RETAIL PRICING RETAIL PRICING

Concept of Retail Pricing Concept of Retail Pricing

Price is an integral part of the retail Price is an integral part of the retail marketing mix – source of revenue marketing mix – source of revenue

Importance of Pricing due to many Importance of Pricing due to many alternatives available for today’s alternatives available for today’s customers – therefore important for customers – therefore important for retailers to increase retailers to increase valuevalue and stimulate and stimulate sales sales

What is Value here ?

Value is the ration of what customers Value is the ration of what customers receive (the perceived benefit of the receive (the perceived benefit of the product and services offered by the product and services offered by the retailer) to what they have to pay for retailer) to what they have to pay for it .it .

Value = Perceived Benefits Value = Perceived Benefits

Price Price

Factors to be considered before arriving at the price

of a product Demand for the product and the target

market – ex:- electronics – price related to – ex:- electronics – price related to quality , designer clothes etc quality , designer clothes etc

Store PoliciesStore Policies – image to be created ex:- – image to be created ex:- prestige image , penetrate the market policy prestige image , penetrate the market policy

Competition for the product Competition for the product Economic condition Economic condition Cost Cost Legal ConstraintLegal Constraint Customer Price sensitivity Customer Price sensitivity

Types of Price DiscriminationTypes of Price Discrimination First DegreeFirst Degree – Set unique price for each customer – Set unique price for each customer

equal to customer’s willingness to payequal to customer’s willingness to pay– Auctions, Personalized Internet PricesAuctions, Personalized Internet Prices

Second DegreeSecond Degree – Offer the same price schedule to all – Offer the same price schedule to all customers customers – Quantity discountsQuantity discounts– CouponsCoupons– Markdowns Late in SeasonMarkdowns Late in Season– Early Bird Special Early Bird Special – Over Weekend Travel DiscountOver Weekend Travel Discount

Third DegreeThird Degree – Charge different groups different – Charge different groups different pricesprices– Kids MenuKids Menu– Seniors DiscountsSeniors Discounts

Price Sensitivity and Price Sensitivity and DemandDemand

When increases

can decrease

as fewer customers feel the product is a good value

price

sales

Price Sensitivity of customers determines how many units will be sold at different Price levels .

One approach that can be used to measure the price sensitivity of customers is a Price experiment .

Situation :- A movie theater chain wants to determine how many movie tickets Will be sold at different price levels .

6 theaters – with similar trading areas -Prices at different levels in each of the theaters for a week -Assume variable cost per ticket - $5 -Fixed cost of operating the theater (rent,labor etc) $8,000

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As prices increase , the fixed cost remain same, sales and VC both decrease

Quantity Sold at Different PricesQuantity Sold at Different Prices Profit at Different PricesProfit at Different Prices

So the highest profit level occurs at a $ 7.00 price

Price ElasticityPrice Elasticity

Elasticity = percent change in quantity sold percent change in price

Elasticity = percent change in quantity sold percent change in price

= (new quantity sold – old quantity sold)/old quantity sold (new price – old price)/(old price)

= (1100-1500)/1100 (10-9)/9

= -0.2667 .1111

= -2.4005

A commonly used measure of price sensitivity is price elasticity .

Illust :- A retailer originally priced a private-label DVD player at $9 and raised the price To $10 . Prior to raising the price , the retailer was selling 1500 units a week. When the priced was increased , sales dropped to 1,100 units per week. The calculation of the price Elasticity is as follows :-

Because the quantity sold usually Because the quantity sold usually decreases when prices increase , decreases when prices increase , price elasticity is a negative number . price elasticity is a negative number .

PE > -1 (Price insensitive = Price PE > -1 (Price insensitive = Price inelastic)inelastic)

PE < -1 (Price Sensitive = Price elastic PE < -1 (Price Sensitive = Price elastic ) )

Other factors affect price sensitivity :

1. Substitutes of product 2. Products and services that are necessary , ex:- petrol, medical services 3. Products expensive relative to consumers income – cars – price elaastic movie tickets – price inelastic

For products with price elasticities less than -1, the price that maximizes profits can be determined by the following formula:

Profit maximizing price = price elasticity x cost

price elasticity +1

COMPETITIONCOMPETITION

Retailers can price above, below , or at parity Retailers can price above, below , or at parity with the competition . The chosen pricing with the competition . The chosen pricing

policy must be consistent with the retailer’s policy must be consistent with the retailer’s overall strategy and its relative market overall strategy and its relative market

position. position.

How Can Retailers Reduce Price How Can Retailers Reduce Price Competition?Competition?

Develop lines of Develop lines of private label private label merchandisemerchandise

Negotiate with Negotiate with national brands national brands manufacturers for manufacturers for exclusive distribution exclusive distribution rightsrights

Have vendors make Have vendors make unique products for unique products for the retailerthe retailer

PhotoLink/Getty Images

Legal and Ethical Pricing Legal and Ethical Pricing IssuesIssues

Price Discrimination- Price Discrimination- hair salon price differently for women as compared to men hair salon price differently for women as compared to men

Predatory Pricing-Predatory Pricing- when a dominant retailer sets prices below its costs to drive when a dominant retailer sets prices below its costs to drive competitive retailers out of business ex:- Wal-mart. competitive retailers out of business ex:- Wal-mart.

Resale Price Maintenance-Resale Price Maintenance- Vendors often encourage retailers to sell their Vendors often encourage retailers to sell their merchandise at a specific price , known as the manufacturer’s suggested retail merchandise at a specific price , known as the manufacturer’s suggested retail price (MSRP) . Although this is not legal now . price (MSRP) . Although this is not legal now .

Horizontal Price fixing- Horizontal Price fixing- agreement between retailers that are in direct competition agreement between retailers that are in direct competition with each other to set the same prices. with each other to set the same prices.

Bait and Switch tactics- Bait and Switch tactics- unlawful deceptive practice that lures customers into a store unlawful deceptive practice that lures customers into a store by advertising a product at a lower –than- normal price (bait) and then , once by advertising a product at a lower –than- normal price (bait) and then , once customers are in the store , induces them to purchase a higher –priced model (the customers are in the store , induces them to purchase a higher –priced model (the switch) switch)

Scanned vs. Posted Prices- Scanned vs. Posted Prices- scanned price is below the posted price scanned price is below the posted price

Retail Price and Markup Retail Price and Markup

The markup is the difference between the retail price The markup is the difference between the retail price and the cost of an item .and the cost of an item .

Markup = Retail price – Cost of an item Markup = Retail price – Cost of an item

Markup is determined to cover all of the retailers Markup is determined to cover all of the retailers operating expenses (labor costs , rent, utilities , operating expenses (labor costs , rent, utilities , advertising etc) advertising etc)

Retail Price and MarkupRetail Price and Markup

Retail Price $125

Cost of Merchandise $75

Margin $50

Markup as a Percent of Retail Price 40% = $50/$125

Retail Price = cost + markup

Example :- Sporting goods retailer buys a tennis racket for $75 and setsExample :- Sporting goods retailer buys a tennis racket for $75 and sets the retail price at $ 125 , the markup is $50 .the retail price at $ 125 , the markup is $50 .

Markup PercentMarkup Percent

Markup percent is a markup as a percentage of the retail price.

Markup percent = retail price – cost of merchandise retail price

= 125 – 75 125 = 40%

MarkupsMarkups

Initial markup – retail selling price initially set for the merchandise minus the cost of the merchandise.

Maintained markup – the actual sales realized for themerchandise minus its costs

Retailers rarely sell all items at the initial price . They frequently reduce the Price of items for special promotions or to get rid of excess inventory at The end of a season . Factors that reduce the actual selling price from the Initial sales price are called REDUCTIONS

Initial and Maintained MarkupInitial and Maintained Markup

Initial Retail Price $1.00

Cost of Merchandise $.60

Maintained Markup $.30

Maintained Markup as a Percent of Retail Price 30% = $.30/$1.00

Reductions $.10

Reasons for Taking MarkdownsReasons for Taking Markdowns

Get rid of slow-moving, obsolete, Get rid of slow-moving, obsolete, uncompetitive priced merchandiseuncompetitive priced merchandise

Increase sales and promote Increase sales and promote merchandisemerchandise

Generate cash to buy additional Generate cash to buy additional merchandisemerchandise

Increase traffic flow and sale of Increase traffic flow and sale of complementary products generate complementary products generate excitement through a saleexcitement through a sale

Liquidating Markdown Liquidating Markdown MerchandiseMerchandise

Place merchandise on Internet auction Place merchandise on Internet auction sitesite

Sell the remaining merchandise to Sell the remaining merchandise to another retaileranother retailer

Consolidate the unsold merchandiseConsolidate the unsold merchandise Give merchandise to charityGive merchandise to charity Carry the merchandise over to the next Carry the merchandise over to the next

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Use of Break-Even Analysis Use of Break-Even Analysis

Retailers want to know the number of Retailers want to know the number of units they need to sell to begin units they need to sell to begin making a profit . making a profit .

- The formula for calculating the sales The formula for calculating the sales quantity needed to break even is :- quantity needed to break even is :-

Break-even quantityBreak-even quantity = = Total fixed costs Total fixed costs

Actual unit sales price - Unit Actual unit sales price - Unit

variable costvariable cost

Breakeven AnalysisBreakeven Analysis

Understanding the Implication of Fixed and Variable Understanding the Implication of Fixed and Variable CostCost

BEP quantity Fixed cost =

Actual unit sales price - Unit variable cost

Unit Sales

Fixed Costs

Contribution/UnitBreakeven point

Illustration of Breakeven Illustration of Breakeven AnalysisAnalysis

American Eagle Outfitter is interested in American Eagle Outfitter is interested in developing private label cargo pants that developing private label cargo pants that will sell for $24.99. The cost of developing will sell for $24.99. The cost of developing the pants is $400,000. This includes the the pants is $400,000. This includes the cost of salaries, benefits, space for the cost of salaries, benefits, space for the members of the design team. The variable members of the design team. The variable cost of manufacturing the pants is $15.00. cost of manufacturing the pants is $15.00. How many cargo pants does American How many cargo pants does American Eagle Outfitter have to sell to breakeven Eagle Outfitter have to sell to breakeven on its $400,000 investment?on its $400,000 investment?

Cargo Pants Cargo Pants Illustration of Breakeven Illustration of Breakeven

AnalysisAnalysisBreakeven Quantity = Fixed CostBreakeven Quantity = Fixed Cost

Unit Price – Variable Unit Price – Variable CostCost

50,040 units = $400,00050,040 units = $400,000

$24.99 - $15.00 $24.99 - $15.00

Percent Sales Increase Needed Percent Sales Increase Needed to Breakeven on a Price to Breakeven on a Price

DecreaseDecrease The Gap has bought The Gap has bought

60,000 women’s tee shirts 60,000 women’s tee shirts at $5 a unit. It was at $5 a unit. It was originally going to price the originally going to price the tee shirts at $12.00, but is tee shirts at $12.00, but is considering reducing the considering reducing the retail price to $10.00 – a retail price to $10.00 – a 16.67% price reduction. 16.67% price reduction. How much does sales have How much does sales have to increase for The Gap to to increase for The Gap to make the same profit at the make the same profit at the lower price?lower price?© Digital Vision

The Gap Considers a The Gap Considers a Price Cut of 16.67%Price Cut of 16.67%

Breakeven % = 100 x (-%price change) Breakeven % = 100 x (-%price change) Sales Change % initial Sales Change % initial margin -% price change margin -% price change

39.78% = 100 x – (-16.67) 39.78% = 100 x – (-16.67) (7/12) + (-16.6) (7/12) + (-16.6)

12-5 =7 (margin)

Price Adjustments Price Adjustments

Markdowns Markdowns - Price reductions or discounts from Price reductions or discounts from

the initial retail price . the initial retail price .

Variable PricingVariable Pricing

- Charging different prices to different - Charging different prices to different customers customers

Reasons for taking Reasons for taking Markdowns Markdowns

Clearance Markdowns Clearance Markdowns Promotional Markdowns Promotional Markdowns Get rid of slow-moving, obsolete, Get rid of slow-moving, obsolete,

uncompetitive priced merchandiseuncompetitive priced merchandise

Increase sales and promote merchandiseIncrease sales and promote merchandise

Generate cash to buy additional merchandiseGenerate cash to buy additional merchandise

Increase traffic flow and sale of Increase traffic flow and sale of complementary products generate complementary products generate excitement through a saleexcitement through a sale

Liquidating Markdown Liquidating Markdown MerchandiseMerchandise

if after best of planning some items may not be sold after end of if after best of planning some items may not be sold after end of

season alsoseason also Place merchandise on Internet auction Place merchandise on Internet auction sitesite

Sell the remaining merchandise to Sell the remaining merchandise to another retaileranother retailer

Consolidate the unsold merchandiseConsolidate the unsold merchandise Give merchandise to charityGive merchandise to charity Carry the merchandise over to the next Carry the merchandise over to the next

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Types of Price DiscriminationTypes of Price Discrimination (Individualized V.P)First Degree(Individualized V.P)First Degree – Set unique price for – Set unique price for

each customer equal to customer’s willingness to payeach customer equal to customer’s willingness to pay– Auctions, Personalized Internet PricesAuctions, Personalized Internet Prices

(Self-selected V.P)Second Degree(Self-selected V.P)Second Degree – Offer the same – Offer the same price schedule to all customers price schedule to all customers – Quantity discountsQuantity discounts– CouponsCoupons– Markdowns Late in SeasonMarkdowns Late in Season– Early Bird Special Early Bird Special – Over Weekend Travel DiscountOver Weekend Travel Discount

(V.P by Market Segment)Third Degree(V.P by Market Segment)Third Degree – Charge – Charge different groups different pricesdifferent groups different prices– Kids MenuKids Menu– Seniors DiscountsSeniors Discounts

PRICING PRICING STREATEGIES STREATEGIES

Hi-Lo PricingHi-Lo Pricing

Most Department Stores, Publix, Most Department Stores, Publix, KmartKmart

Benefits to ConsumerBenefits to Consumer– Spend Time to Find Lowest PriceSpend Time to Find Lowest Price

Benefits to RetailerBenefits to Retailer– Maximize Profits -- Price DiscriminationMaximize Profits -- Price Discrimination

– Problem: Trains People to Buy on DealProblem: Trains People to Buy on Deal

Wal-Mart, Category Specialists, Dillards, Wal-Mart, Category Specialists, Dillards, Food Lion Food Lion

Benefits to ConsumersBenefits to Consumers– Assured of Low Price on Every VisitAssured of Low Price on Every Visit– Less StockoutsLess Stockouts

Benefits to RetailerBenefits to Retailer– Lower Advertising ExpenseLower Advertising Expense– Lower Labor CostsLower Labor Costs

Everyday Low PricingEveryday Low Pricing

Pricing StrategiesPricing Strategies

EDLPEDLP Builds loyalty – Builds loyalty –

guarentees low guarentees low prices to customersprices to customers

Lower advertising Lower advertising costscosts

Better supply chain Better supply chain managementmanagement– Fewer stockoutsFewer stockouts– Higher inventory Higher inventory

turnsturns

Hi-LoHi-Lo Higher profits – Higher profits –

price price discriminationdiscrimination

More excitementMore excitement Build short-term Build short-term

sales and sales and generates trafficgenerates traffic

Determining Service QualityDetermining Service Quality

Customers are likely to use price as an indicator of both service costs and service quality. This can depend on several factors:

Royalty-Free/CORBIS

Other information available to the customer•When service cues to quality are readily accessible•When brand names provide evidence of a company’s reputation•When the level of advertising communicates the company’s belief in the brand•The risk associated with the service purchase

PRICING PRICING TECHNIQUES FOR TECHNIQUES FOR

INCREASING SALES INCREASING SALES

Certain items are priced lower than Certain items are priced lower than normal to increase customers traffic flow normal to increase customers traffic flow and/or boost sales of complementary and/or boost sales of complementary products.products.

Best items: purchased frequently, Best items: purchased frequently, primarily by price-sensitive shoppers.primarily by price-sensitive shoppers.

Examples: bread, eggs, milk, disposable Examples: bread, eggs, milk, disposable diapers.diapers.

Leader PricingLeader Pricing

Allan Rosenberg/Cole Group/Getty ImagesDennis Gray/Cole Group/Getty Images Ryan McVay/Getty Images

Price LiningPrice Lining

A limited number of predetermined price A limited number of predetermined price points.points.

Ex: $59.99 (good), $89.99 (better), and Ex: $59.99 (good), $89.99 (better), and 129.99 (best)129.99 (best)

Benefits:Benefits:– Eliminates confusion of many prices.Eliminates confusion of many prices.– Merchandising task is simplified.Merchandising task is simplified.– Gives buyers flexibility.Gives buyers flexibility.– Can get customers to “trade up.”Can get customers to “trade up.”

Benefits of Price LiningBenefits of Price Lining

Confusion that arises from multiple price Confusion that arises from multiple price choices is eliminatedchoices is eliminated

The merchandising talk is simplifiedThe merchandising talk is simplified It gives buyers greater flexibilityIt gives buyers greater flexibility It gives can be used to get customers to It gives can be used to get customers to

“trade up” to a more expensive model“trade up” to a more expensive model

Internet and Price Internet and Price CompetitionCompetitionThe Internet offers unlimited shopping experience.

Seeking lowest price? Use shopping bots or search engines.

These programs search for and provide lists of sites selling what interests the consumer.

Retailers using the electronic channel can reduce customer emphasis on price by providing services and better information.

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The Three Most Important Things The Three Most Important Things in Retailingin Retailing

Location, location, location

Now, it is more :

Information, information, information!!

Odd PricingOdd Pricing

A price that ends in an odd number A price that ends in an odd number ($.57)or just under a round number ($.57)or just under a round number ($98).($98).

Retailers believe practices increases Retailers believe practices increases sales, but probably doesn’t.sales, but probably doesn’t.

Does delineate:Does delineate:– Type of store (downscale store might use Type of store (downscale store might use

it.)it.)– SaleSale