MICROECONOMICS – 2 - ASSIGNMENT

Pricing Strategy – Comparison of 7/11 and Cold Storage

Submitted by : -

Nataraj PangalGAPR09SMM107

Introduction : -

7-Eleven, Inc. is the world’s largest chain of convenience stores, with over 400 stores in Singapore it is the most omnipresent store in Singapore. Originally the stores were open from 7 a.m. to 11 p.m, and hence derived the name. However, today, the cornerstone of 7-Eleven’s business is to offer customers 24-hour convenience, seven days a week. 7-Eleven is a convenience store focused on catering to the needs of convenience oriented customers by providing a range of fresh, high quality products and services at any time during the day or night.

Cold Storage is a premier player in retailing and has over 36 stores all over Singapore. It offers a comprehensive range of quality products at reasonable price and also provides various schemes to attract customers. Some of the weekly schemes offered are : - Great Fresh Savings, SuperBuys, No Frills & First Choice. Being a leading discount supermarket chain in Singapore Cold Storage exemplifies quality, huge range of products at competitive prices.

Comparison of Pricing Strategy : -

Products 7/11 Cold Storage

Ruffle Lays BBQ Style SGD 6.25 SGD 3.65Seasons Limón Ice Tea (500 ml) SGD 2.50 SGD 1.20Pepsi (500 ml) SGD 1.30 SGD 1.20Magnolia Fresh Milk (1l) SGD 3.85 SGD 3.70

The above table is a comparison between the prices of various products in 7/11 and Cold Storage. The comparison of prices of these products shows that the pricing of 7/11 is higher than that of Cold Storage.

Analysis : -

Average Cost / Marginal Cost : -7/11 being a convenience store is open 24 hours a day and 7 days a week. It is a small shop and stocks lesser goods as compared to Cold Storage. Also, there are over 400 7/11 stores in Singapore as compare to 36 Cold Storage stores. Cold Storage on the other hand is a huge retail store with more emphasis on quality of goods and operates from 9:00 am to 10:00 pm. It also stocks a huge amount and variety of goods catering to various market segments.

Hence, it can be inferred that the Average Cost that 7/11 incurs on each product is higher as compared to that of Cold Storage.

As depicted in the above figures the Average Cost of 7/11 is higher than that of Cold Storage. Hence, in order to make profits 7/11 has to ensure that that its Price is above the Average Cost.

Price Elasticity of Demand: -As stated previously 7/11 is a convenience store open throughout the year and omnipresent throughout Singapore. However, Cold Storage has fixed store hours and is not as ubiquitous as 7/11 is. Hence, 7/11 is extremely suitable and sometimes the only option available for people. Hence, when no other options are available the Price Elasticity of Demand will be less. And lower the Price Elasticity of Demand higher would be the price. Similarly, when Cold Storage operates there are other competitors like Fair Price and 7/11 also present; hence its Price Elasticity of Demand will be High. Higher the Price Elasticity of Demand, lower would be the price.This is also one of the reasons why 7/11 prices its products higher than Cold Storage.

Fixed Cost / Variable Cost: -For reasons mentioned above, the proportion of Fixed Cost as compared to Variable Cost is smaller for 7/11. Hence, in order to increase profits, 7/11 cannot reduce its price. On the contrary the proportion of Fixed Cost as compared to Variable Cost is larger for Cold Storage. Hence, in order to increase profits it could reduce its price.Hence, given 7/11’s high Variable Cost the Price has to be maintained high.

Consumer Surplus : -7/11’s strategy is to make best use of the Consumer Surplus available and hence prices its commodities high. Being easily available at any time of the day the Consumers are willing to pay a little higher for the commodities. On the other hand, Cold Storage’s strategy is to increase market penetration by maintaining lower prices and providing various weekly schemes and offers to attract customers.

The adjacent figure depicts that 7/11 has priced its product at Ps to make best use of the Consumer Surplus available. Whereas, Cold Storage reduced its price and offered more schemes to increase market penetration.

Hence, 7/11 has priced its products higher as compared to Cold Storage.