Toys R Us has been using a penetration pricing strategy in its business. “Penetration pricing strategy is a relatively low market entry price with the objective of building volume, and market position” (Cravens & Piercy, 2003). Toys R Us started off as a category-killer where in it applied a disintermediation of intermediary layers by removing wholesalers and agents from the supply chain. It got into direct contact with suppliers and functioned as a retailer catering directly to the end customer. However, as the industry evolved over the years it is now facing a similar problem against the retail tsunami that Wal-Mart is and its peer Target Corporation.
Whereby, Toys R Us viability to remain in the market is highly related to its pricing techniques. Craven and Piercy state that “when price is an important factor for a large segment of buyers, a low active price strategy is very effective” (2003). This is exactly the pricing model that Toys R Us has been following. Toys R Us has long been a follower of low-active pricing strategy under the market penetration pricing model. Its choice of pricing has been largely dictated by the high price sensitivity of the customers in its industry. Since the bargaining power of customers in the toy industry is high Toys R Us could not have succeeded if it charged higher profit margins. This strategy is by design vulnerable to competition as it encourages competitors to offer comparable prices. Cravens and Piercy further explain that this strategy is not suitable for fierce competition and only works when a company has cost advantages and strong positioning within the industry (2003). This strategy was working for Toys R Us until Wal-Mart came around the corner as well as other discount retailers. It would have been better for the company if it had followed a medium price and backed it up by Superior Promotion, Superior Distribution, Superior Quality and Superior Service. This way it could have justified a bit higher profit margin.
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