Pricing in Retail

8/14/2019 Pricing in Retail

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Retail Pricing



Pricing Influenced By

• Marketing objectives

• Government regulations

•

Consumer perceptions• Consumer demand



Price & Marketing objectives

• Match price to objectives in strategic marketingplan

• Common objectives – increase market share

– increase sales – improve profits

– project a particular image

– combat competition

• Slashed prices boost sales & fend-off lower-pricedrival brands

• Premium pricing with other marketing mix giveluxury position



Price & Marketing objectives

• Match price to objectives in strategic marketingplan

• Common objectives – increase market share

– increase sales – improve profits

– project a particular image

– combat competition

• Slashed prices boost sales & fend-off lower-pricedrival brands

• Premium pricing with other marketing mix giveluxury position





Pricing & Consumerperceptions

• Customers will elicit perception of quality from price

• Rough price range usually incustomers mind

• Unexpectedly low price triggers fearthe item is low quality

• Unexpectedly high price makebuyers question is product worth



Pricing & Consumer demand

• Costs establish floor for price

• Demand establish ceiling for price

• Theoretically:

– if price too high demand fall & Producersreduce prices to stimulate demand

– if price too low demand increases & producersmotivated to raise prices

– When prices climb & profits improve producersboost output until supply & demand balance



Price elasticity

• Some products insensitive tochanges in price & Some productshighly responsive

• Price elasticity: a measure of thesensitivity of demand to changes inprice



Pricing Methods

• Cost-based & Priced-based pricing

• Price skimming

•

Penetration pricing



Cost-based Pricing

• Cost-based pricing (cost plus pricing):

– Starting with cost of production

– Then add markup to the cost of product

• Simple but little sense

– Ignores demand & competitors prices, &does not lead to best price

– Ensures certain profit but sacrifices profitopportunity



Priced-based Pricing

• Maximize profit by establishing optimal pricefor product

• How to optimize the price? – Based on analysis of product’s competitive

advantage

– User’s perception of item

– Market targeted

• When price is established, focus on keepingcosts at level allows healthy profit

• Few businesses fail from over pricing

• Many businesses fail from underpricing



Price Skimming

• Skimming: charging a high price for a new productduring the introductory stage & lowering the pricelater

• Price vary depending on stage in product life cycle

• During introductory phase objective to recoverdevelopment costs ASAP, so price is high & theydrop later when product is no longer a novelty &competition heats up

• Makes sense under 2 conditions: – Product quality & image support higher price

– Competitors cannot enter market with competingproducts & undercut price



Penetration Pricing

• Penetration Pricing: introducing a new product at alow price in hopes of building sales volume quickly

• Advantages: – discouraging competition because the low price

–

Limits profit for everyone – Helps expanding entire product category by attracting

customers who don’t buy at higher, skim-pricing levels

– If you compete pioneers in category, this strategy helps intaking customers away from pioneer

• Makes sense when market highly price sensitive, so

low price generates additional sales & companymaintain low-price position long to keep outcompetition



Price Adjustment Strategies

• Price discounts

• Bundling

• Dynamic Pricing

• Everyday Low Prices (EDLP)

– Charge the Lowest Price all the time – Set prices between regular non-sale price and deep

discount sale prices of a high/low pricing competitor.

• High/Low Pricing

– Regular prices are higher than EDLP competitors, butmerchandise frequently on sale at lower prices.

id i i i il



Considerations in Setting RetailPrice

Price of Merchandise

Cost of

Merchandise

Demand:What will the

customer willpay formerchandise?

Competitors How are

they pricingmerchandise?



Price Discounts

• Discount Pricing: offering a reduction inprice

• Depends on type of customer targeted &type of item offered

• Discount boost sales but can touch off pricewars between competitors

• Price war encourage customers to focusonly on pricing not on value or benefits

•

Price war can hurt entire industry for years• To offset loss of revenue stock shelves with

more profitable items otherwise if youcouldn't compete you close up business



Examples

• Wholesaler or retailer Discount: toencourage orders

• Customer cash discount: to reward

customers who pay cash or pay promptly• Quantity discount: to Large volumes buyer

• Seasonal discount: to who buy out of season

• Value pricing: charging affordable price forhigh quality offering (for certain times orcertain customer segment)



Bundling

• Definition: Combining severalproducts & offering the bundle at areduced price

• Promote sales of products consumersmight not otherwise buy

• Make products harder for consumersto make price comparison



Dynamic Pricing

• Definition: Charging different prices depending onindividual customers & situations

• By using internet technology

• Enables to move slow-selling merchandise

instantly• Allows to experiment with different pricing levels

• Tactics: – Auction pricing (buyers bid against each other & the

highest bid buy)

– Group buying (buyers obtain volume discount by joiningbuying groups)

– Name-your-price (buyers specify how much to pay &sellers choose whether to sell)



Demand –

Price Customer Is Willing toPay

• Estimate Sales Made at DifferentPrice Levels

• Calculate Profit at Each Price Level

• Set Prices to Maximize Profits





Breakeven Analysis

Understanding the Implication of Fixed and VariableCost

BEP

quantity

Fixedcost=

Unit price - Unit

variable cost

Calculating Breakeven Quantity

UnitSales

Fixed Costs

Contribution/Unit



Price Adjustments

• Markdowns

• Coupons

•

Rebates• Price Bundling

• Multiple-Unit Pricing

• Variable Pricing



Reasons for TakingMarkdowns

• Get rid of slow-moving, obsolete,uncompetitively priced merchandise

• Increase sales and profits through pricediscrimination

• Generate cash to buy better selling merchandise

• Increase traffic flow and sale of complementaryproducts generate excitement through a sale



Initial Markup

Retail Price$1.00

Cost of Merchandise$.60

Margin

$.40

Initial Markup 40% =

$.40/$1.00



Maintained Markup

Initial RetailPrice $1.00

Cost of Merchandise$.60

MaintainedMarkup$.30

Maintained Markup

Reductions $.10



Coupons

• Documents that entitle the holder to areduced price off a product or service.

• Purpose

– Reduce price to price sensitive customerswho will spend the effort to clip coupons

– Induce customer to try products

– Convert first time users to regular ones

– Encourage large purchases – Increase usage

– Protect margins and retain customers



Rebates

• Money returned to the customer based on aportion of the purchase price.

• Retailers’ perspective: more advantageousthan coupons since they increase demand,

but retailer has no handling costs.

• Manufacturers like rebates because:

– Many customers don’t redeem.

– They can offer price cuts to customers directly.



Variable Pricing

• Application of price discrimination

– By location – zone pricing

– Early Bird Special

– Seniors Discounts – Over Weekend Travel Discount

– Quantity Discount

• Electronic channel has potential forcharging a different price to each customer