Retail Pricing Mma[1]

8/8/2019 Retail Pricing Mma[1]

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Retail Pricing


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Everyday Low Price versusHigh/Low Pricing Strategies

Everyday Low Prices (EDLP)

Set between regular non-sale price and deepdiscount sale prices.

Similar to Everyday Stable Prices.

High/Low Pricing

Prices are lower than EDLP competitors, but use

promote frequent sales.


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Pricing Strategies

EDLP Strategy

5 Advantages

Reduced Price Wars

Reduced Advertising

Improved CustomerService

Reduced Stockouts &Improved InventoryManagement

Increased ProfitMargins

High/Low Strategy

5 Advantages

Same MerchandiseAppeals to Multiple

MarketsCreates Excitement

Moves Merchandise

Emphasis on Quality orService

Difficult to MaintainEDLP

OR


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Pricing Guidelines

EDLP should not be used for all productcategories.

Wean customers off high/low strategy slowly

Must really have EDLP

Retailers cant avoid sales altogether


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Coupons

Documents that entitle the holder to a reducedprice or X cents off a product or service.

Purpose

Induce customer to try products for first time

Convert first time users to regulars

Encourage large purchases

Increase usage

Protect market share


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Coupons: The Disadvantages

Since coupons encourage larger purchases,may be stealing sales from future.

Coupons may annoy, alienate, and confuse

customers


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Rebates

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

Retailers perspective: more advantageous

than coupons since they increase demand, butretailer has no handling costs.

Manufacturers like rebates because:

Many customers dont redeem.

They can offer price cuts to customers directly.


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Leader Pricing

Certain items are priced lower than normal toincrease customers traffic flow and/or boostsales of complementary products.

Best items: purchased frequently, primarily byprice-sensitive shoppers.

Examples: bread, eggs, milk, disposable

diapers.


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Price Bundling andMultiple-unit Pricing

Price Bundling: practice of offering two ormore different products or services at one price.

Multiple-unit pricing: similar to price bundling

except products or services are similar ratherthan different.


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Price Lining

A limited number of predetermined price points.

Ex: $59.99, $89.99, and 129.99

Benefits: Eliminates confusion of many prices.

Merchandising task is simplified.

Gives buyers flexibility.

Can get customers to trade up.


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Odd Pricing

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

Retailers believe practices increases sales, but

probably doesnt.

Does delineate:

Type of store (downscale store might use it.)

Sale


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Methods of Setting Retail Price

Cost-oriented: adding a fixed percentage tothe cost of the merchandise.

Demand-oriented: prices based on what

customer will pay.

Competition-oriented: what competition isdoing.

Combine all three.


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Sample Income StatementShowing Gross Margin

Net Sales $ 120,000

- Cost of goods sold 58,000

= Maintained markup 62,000

- Alteration costs + cash discounts 3,000

= Gross margin $ 59,000


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Initial and Maintained Markups

Initial markup = retail selling price initiallyplaced on the merchandise - cost of goods sold

Maintained markup = Actualsales that you get

for the merchandise - cost of goods sold


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Determining Initial Markupfrom Maintained Markup

Maintained markup = net sales - invoice costs + cash discounts

Gross margin = maintained markup - alteration costs + cash discounts

initial markup = ($maintained markup + $ reductions)($ net sales + $ reductions)

or

Initial markup = (maintained markup + reductions) 100% + reductions


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Setting Up the Problem

Retail = Cost + Markup


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Determining the Initial Retail PriceUnder Cost-Oriented Pricing

Example of markup as a % of retail: . Retail = Cost + Markup 100% =70% + 30%

Example of markup as a % of cost: . Retail = Cost + Markup 130% =100% + 30%

Example of markup as a % of cost: where cost = $5.00 and markup as a% of cost = 33% . Retail = cost + markup, or, $ 6.66 = $5.00 + $ 1.66( $1.66 = $ 5.00 X 33%)

Example of markup as a % of retail: where retail = $10.00 and markupas a % of retail = 30% . Retail = Cost + Markup, or, $ 10.00 = $7.00 + $3.00


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Determining the Initial Retail PriceUnder Cost-Oriented Pricing (Con.)

Example of markup as a % of retail with cost given: where cost =$5.00 and markup and markup as a % of retail = 50% Retail = Cost +Markup, or $5.00 + 50% retail

since we dont know retail, we must convert markup as a % of retailto markup as a % of cost using the formula: Markup % cost =markup % retail / 100% - markup % retail, 100% = 50% / 50%

So, Retail = cost + Markup, or,

$ 10.00 = $ 5.00 + $ 5.00 ( 100% of $ 5.00 = $ 5.00 )


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An alternative method of solution is :

Retail = Cost + Markup

R = $ 5.00 + .5R

.5R = $ 5.00

R = $ 10


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A third method of solution is:

Retail = Cost z (1-markup)


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Reasons for Taking Markdowns

Get Rid of Slow-Moving, Obsolete,Uncompetitively Priced Merchandise

Increase Sales

Generate Cash

Increase Traffic Flow

Increase Sale ofComplementaryProducts


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How To Reduce Markdowns

Have A Good Merchandising Plan

Insist On Timely Deliveries

Work With Vendors

Obtain Markdown Money


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Liquidating Markdown Merchandise

Auction on Internet (eBay), have specialclearance location on own webpage, or utilizespecial Internet liquidation sites

They can job out the remaining merchandiseto another retailer

They can consolidate the marked-down

merchandise They can carry the merchandise over to the

next season


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Clearance CenterLiquidates Markdowns


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Calculating Break-Even Volume

BEPquantityFixed cost

=

Unit price - Unit variable cost


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Factors That Affect CustomersSensitivity to Price

Substitute Awareness Effect

Total Expenditure Effect

Difficult Comparison Effect

Benefits/Price Effect

Situation Effect


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A Pricing Experiment

Before After

Store 1 10 units @ $100 21 units @ $80

Gross margin = $500 Gross margin = $630

Store 2 12 units @ $100 13 units @ $100

Gross margin = $600 Gross margin = $650


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Price Discrimination

Occurs when vendor sells same product to twoor more customers at different prices.

Generally illegal from vendor to retailer except:

costs are different

quantity and functional discounts

changing market conditions

Generally legal from retailer to consumer .


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Vertical Price Fixing

Agreements to fix prices between parties atdifferent levels of the same marketing channel.

Vendors cant force retailers to sell at MSRP.

Retailers can sell above MSRP.


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Predatory Pricing

Establishing merchandise prices to drivecompetition from the marketplace.

Illegal!

Retailers can charge different prices at differentlocations if costs are different.


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Comparative Price Advertising

Compares price of merchandise offered for salewith a higher regular price or MSRP.

Good because it gives consumers information

about what merchandise should sell for.

Illegal if used to deceive consumer.


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Potential Deceptions ofComparative Price Advertising

Comparison price advertising inflatesperceptions of savings and value, andreduces search for lower prices.

Consumers use price to infer quality.

If advertised reference price is fictitious, then

customer is deceived.


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Guidelines for Retailers to AvoidDeception in Comparative Price Advertising

Have reference price in effect about one-third ofthe time.

Disclose how sale prices are set and how longthey will be offered.

Offer a satisfaction guaranteed policy.

Be careful when using MSLP.

Use objective terms.

Use reference prices that can be easilyverified.


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Bait-and-Switch

Attract customers into store by advertising aproduct at a lower than usual price (the bait)and then induces customer to switch to higher-priced model (the switch).

Can occur by

Retailer out of advertised model.

Retailer has advertised model, but disparages it.