Morphing price tag in a shopping aisle, symbolizing dynamic pricing.

The Price is Right? Unlocking the Secrets of Small Price Changes in Retail

Lena Kashyap in Business & Economy July 2025 • 4 min read.

"Ever wondered why those seemingly insignificant price adjustments happen? New research unveils the surprising role of sales volume and menu costs in retail pricing strategies."

In the fast-paced world of retail, pricing is a constant balancing act. While we often focus on significant price swings, a fascinating phenomenon lies in the realm of small price changes. These minor adjustments, often just a few cents, might seem inconsequential, but they reveal a deeper understanding of how retailers strategize to maximize profits and respond to market dynamics.

The idea of setting a single price and sticking to it might seem simple, but the reality is far more complex. Companies must weigh several factors, from consumer behavior and competition to the internal costs associated with changing prices, known as 'menu costs.' These considerations help to explain the prevalence of so-called small price changes in the retail environment.

A recent study has shed new light on this topic, revealing the significant role that sales volume plays in determining the frequency and size of price adjustments. By analyzing a large dataset of retail scanner information, researchers have uncovered a compelling link between product sales and those seemingly minor price changes. It turns out these changes may be more calculated than random.

The Menu Cost Model: More Than Meets the Eye

Morphing price tag in a shopping aisle, symbolizing dynamic pricing.

At the heart of retail pricing strategy is the 'menu cost' model. It suggests that businesses face real costs each time they alter a price. This includes tasks such as updating price tags, informing staff, and updating databases. Those menu costs create a threshold that companies must consider before making any price change.

Conventional thinking suggests that the menu cost model leads to infrequent but substantial price changes. In this view, the costs of making an adjustment are only worth it if the price shift is large enough to significantly impact profits. However, real-world observations consistently show a high percentage of small price adjustments, seemingly contradicting the basic menu cost model.

Reconciling the Discrepancy: Economists have developed several theories to explain the disconnect between the basic menu cost model and the prevalence of minor price adjustments:
Stochastic Menu Costs: The cost of changing prices isn't fixed but varies, sometimes being low enough to justify small adjustments.
Economies of Scope: Businesses can adjust multiple prices at once, reducing the individual cost of each change.
Consumer Inattention: Consumers don't always notice small price changes, making them a subtle tool for businesses.

Despite the potential insights offered by these explanations, new research points to a key factor often overlooked: sales volume. The number of items sold dramatically impacts whether a price adjustment is worthwhile.

The Future of Pricing: Navigating a Complex Landscape

The exploration of small price changes in retail reveals a complex interplay of factors. By understanding the influence of sales volume, menu costs, and consumer behavior, businesses can refine their pricing strategies to optimize profitability while remaining competitive. In an era of ever-increasing data and analytical capabilities, we can expect even more sophisticated pricing approaches to emerge, further blurring the lines between art and science in the retail world.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2403.07166,

Title: Small Price Changes, Sales Volume, And Menu Cost

Subject: econ.gn q-fin.ec

Authors: Doron Sayag, Avichai Snir, Daniel Levy

Published: 11-03-2024

Everything You Need To Know

What are 'menu costs' and how do they influence retail pricing strategies?

The term 'menu costs' refers to the expenses businesses incur when changing prices. These costs involve updating price tags, informing staff, and modifying databases. According to the 'menu cost' model, these costs act as a threshold, influencing retailers to make infrequent but larger price changes to justify the incurred expenses. However, empirical observations frequently show numerous small price changes, which apparently contradicts the basic 'menu cost' model, thereby sparking the need for additional research and explanation. The 'menu cost' model highlights the complexities involved in retail pricing decisions.

Why do retailers make small price changes instead of sticking to a single price?

Retailers make small price changes because of a combination of factors. The 'menu cost' model plays a role, but does not fully explain it. Also, 'Stochastic Menu Costs', 'Economies of Scope', and 'Consumer Inattention' are potential reasons. Recent research indicates that sales volume has a major role in determining the frequency and size of these price adjustments. The number of items sold dramatically impacts whether a price adjustment is worthwhile. Small price changes are a strategic tool that businesses use to maximize profits and react to market dynamics. Small changes are also more subtle and might be missed by consumers.

How does sales volume impact price adjustments in retail?

Sales volume plays a critical role in determining both the frequency and size of price adjustments. The research reveals a strong link between product sales and minor price adjustments. A high sales volume can make even small price changes worthwhile for retailers. When a product is selling well, even a slight price increase can generate significant profits, while a small price decrease can stimulate even higher sales. This contrasts with products with low sales volume, where price adjustments may be less frequent or more substantial to make a meaningful impact on overall profitability. Thus, sales volume provides a crucial context for understanding retail pricing dynamics and the strategic use of small price changes.

What is the significance of the 'menu cost' model in the context of retail pricing?

The 'menu cost' model is at the heart of the retail pricing strategy. It suggests that businesses consider the costs associated with each price change. These costs, encompassing tasks such as updating price tags and databases, create a barrier to frequent price adjustments. The model initially proposed that retailers would make significant price changes to offset these costs. However, the reality of the market often shows numerous small price adjustments. The basic 'menu cost' model, therefore, requires further explanation. It highlights the factors that retailers consider when setting and adjusting prices.

Beyond 'menu costs' and sales volume, what other factors influence retail pricing decisions?

Beyond 'menu costs' and sales volume, other factors are also at play. These factors include consumer behavior and competition, which force retailers to balance their pricing strategies. There are also different theories to explain the apparent disconnect between the basic 'menu cost' model and the prevalence of minor price adjustments: 'Stochastic Menu Costs', 'Economies of Scope', and 'Consumer Inattention'. In the dynamic retail landscape, businesses must consider various aspects to refine their pricing strategies, optimize profitability, and maintain competitiveness, especially in an era of increased data analysis and analytical capabilities.