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Target’s Pricing Strategy: One Penny Higher Than Wal-Mart

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Ben Franklin famously said, “A penny saved is a penny earned.”

Target CEO Gregg Steinhafel seems to have adopted that philosophy as the retailer’s pricing strategy.

Mr. Steinhafel recently told a luncheon crowd at the Economic Club of Minnesota in Minneapolis — Target’s headquarters city — that Target does not want an “all-out price war” with Wal-Mart.  But Target’s prices will be within two percent of its chief competitor, said the CEO.

“We want to be a penny higher than Wal-Mart,” he said.  “So, if they have bananas for 48 cents, we want to have bananas for 49 cents.  If it’s a ten dollar item, the difference might be a nickel.”

If Target can buy from vendors as cheaply as Wal-Mart and price their products accordingly, the firm’s margins will be brutally squeezed. But if that pricing strategy attracts more customers, then Target’s bottom line could grow fatter on volume.

But Target is attempting to lure customers by creating a better shopping experience in stores and online, said Mr. Steinhafel. The bait is store design, innovative technology and customer service.

As long ago as early 2012, Target sent letters to some of its vendors asking for discussion of the “penny higher” pricing strategy that would eliminate many pricing promotions.  Target asked for the same pricing from vendors that online sellers get.

As part of its pricing strategy, in January Target announced an ongoing price-matching program which would match the prices of online retailers Amazon.com, Walmart.com, Bestbuy.com and Toysrus.com.

First quarter earnings for Target will be announced in late May.  Full year sales increased 5.1 percent to $72 billion, up from $68.5 billion the previous year. Comparable store sales were up 2.7 percent.

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