shoppers looking for savings might stick to the store brand.

Product differentiation helps the supermarket appeal to both ends of the consumer spectrum without adding competition between their offerings.

Profit Margins

Why would a supermarket devote 80% of its display space to a premium brand? The answer lies in improving profit margins.
A profit margin is the difference between what it costs a store to purchase a product and the price at which they sell it.
Higher-priced items often have larger margins, translating to potentially greater profits with fewer sales compared to cheaper options. Here’s how the strategy works:

• **Greater Revenue per Unit:** Selling fewer, higher-cost items can mean more revenue than selling many lower-priced items.
• **Value Derivation:** The premium brand gives the impression of added value, which justifies the higher price.
• **Space Optimization:** More display space for these goods enhances their visibility, thus increasing the chances of selling these higher-margin items.

Ultimately, focusing on products with higher profit margins can result in significant gains, making full use of available shelf space and investing in consumer preferences.