Chapter 1717Pricing in Retailing

RETAIL MANAGEMENT:A STRATEGICAPPROACH,

10th Edition

BERMANBERMAN EVANS EVANS

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Chapter Objectives

To describe the role of pricing in a retail strategy and to show that pricing decisions must be made in an integrated and adaptive manner

To examine the impact of consumers; government; manufacturers, wholesalers, and other suppliers; and current and potential competitors on pricing decisions

To present a framework for developing a retail price strategy: objectives, broad policy, basic strategy, implementation, and adjustments

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Pricing Options for Retailers

Discount orientation At-the-market orientation Upscale orientation

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Figure 17-1: The Classy Lord & Taylor

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Figure 17-2: Comparison Shopping

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Figure 17-3: Factors Affecting Retail Price Strategy

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Price Elasticity of Demand

The sensitivity of customers to price changes in terms of the quantities they will buy* Elastic – small percentage changes in

price lead to substantial percentage changes in the number of units bought

* Inelastic – large percentage changes in price lead to small percentage changes in the number of units bought

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Table 17-1: A Movie Theater’s Elasticity of Demand

Price ($) Tickets Sold

(Saturday Night)

Total Ticket Receipts

Elasticity of Demand (E)

6.00 1,000 6,000

E = 0.68

7.00 900 6,300

E = 0.79

8.00 810 6,480

E = 1.00

9.00 720 6,480

E = 2.54

10.00 550 5,500

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Market Segments by Price Sensitivity

Economic consumers Status-oriented consumers Assortment-oriented consumers Personalizing consumers Convenience-oriented consumers

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The Government and Retail Pricing

Horizontal Price Fixing Vertical Pricing Fixing Price Discrimination (Robinson-Patman

Act) Minimum Price Laws Unit Pricing Item Price Removal Price Advertising

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Justifiable Price Discrimination

Products are physically different The retailers paying different prices are

not competitors Competition is not injured Price differences are due to differences

in supplier costs Market conditions change – costs rise or

fall or competing suppliers shift prices

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Competition and Retail Pricing

Market pricingMarket pricing – retailers often price similarly to each other and have less control over price because consumers can easily shop around

Administered pricingAdministered pricing – firms seek to attract consumers on the basis of distinctive retailing mixes

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Figure 17-4: A Framework for Developing a Retail Price Strategy

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Objectives and Pricing

MarketSkimming

Market Penetration

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Figure 17-6: Specific Pricing

Objectives

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Price Policy Choices

No competitors will have lower prices; no competitors will have higher prices; or prices will be consistent with competitors

All items will be priced independently or the prices for all items will be interrelated to maintain image and ensure proper markups

Price leadership will be exerted; competitors will be price leaders and set prices first; or prices will be set independent of competitors

Prices will be constant over a year or season; or prices will change if costs change

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Price Strategy

Demand-Oriented Pricing Cost-Oriented Pricing Competition-Oriented Pricing

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Demand-Oriented Pricing

Psychological pricingPsychological pricing* Price-quality association* Prestige pricing

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Table 17-4: Markup Equivalents

Percentage of Retail Percentage of Cost

10.0 11.1

20.0 25.0

30.0 42.9

40.0 66.7

50.0 100.0

60.0 150.0

70.0 233.3

80.0 400.0

90.0 900.0

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Figure 17-7: How to

Determine Direct

Product Profitability

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Integration of Approaches to Price Strategy

If prices are reduced, will revenues increase greatly? (Demand orientation)

Should different prices be charged for a product based on negotiations with customers, seasonality, and so on? (Demand orientation)

Will a given price level allow a traditional markup to be attained? (Cost orientation)

What price level is necessary for a product requiring special costs in purchasing, selling, or delivery? (Cost orientation)

What price levels are competitors setting? (Competitive orientation)

Can above-market prices be set due to a superior image? (Competitive orientation)

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Figure 17-8: Specific Pricing Decisions

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Price Strategy Concepts

Customary Pricing* Everyday Low

Pricing

Variable Pricing* Yield Management

Pricing

One-Price Policy

Flexible Pricing* Contingency

Pricing

Odd Pricing Leader Pricing Multiple-Unit

Pricing Price Lining

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Figure 17-9: Ikea and Everyday Low Pricing

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Figure 17-10: Odd Pricing

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Reasons to Use Multiple-Unit Pricing

A firm could seek to have shoppers increase their total purchases of an item

This approach can help sell slow-moving and end-of-season merchandise

Price bundling may increase sales of related items

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Price Adjustments

Adaptive mechanism* Markdown* Additional markup* Employee discount

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Figure 17-10:Price Change Authorization

Form

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Timing Markdowns

Early markdown policy Late markdown policy Staggered markdown policy Automatic markdown plan Storewide clearance

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Figure 17-12: Promoting Markdowns