UNIT-2

Store Location- Location is the most important ingredient for any business that
relies on customers. It is also one of the most difficult to plan for completely.
Location decisions can be complex, costs can be quite high, there is often little
flexibility once a location has been chosen and the attribute of location have a
strong importance on retailers overall strategy.

Importance of Location Decision:

Location is a major cost factor because it:
 Involves large capital investment
 Affects transportation cost
 Affects human resources

Location is major revenue factor because it

 Affects the amount of customer traffic
 Affect the volume of business

A location decision is influenced by the flow of pedestrian and vehicular traffic,

which determine the footfalls in a retail store. Footfalls refer to the no. of
customers who visit a store in a defined time period.

Factors Influencing Store Location or Trading Area Analysis- If the organization

can configure the right location for the manufacturing facility, it will have
sufficient access to the customers, workers, transportation, etc. For
commercial success, and competitive advantage following are the critical
factors:
1. Customer Proximity: Facility locations are selected closer to the customer
as to reduce transportation cost and decrease time in reaching the
customer.

2. Business Area: Presence of other similar stores around makes business area
conducive for facility establishment.

3. Availability of Skill Labor: Education, experience and skill of available labor

are another important, which determines store location.

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

 4. Consumer’s demographic & socio economic characteristics are uncovered.
For a new store the study of proposed trading areas reveals opportunities &
the retail strategy necessary to succeed.

5. The focus of promotional activities is ascertained & the retailer can look at
media coverage patterns of proposed or existing locations.

6. The best number of stores for a chain to operate in a given area is

calculated. How many outlets should a retailer have in a region to provide
good service for customers (without raising costs to much or having too
much overlap)?

7. The impact of internet is taken into account. Store based retailers must
examine trading areas more carefully than ever to see how their customer’s
shopping behavior is changing due to the web.

Delineating the Trading Area of a New Store- below mentioned is the models for
understanding the assessing new store locations-

1. Analog model- it is the simplest & most popular form of trading area
analysis. Potential sales for a new store are estimated on the basis of
revenues for similar stores in existing areas, the competition at prospective
locations, the new stores expected market share at that location, the size &
density of the location’s primary trading area.

2. Regression model- it uses a series of mathematical equations showing the

association between potential store sales & several independent variables
at each location, such as population size, average income, the number of
households, nearby competitors, transportation barriers & traffic patterns.

3. Gravity model- it is based on the premise that people are drawn to stores
that are closer & more attractive than competitor’s stores. The distance
between consumers & competitors, the distance between consumers & a
given site are included in this model.

4. Computerized model- it offers several benefits like it operates in an

objective & systematic way. They offer insights as to how each location
attribute should be weighted. They are useful in screening a large number
of locations. They can assess management performance by comparing
forecasts with results.
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
5. Reilly’s Law- In 1931, William J. Reilly was inspired by the law of gravity to
create an application of the gravity model to measure retail trade between
two cities. His work and theory, The Law of Retail Gravitation, allows us to
draw trade area boundaries around cities using the distance between the
cities and the population of each city. Reilly realized that the larger a city
the larger a trade area it would have and thus it would draw from a larger
hinterland around the city. Two cities of equal size have a trade area
boundary midway between the two cities. When cities are of unequal size,
the boundary lies closer to the smaller city, giving the larger city a larger
trade area. Reilly called the boundary between two trade areas the
breaking point (BP). On that line, exactly half the population shops at either
of the two cities. The formula is used between two cities to find the BP
between the two. The distance between the two cities is divided by one
plus the result of dividing the population of city b by the population of city
a. The resulting BP is the distance from city a to the 50% boundary of the
trade area. One can determine the complete trade area of a city by
determining the BP between multiple cities or centers. Of course, Reilly's
law presumes that the cities are on a flat plain without any rivers, freeways,
political boundaries, consumer preferences, or mountains to modify an
individual's progress toward a city. The law may be expressed algebraically
as:

Dab=d/1+ b /Pa where Dab= limit of city A’s trading area, measured in miles

along the road to city B, d= distance in miles along a major road way
between cities A & B, Pa=Population of city A, Pb=Population of city B.

6. Huff’s Law- this law works on the basis of product assortment (of the items
desired by the consumer) carried at various shopping locations, travel times
from the shopper’s home to alternative locations & the sensitivity of the
kind of shopping to travel time. Assortment is rated by the total square feet
of selling space a retailer expects all firms in a shopping area to allot to a
product category. Sensitivity to the kind of shopping entails the trip’s
purpose (restocking versus shopping) & the type of good/service sought
(such as clothing versus groceries).
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 Type of Retail Location:

Free standing location: Where there is no other retail outlets in the vicinity of the
store and therefore depend on its own pulling power and promotion. Dhabas on
highways.

Neighborhood stores: Located in residential neighborhoods and serve a small

locality. They sell convenience products like groceries.

Highway stores: Located along highways or at the intersections of two highways

and attract customers passing through these highways. Fast food restaurants,
Dhabas with good parking facilities.

Business associated location: These are locations where a group of retail outlets
offering a variety of merchandise work together to attract customers to their retail
area but also compete against each other for the same customers.

Isolated /Freestanding Location Where there are no other outlets in the vicinity
of the location and therefore store depends on its own pulling power and
promotion to attract customers. This type of retail store is physically different from
other retail stores. It does not enjoy the same benefits that shopping centre’s
offer from the stand point that customer of a free standing store must have made
a special trip to get there. Shoppers are not “just next door” and decide to walk in
as they could in a mall or strip center. Freestanding locations constituted about 22
percent of all retail space, and a recent survey of retailers shows that this category
leads all others for future importance. Drive in locations is special cases of
freestanding sites that are selected for satisfying the needs of customers who
shop in their automobile. In some situations, the drive – in aspect of the retail
business is only to supplement existing in – store sales, but the same
requirements of all drive – in location apply. These sites are usually positioned
along or decide heavy traffic arteries in neighbor hoods, city streets, or inner city
through fares because, as the experience of McDonald’s shows, up to 55 percent
of total store sales are often attributable to drive – through business.

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

Business Associated Location In such a location a group of retail outlets offering a
variety of merchandise work together to attract customers to their retail area, but
also compete against each other for the same customers. Business Associated
Locations are of two type’s a. Unplanned Shopping Centers (Part of Business
District/Centers) b. Planned Shopping Centers (Part of a Shopping Center)
a. Unplanned Shopping Centers (Part of Business District/Centers) A retail store
can also be located as a part of a business district. Often this is referred as
unplanned shopping centers. A business district is place of commerce in a city
which has been developed historically as the center of trade and commerce in the
city or town. A business districts can be a central, secondary or a Neighborhood
business district. A Central business District (CBD) is the main center of commerce
and trade in the city. (High land rates, intense development) A CBD is the hub of
retailing activity in a city. CBD served different sections of population. For
example: Connaught place in Delhi, Colabain Mumbai, Commercial Street and in
Bangalore are up market CBDs. CBDs serve the upper and upper middle class
customers across these cities like, Chandani Chowk in Delhi, Kalbadevi-Bhuleswar
in Mumbai and Chickpet/MG Road in Bangalore.

b. Planned Shopping Centers (Part of a Shopping Center) A shopping center has

been defined as “a group of retail and other commercial establishments that is
planned, developed, owned and managed as a single property”. A mall is typically
enclosed and climate controlled. A walkway is provided in front of the stores. A
strip centre is a row of stores with parking provided in the front of the stores. The
expansion of suburbia brought with it planned residential developments. Many
new city streets and thorough fares along which retail businesses could be
established connected these new sub divisions. The notion of the planned
shopping center was born. Developers could plan multi store facilities that would
serve the needs of these new neighborhoods with grocery, drug, and apparel
goods. With the availability of large tracts of relatively cheap undeveloped land
located many miles from the inner city, but close to these new living areas, large
centre’s could be designed that would offer one stop shopping to entire clusters of
residential areas. The last thirty years witnessed the widespread development of
multiunit retail strip centres and the construction of multiuser shopping malls/
theme parks. Several important issues surround the choice of locating a retail
business in a planned shopping center. One important consideration is the nature
of the business sharing leases space within the center & managed as a single
property” The basic configuration of a shopping centre is a “Mall” or Strip centre.
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
Fashion/Specialty Centre This type is composed mainly of upscale apparel shops,
boutiques, and craft shops carrying selected fashion or unique merchandise of
high quality and price. These centers need not be anchored, although sometimes
restaurants or entertainment can provide the draw of anchors. The physical design
of the center is very sophisticated, emphasizing a rich décor and high quality
landscaping. These centers usually are found in trade areas having high-income
levels.

Steps Involved in Selecting a Store Location

1. The size of the trade area (geographic area encompassing most of the
customers who would patronize a specific retail site)
2. The occupancy cost of the location 
3. The pedestrian and vehicle customer traffic 
4. The restrictions placed on store operations by the property manager 
5. The convenience of the location for customers 

After identifying the region the following steps to be followed

1. Identifying the market in which to locate the store. 
2. Evaluate the demand and supply within that market. i.e. determine the
market potential.
3. Identify the most attractive sites 
4. Select the best site available 

Market Area Analysis

Issues to be Considered in Location Analysis:- The several factors used in location

analysis are:-
1. Effect of Demographic Factor- Demography is the study of population
characteristics that are used to describe consumers. Retailers can obtain
information about the consumer’s age, gender, income, education, family
characteristics, occupation, and many other items. These demographic
variables may be used to select market segments, which become the target
markets for the retailer. Demographics aid retailers in identifying and
targeting potential customers in certain geographic locations. Retailers are
able to track many consumer trends by analyzing changes in demographics.
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 Demographics provide retailers with information to help locate and
describe customers. Linking demographics to behavioral and lifestyle
characteristics helps retailers find out exactly who their consumers are.
Retailers who target certain specific demographics characteristics should
make sure that those characteristics exist in enough abundance to justify
locations in new countries or regions.
2. Effect of Economic Factor- Businesses operate in an economic environment
and base many decisions on economic analysis. Economic factors such as a
country’s gross domestic product, current interest rates, employment rates,
and general economic conditions affect how retailers in general perform
financially. (Gross domestic product is a measure of the goods and services
produced in the country.)
3. Effect of Social/Cultural Factor- In recent years, the concept of social
responsibility has entered into the marketing literature as an alternative to
the marketing concept. The implication of socially responsible marketing is
that retail firms should take the lead in eliminating socially harmful
products such as cigarettes and other harmful drugs etc. There are
innumerable pressure groups such as consumer activists, social workers,
mass media, professional groups and others who impose restrictions on
marketing process and its impact may be felt by retailers in doing their
business. The society that people grow up in shapes their basic beliefs,
values and norms. Cultural characteristics affect how consumers shop and
what goods they purchase. The values, standards, and language that a
person is exposed to, while growing up are indicators of future consumption
behavior. Consumers want to feel comfortable in the environment in which
they shop. To accomplish this, retailers must understand the culture and
language of their customers. In a bilingual area, a retailer may need to hire
employees who are capable of speaking both of the languages spoken by
the customers. Some retailers have found it useful to market to the cultural
heritage of their consumers, while other retailers seek to market cross –
culturally.
4. Effect of Demand and Supply- A market depends on the relationship
between supply and demand. It acts as a price fixing mechanism for goods
and services.

Demand- The demand for a retailer’s goods and services will influence where
the retailer will locate its stores. Not only must consumers want to purchase
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
the goods, but they must have the ability or money to do so as well. Demand
characteristics are a function of the population and the buying power of the
population that the retailer is targeting. Population and income statistics are
available for most countries and regions with developed economics. In
developing countries, the income data may be little more than an informed
guess. These statistics allow the comparisons of population and a basic
determination of who will be able to purchase the goods carried in the store.
This is of utmost importance for retailers, whether they carry higher-priced
goods – such as durables, furniture, jewellery, and electronics – or lower –
priced goods-such as basic apparel or toys. Demand is the quantity of a good
or service that consumers are willing to buy at a given price. It is high if the
price of a commodity is low, while in the opposite situation - a high price -
demand would be low. Outside market price, demand can generally be
influenced by the following factors:
 Utility. While goods and services that are necessities (such as food) do
not see much fluctuation in the demand, the demand for items deemed
of lesser utility (even frivolous) would vary according to income and
economic cycles.
 Income level. Income, especially disposable income, is directly
proportional with consumption. A population with a high income level
has much more purchasing power than a population with a low income.
 Inflation. Involves an increase in the money supply in relation to the
availability of assets, commodities, goods and services. Although it
directly influences prices, inflation is outside the supply-demand
relationship and decreases the purchasing power, if wages are not
increased accordingly. Taxation. Sale and value added taxes can have an
inhibiting effect on sales of goods and services as they add to the
production costs and claim a share of consumer’s income.
 Savings. The quantity of capital available in savings can provide a
potential to acquire consumption goods. Also, people may restrain from
consuming if saving is a priority, namely in periods of economic
hardship. The wide availability of credit in a fiat currency system has
considerably skewed the relationships between savings and
consumption as it promotes current consumption levels, but at the
expense of future consumption.

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

Supply- It is the amount of goods or services, which firms or individuals are
able to produce taking account of a selling price. Outside price, supply can
generally influenced by the following factors:
 Profits. Even if the sales of a product are limited; if profits are high an
activity providing goods or services may be satisfied with this situation.
This is particularly the case for luxury goods. If profits are low, an activity
can cease, thus lowering the supply.
 Competition. Competition is one of the most important mechanisms for
establishing prices. Where competition is absent (an oligopoly), or where
there is too much (over-competition), prices artificially influence supply
and demand.

According to the market principle, supply and demand are determined by the
price, which is equilibrium between both. It is often called equilibrium price or
market price. This price is a compromise between the desire of firms to sell
their goods and services at the highest price possible and the desire of
consumers to buy goods and services at the lowest possible price.
5. Effect of Competition Factor- Levels of competitions vary by nation and
region. In some areas, retailers will face much stiffer competition than in
other areas. Normally, the more industrialized a nation is, the higher the
level of competition that exists between its borders. One of the
environmental influences on the success or failure of a retail establishment
is how the retailer is able to handle the competitive advantages of its
competition. A retailer must be knowledgeable concerning both direct and
indirect competitors in the marketplace, what goods and services they
provide, and their image in the mind of the consumer population.
Sometimes a retailer may decide to go head to head with a competitor
when the reasons are not entirely clear.
6. Effect of Infrastructure Factors- Infrastructure characteristics deal with the
basic framework that allows business to operate. Retailers require some
form of channel to deliver the goods and services to their door. Depending
on what type of transportation is involved, distribution relies heavily on the
existing infrastructure of highways, roads, bridges, river ways, and railways.
Legal infrastructures – such as laws, regulations and court rulings – and
technical infrastructures - such as level of computerization, communication
systems, and electrical power availability also influence store location
decisions. Distribution plays a key role in the location decision especially for
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 countries and regions. There is a significant variance in quantity and quality
of infrastructures across countries. A retailer, whose operation depends on
reliable computerization and communications, would not need to consider
a country or a region that did not meet those criteria. The need for
refrigerated trucks to distribute frozen juice might limit a retailer like
Orange juice in its ability to expend to India. The multilevel small wholesaler
infrastructure in Japan has been a major hurdle for retailers attempting to
enter that market. The legal environment is a part of the overall
infrastructure a firm must consider.
7. Effect of Political/ Legal Factor-Retail marketing decisions are substantially
impacted by developments in the political / legal environment. This
environment is composed of laws, government agencies and pressure
groups that influence and constrain various organizations and individuals in
society. Legislation affecting retail business has steadily increased over the
years.
8. Effect of Technological Factor- In the following areas, technology has been
extensively used-
 Packing of the products
 Printing the name of the shop on the product visibly
 Modern refrigerators where merchandise can be used for a long time
 Billing

The Strategic Profit Model- The strategic profit model is a method for
summarizing the factors that affect a firm's financial performance as measured by
ROA (return on assets). The model decomposes ROA into two components: (1) net
profit margin and (2) asset turnover. The net profit margin is simply how much
profit (after tax) a firm makes divided by its net sales. Thus, it reflects the profits
generated from each of sales. If a retailer's net profit margin is 5 percent, it makes
$.05 for every dollar of merchandise or services it sells. Asset turnover is the
retailer's net sales divided by its assets. This financial measure assesses the
productivity of a firm's investment in its assets and indicates how many sales
dollars are generated by each dollar of assets. Thus, if a retailer's asset turnover is
3.0, it generates $3 in sales for each dollar invested in the firm's assets. The
retailer's ROA is determined by multiplying the two components together:
Net profit margin X Asset turnover = Return on assets (ROA)
Net Profit/ Net Sales X Net Sales/Total Assets = Net Profit/Total Assets

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

The strategic profit model illustrates two important issues. First, retailers and
investors need to consider both net profit margin and asset turnover when
evaluating their financial performance. Firms can achieve high performance (high
ROA) by effectively managing both net profit margins and asset turnover. Second,
retailers need to consider the implications of strategic decisions on both
components of the strategic profit model. For example, simply increasing prices
will increase the gross margin and net profit margins (the profit margin
management path). However, increasing prices will result in fewer sales, and
assuming the level of assets stays the same, asset turnover will decrease. Thus
profit margin increases, assets turnover decreases, and the effect on ROA depends
on how much the profit margin increases compared to the decrease in asset
turnover.

Retail’s Performance Objectives and Measures: Many factors contribute to a

retailer's overall performance, which makes it hard to find a single measure to
evaluate performance. For instance, a sale is a global measure of a retail store's
activity level. However, a store manager could easily increase sales by lowering
prices, but the profit realized on that merchandise (gross margin) would suffer as
a result. Clearly, an attempt to maximize one measure may lower another.
Managers must therefore understand how their actions affect multiple
performance measures. It's usually unwise to use only one measure because it
rarely tells the whole story. The measures used to evaluate retail operations vary
depending on (1) the level of the organization at which the decision is made and
(2) the resources the manager controls. For example, the principal resources
controlled by store managers are space and money for operating expenses (such
as wages for sales associates and utility payments to light and heat the store).
Thus, store managers focus on performance measures like sales per square foot
and employee retailers.

Types of Measures- It breaks down a variety of retailers' performance measures

into three types: output measures, input measures, and productivity measures.
Input measures assess the amount of resources or used by the retailer to achieve
outputs such as sales. Output measures assess the results of a retailer’s
investment decisions. For example, sales revenue results from decisions about
how many stores to build how much inventory to have in the stores, and how
much to spend on advertising. A productivity measure (the ratio of an output to

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

an input) determines how effectively retailers use their resource-what return they
get on their investments.

Level of Output Input Productivity

Organization (output/input)
Corporate Net Sales, Square feet of store Return on assets
(measures forNet Profit, space , Asset turnover
Growth in Sales, Number of Sales per employees
entire corporation) profits, same store employees, Inventory, Sales per square foot
sales Advertising
expenditure
Merchandise Net Sales, Inventory level, Gross margin return
Management Gross Margin, Growth Markdowns, on investment
in sales Advertising expenses, (GMROI),
(measures for a Cost of merchandise Inventory turnover,
merchandise Advertising as a
category) percentage of sales,
Markdown as a
percentage of sales
Store operation Net Sales, Square feet of selling Net sales per square
(measures for a Gross Margin, Growth areas, foot,
in sales Expenses for utilities Net sales per sales
store or Number of sales associate or per
department within associates selling hour,
a store) Utility expenses as a
percentage of sales,
Inventory shrinkage

Pricing Approaches: There are three retail pricing approaches based on the long-
term objectives of the pricing decision. They are discount orientation, upscale
orientation, and at – the – market orientation.
a) Discount Orientation Here low prices are used as the major tool for
competitive advantage. The store portrays a low status image and offers fewer
shopping frills. Profit margins are kept low to target price-based customers. The
model works on high inventory turnover and lower operating costs. This is
arguably the most common model in India because of the low per capita income
and price consciousness. It is not uncommon to see affluent people buying from
these low-price shops as Indians largely look for value for money. Frills can be
sacrificed for some satisfactory price cuts. Roadside discount shops thrive in India
where everything from clothes to perfumes is sold and the clientele is not
necessarily the lower middle class. One such market is the Janpath market in New
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
Delhi. However, with the advent of globalization, Indians are opening up and this
seems to be changing.
b) Up scale Orientation In Up scale Orientation competitive advantage is derived
from the prestigious image of the store. The profit margins per unit are high,
coupled with higher operating costs and lower inventory turnover. These stores
usually stock distinctive product offerings and provide, high quality service,
building up customer loyalty. The products stored generally go with the image of
the store. It may be appropriate in situations of inelastic demand in which an
organization decides to keep its prices high. The reason for such strategy might
also include a growing super – premium segment of the market, overcrowding at
the bottom – end of the market, or the desire to create a prestige image for the
product.
c) At – the – market Orientation A store with at – the – market orientation
normally sets average prices. It offers solid service and a nice atmosphere to
middle – class shoppers. Margins are average to good and it stocks moderate to
above quality products. Since this model caters to the middle class, it has a huge
target market. Moreover, as income increases, the price – based customers shift
to these stores. Therefore, some discounts retailers also own such a store to
capture customers who would shift to a higher priced store as their income rises.

Pricing Strategies Following are the various pricing strategies followed by the
retailer to meet his short- and long term objectives. The adoption of these
strategies is guided by the basic pricing approach of the retailer.

a) Every Day Low Pricing (EDLP)- EDLP has been popularized by large
retailers like Wal-Mart, Home Depot, and Staples among others. This
strategy entails continuity of retail prices below the MRP mentioned
on the goods-in other words, at a level somewhere between the
regular price at which the goods are sold and the deep discount price
offered when a sale is held. So, low does not necessarily mean
lowest. The price at a competing store where goods are on sale may
be selling at lower prices. However, in case of EDLP, these low prices
are stable and not subject to a one-time sale. In India, many co-
operative stores have adopted this strategy. One store that uses ED
LP is Big Bazaar. Here, goods are either sold below their normal
prices, or some sales promotion scheme is available. For EDLP to

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

 work, volumes are necessary so that the store can negotiate with the
manufacturers for bargain prices.
b) High-Low pricing- in high-low pricing, retailers offers prices that are
sometimes above their competitor's ELDP, but they use
advertisements to promote frequent sales. In the past, retailers
would mark down merchandise at the end of a season to clear the
stock. Grocery stores would only have sales when they were
overstocked. Sale is very common in garment retailing. A sale is
organized at the end of a season to serve basically two purposes.
One, goods that have not managed to get sold is disposed off.
Otherwise, extra handling and storage expenses have to incur in
respect of these goods. Moreover, there is no surety that they will get
sold in the next season. Second, the sale provides an opportunity for
a different target segment to visit the store. This segment is very
product conscious and would compromise on design, color, etc., to
buy cheaper. They also look for bargains where they are able to get a
good quality product at sale prices. Nowadays, retailers also use sales
to respond to increased competition and a more value conscious
customer. High-low pricing is used by stores like Lifestyle.

S.NO. Advantages of EDLP Pricing Advantages of EDLP Pricing

1 Less reliance on price Same merchandise can be used to
reduction to compete. target different segments.
2 Reduced advertising Enthusiasm is created among
customers.
3 Improved customer service Image of quality is created.
4 Better inventory management Difficult to implement EDLP.

External Factors Affecting a Retail Price Strategy

1. The customer & retail pricing- Retailers should understand the price
elasticity of demand – the sensitivity of customers to price changes in
terms of the quantities they will buy – because there is often a
relationship between price and consumer purchases and perceptions.
If small percentage changes in price lead to substantial percentage
changes in the number of units bought, demand is price elastic. This
occurs when the urgency to purchase is low or there are acceptable
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 substitutes. If large percentage changes in price lead to small
percentage changes in the number of units bought, demand is price
inelastic. Then purchase urgency is high or there are no acceptable
substitutes (as takes place with brand or retailer loyalty). Unitary
elasticity occurs when percentage changes in price are directly offset
by percentage changes in quantity. Price elasticity is computed by
dividing the percentage change in the quantity demanded by the
percentage change in the price charged. Because purchases generally
decline as prices go up, elasticity tends to be a negative number:
Elasticity = Quantity 1 - Quantity 2/ Quantity 1 + Quantity 2/ Price 1 - Price 2/
Price 1 + Price 2

Price sensitivity varies by market segment, based on shopping orientation. After

identifying potential segments, retailers determine which of them form target
market: ™
 Economic consumers-They perceive competing retailers as similar and shop
around for the lowest possible prices. This segment has grown dramatically
in recent years. ™
 Status-oriented consumers- They perceive competing retailers as quite
different. They are more interested in prestige brands and strong customer
service than in price. ™
 Assortment-oriented consumers-They seek retailers with a strong selection
in the product categories being considered. They want fair prices. ™
 Personalizing consumers-They shop where they are known and feel a bond
with employees and the firm itself. These shoppers will pay slightly above
average prices. ™
 Convenience-oriented consumers-They shop because they must, want near
stores with long hours, and may use catalogs or the Web. These people will
pay higher prices for convenience.

2. The Government and Retail Pricing Three levels of government may

affect retail pricing decisions: federal, state, and local. When laws are
federal, they apply to interstate commerce. A retailer operation only
within the boundaries of one state may not be restricted by some
federal legislation. Major government rules relate to horizontal price
fixing, vertical price fixing, price discrimination,, minimum price
levels, unit pricing , item price removal, and price advertising.
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
a) Horizontal Price Fixing An agreement among manufacturers, among
wholesalers, or among retailers to set prices is known as horizontal price fixing.
Such agreements are illegal under the Sherman Antitrust Act and the Federal
Trade Commission Act, regardless of how “reasonable” prices may be. It is also
illegal for retailers to get together regarding the use of coupons, rebate, or other
price – oriented tactics.
b) Vertical Price Fixing When manufacturers and wholesalers seek to control the
retail prices of their goods and services, Vertical price fixing occurs. According to
Consumer Goods Pricing Act, retailers in the United States cannot be forced to
adhere to minimum retail price set by manufacturers and wholesalers. However,
as a result of Supreme Court ruling, manufacturers and wholesalers are allowed to
set maximum retail prices. This ruling “opened the door for manufacturers and
wholesalers to cap the prices retailers charge for their products. It reversed a
decision that barred such limits and left retailers and franchisees free to raise
prices above suppliers' suggested prices. Now, manufacturers can set a maximum
price as long as they show they aren't stifling competition.
c) Price Discrimination The Robinson-Patman Act bars manufacturers and
wholesalers from discriminating in price or purchase terms in selling to individual
retailers if these retailers are purchasing products of "like 'quality" and the effect
of such discrimination is to injure competition. The intent of this act is to stop
large retailers from using their power to gain discounts not justified by the cost
savings achieved by suppliers due to big orders. There are exceptions that allow
justifiable price discrimination when: ™ 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 their prices. Discounts are
not illegal, as long as suppliers follow the preceding rules, make discounts
available to competing retailers on an equitable basis, and offer discounts
sufficiently graduated so small retailers can also qualify. Discounts for cumulative
purchases (total yearly orders) and for multi store purchases by chains may be
hard to justify. Although the Robinson-Patman Act restricts sellers more than
buyers, retailers are covered under Section 2(F): "It shall be unlawful for any
person engaged in commerce, in the course of such commerce, knowingly to
induce or receive discrimination in price which is prohibited in this section." Thus,
a retail buyer must try to get the lowest prices charged to any competitor, yet not
bargain so hard that discounts cannot be justified by acceptable exceptions.

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma

d) Minimum-Price Laws About half the states have minimum-price laws that
prevent retailers from selling certain items for less than their cost plus a fixed
percentage to cover overhead. Besides general laws, some state rules set
minimum prices for specific products. For instance, in New Jersey and
Connecticut, the retail price of liquor cannot be less than the wholesale cost
(including taxes and delivery charges). Minimum-price laws protect small retailers
from predatory pricing, in which large retailers seek to reduce competition by
selling goods and services, at very low prices, thus causing small retailers to go out
of business. In one widely watched case, three pharmacies in Arkansas filed a suit
claiming Wal- Mart had sold selected items below cost in an attempt to reduce
competition. Wal – Mart agreed it had priced some items below cost to meet or
beat rivals' prices but not to harm competitors. The Arkansas Supreme Court ruled
that Wal-Mart did not use predatory pricing since the three pharmacies were still
profitable. With loss leaders, retailers’ price selected items below cost to lure
more customer traffic for those retailers. Supermarkets and other retailers use
loss leaders to increase overall sales and profits because people buy more than
one item once in a store. However, consider this: The loss leader strategy is used
primarily to attract customers to your business by introducing a bargain.
e) Unit Pricing In some states, the proliferation of package sizes has led to unit
pricing whereby some- retailers must express both the total price of an item and
its price per unit of measure. Food stores are most affected by unit price rules
because grocery items are more regulated than non grocery items. There are
exemptions for firms with low sales. The aim of unit pricing is to enable
consumers to better compare the prices of products available in many sizes.
Retailer costs include computing per- unit prices, printing product and shelf labels,
and keeping computer records. These costs are influenced by the way prices are
attached to goods (by the supplier or the retailer), the number of items subject to
unit pricing, the frequency of price changes, sales volume, and the number of
stores in a chain.
f) Item Price Removal The boom in computerized checkout systems has led many
firms, especially supermarkets, to advocate item price removal - whereby prices
are marked on shelves or signs and not on individual items. Scanning equipment
reads pre-marked product codes and enters price data at the checkout counter.
g) Price Advertising The FTC has guidelines pertaining to advertising price
reductions, advertising prices in relation to competitors' prices, and bait-and-
switch advertising. A retailer cannot claim or imply that a price has been reduced
from some former level (a suggested list price) unless the former price was one
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
that the retailer had actually offered for a good or service on a regular basis
during a reasonably substantial, recent period of time. A somewhat controversial,
but legal, practice is price matching. For the most part, a retailer makes three
assumptions when it "guarantees to match the lowest price of any competing
retailer": (1) this guarantee gives shoppers the impression that the firm always
offers low prices or else it would not make such a commitment. (2) Most shoppers
will not return to a store after a purchase if they see a lower price advertised
elsewhere. (3) The guarantee may exclude most deep discounters by stating they
are not really competitors. Bait-and-switch advertising is an illegal practice in
which a retailer lures a customer by advertising goods and services at
exceptionally low prices; once the customer contacts the retailer (by entering a
.store, calling a toll-free number, or going to a Web site), he or she is told the
good/service of interest is out of stock or of inferior quality. A salesperson (or Web
script) tries to convince the person to buy a more costly substitute. The retailer
does not intend to sell the advertised item. In deciding if a promotion uses bait-
and-switch advertising, the FTC considers how many sales are made at the
advertised price, whether a sales commission is paid on sale items, and total sales
relative to advertising costs.

Pricing Strategies- In Demand- oriented pricing, a retailer sets prices based on

consumer desires. It determines the range of prices acceptable to the target
market. The Top of this range is called demand ceiling, the most people will pay
for a good or service. With cost- oriented pricing, a retailer sets a price floor, the
minimum price acceptable to the firm so that it can reach a specified profit goal.
For Competition-oriented pricing, a retailer sets its prices in accordance with
competitors. The price levels of key competitors are studied and applied.

a) Demand- Oriented Pricing Retailers use Demand- oriented pricing to estimate

the quantities that customers would buy at various prices. This approach studies
customer interests and the psychological implications of pricing. Two aspects of
psychological pricing are the price – quality association and prestige pricing.
According to the price – quality association, many consumers feel high prices
connote high quality and low prices connote low quality. This association is
especially important if competing firms or products are hard to judge on bases
other than price, consumers have little experience or confidence in judging quality
(as with a n w retailer), shoppers perceive large differences in quality among
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
retailers or products, and brand names are insignificant in product choice. Though
various studies have documented a price-quality relationship, research also
indicates that if other quality cues, such as retailer atmospherics, customer
service, and popular brands, are involved, these cues may be more important than
price in a person's judgment of overall retailer or product quality. Prestige pricing-
which assumes that consumers will not buy goods and services at prices deemed
too low-is based on the price-quality association. Its premise is that consumers
may feel too Iowa price means poor quality and status. Some people look for
prestige pricing when selecting retailers and do not patronize those with prices
viewed as too low.
b) Cost-Oriented Pricing One form of cost-oriented pricing, markup pricing, is the
most widely used pricing technique. In markup pricing, a retailer sets prices by
adding per-unit merchandise costs, retail operating expenses, and desired profit.
The difference between merchandise costs and selling price is the markup. If a
retailer buys a desk for $200 and sells it for $300, the extra $100 covers operating
costs and profit. The markup is 33-1/3 percent at retail or 50 percent at cost. The
level of the markup depends on a product's traditional markup, the supplier's
suggested list price, inventory turnover, competition, rent and other overhead
costs, the extent to which the product must be serviced, and the selling effort.
Markup can be computed on the basis of retail selling price or cost but are
typically calculated using the retail price. Why? (1) Retail expenses, markdowns,
and profit are always stated as a percentage of sales. Thus, markups expressed as
a percentage of sales are more meaningful. (2) Manufacturers quote selling prices
and discounts to retailers as percentage reductions from retail list prices. (3) Retail
price data are more readily available than cost data. (4) Profitability seems smaller
if expressed on the basis of price. This can be useful in communicating with the
government, employees, and consumers. This is how a markup percentage is
calculated. The difference is in the denominator:
Markup percentage (at retail) = Retail selling price - Merchandise cost /Retail
selling price Markup percentage (at cost) = Retail selling price - Merchandise
cost/Merchandise cost

c) Competition-Oriented Pricing A retailer can use competitors' prices

as a guide. That firm might not alter prices in reaction to changes in
demand or costs unless competitors alter theirs. Similarly, it might
change prices when competitors do, even if demand or costs remain
the same. As shown in Table 7.3, a competition-oriented retailer can
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 price below, at/or above the market. A firm with a strong location,
superior service, good assortments, a favorable image, and exclusive
brands can set prices above competitors. However, above-market
pricing is not suitable for a retailer that has an inconvenient location,
relies on self-service, is not innovative, and offers no real product
distinctiveness. Competition-oriented pricing does not require
calculations of demand curves or price elasticity. The average market
price is assumed to be fair for both the consumer and the retailer.
Pricing at the market level does not disrupt competition and
therefore does not usually lead to retaliation.

Competition Oriented Pricing Alternatives

Retail Mix Variable Pricing Below at Pricing at the Pricing above the
Market Market Market
Location Poor, inconvenient Close to competitors, Few strong
site, low rent no location advantage competitors,
convenient to
consumers
Customer Service Self service, little Moderate assistance High levels of
sales person support, by sales personnel personal selling,
limited displays delivery, etc
Product assortment More emphasis on Medium or large Small or large
best seller assortment assortment
Atmosphere Inexpensive fixtures, Moderate atmosphere Attractive and
racks for merchandise pleasant décor
Innovativeness in Follower, Concentration on Leader
assortments conservative best- sellers
Special services Not available Not available or extra Included in price
fees
Product lines carried Some name brands, Selection of name Exclusive name
private labels, brands, private labels brands and private
closeouts labels

d) Yield Management Pricing- is a computerized, demand based,

variable pricing technique, where by a retailer determines the
combination of prices that yield the greatest total revenues for a
given period. It is widely used by airlines & hotels industry.
e) One price policy & flexible pricing- in this a retailer charges the same
price to all customers buying an item under similar conditions. It can
be used with customary or variable pricing. With variable pricing all
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 customers interested in a particular section of concert seats would
pay the same price. Flexible pricing whereas lets consumer bargain
over prices, those who are good at it obtain lower prices. Many
jewelry stores, auto dealers & others use flexible pricing. They do not
clearly post bottom line prices, shoppers need prior knowledge to
bargain successfully. It encourages consumers to spend more time,
given an impression the firm is discounted oriented & generates high
margins from shoppers who do not like haggling. It requires high
initial prices & good sales people.
f) Odd pricing- it is a form of psychological pricing. Retail prices are set
at levels below even dollar values such as $0.49,$4.98 & $199 in odd
pricing. The assumption is that people feel these prices represent
discounts or that the amounts are beneath consumer price ceilings.
g) Multiple Pricing- We’ve all seen this one in groceries stores but it’s
pretty common for apparel as well, especially socks, underwear, and
t-shirts. Not to mention its usage in the software and electronics
industries. This tactic is where a merchants sells more than one
product for a single price, a tactic alternatively known as product
bundling pricing. For example, a study looking at the effect of
bundling products found in the early days of Nintendo's Game Boy
hand-held console, it sold the most products when the devices were
bundled with a game rather than individual products alone.
 Pros: Traditionally, retailers using this strategy to create a higher perceived
value for a lower cost which can ultimately lead to driving larger volume
purchases.
Cons: When you bundle products up for a low-cost, you'll have trouble trying to
sell them individually at a higher cost creating cognitive dissonance for
consumers.
h) Above Competition- Carrying on from the strategy above, this is
where you benchmark your competition but consciously price your
products above theirs and brand yourself as being more luxurious,
prestigious, or exclusive. This works for Starbucks when people pick
them over Dunkin' Donuts and it's a scientifically proven fact as
well. Economist Richard Thaler's study looked at people hanging out
on a beach looking for a beer to cool off with the option of
purchasing it at either at a run-down grocery store or a nearby resort
hotel, and found that people were far more willing to pay higher
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 prices at the hotel for the same beer. Sounds crazy right? Well, that's
the power of context.
 Pros: This pricing strategy can work its “halo effect” on your business and
products by giving consumers the perception that your products are of better
quality and more premium due to the amount they’ll be paying for them.
 Cons: It may be difficult to pull off if the location and surrounding
demographic are too price-sensitive and have several other options to purchase
similar products.
i) Below Competition- As the name of this pricing strategy suggests, it
refers to using competitor pricing data as a benchmark and
consciously pricing products below them to lure consumers into your
store over theirs.
 Pros: This strategy can be killer if you can manage to negotiate with your
suppliers to obtain a lower cost per unit while at the same time focusing on
cutting costs and actively promoting your special pricing.
 Cons: This can be difficult to sustain when you’re a smaller retailer given the
lower margins you’ll be making.

GMROI- A gross margin return on investment (GMROI) is an inventory profitability

evaluation ratio that analyzes a firm's ability to turn inventory into cash above the
cost of the inventory. It is calculated by dividing the gross margin by the average
inventory cost and is used often in the retail industry. To illustrate:

Essentials of GMROI: Following are the essentials to apply GMROI successfully:

 To understand gross margin.
 To understand inventory turns
 Proper access to inventory details with regard to price, acquisition cost,
sales volume and inventory turns.

Calculation of GMROI: GMROI indicates the relationship between a retailer’s

total sales, the gross profit margin retailer earns on that sales and the number
of rupees retailer invests in his inventory. Working of GMROI can be
understood with the help of this hypothetical example. A company has five
departments. Given are the details of their respective annual sales, annual
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 gross margin and average inventory cost. And out of the five departments,
which is more productive?

As per the question, Department ‘A’ has the highest sales. Department ‘D’ has the
highest margin. In order to calculate, which department is more productive, we
can calculate the GMROI.

Form the above table 9.2, it is clear that Department ‘E’ has the highest GMROI,
while from table 1, it seems that Department ‘E’ has the lowest annual sales and
margin. Therefore, GMROI is the best way to judge the productivity of a retail
store. Annual sales figures and margin alone are not really enough to tell the
retailer’s actual position. A retailer having various outlets or various departments
within a single outlet can calculate GMROI by departments, as mentioned above
by categories, seasons, gender, regions or otherwise.
Calculating GMROI= GMROI = (Annual sales) X (Gross margin %) / (Average
inventory cost)
Applications of GMROI: The advantage of GMROI is that it is applicable to any
store, department or merchandise classifications within a retail store. In case, a
retailer’s accounting system is fully computerized, a retailer can get GMROI
reports automatically on his computer or through a service as a part of monthly
accounting reports. GMROI should not be seen only as ‘financial management
tool’, but it can be an effective human resource management tool as well. A
retailer can apply GMROI to incentives as a performance appraisal tool for his
employees. Try to involve your staff in improving the firm’s GMROI by setting
targets for achieving a particular gross margin and sales-to-inventory investment
for each product category. A retailer should convey these targets, the reasons for
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
setting them and any rewards that the retailer will give to the department that
will achieve these targets. Motivate employees to share their suggestions that can
improve the firm’s productivity in any manner. Encourage them reward them with
appropriate recognition and financial awards. Let the employees know what
actually they are doing/performing and what is expected from them. Provide
them latest information about their output and contribution. Further, the sense of
healthy competition among various departments can do wonder in terms of
improvement in productivity. In nutshell, GMROI is a powerful management tool
that involves two significant profitability factors: retailer’s gross margin and sales
to inventory investment ratio. With the retail space becoming costlier, mall rentals
soaring and inventory cost constantly rising; a retailer must get the best possible
highest return from every rupee invested in inventory. GMROI will enable a
retailer to achieve these goals by keeping a close watch on GMROI.

Factors That Affect Pricing Decisions- Organizations must understand buyers,

competitors, the economic conditions, and political regulations in other markets
before they can compete successfully.

1. Customer’s- How will buyers respond? Three important factors are

whether the buyers perceive the product offers value, how many
buyers there are, and how sensitive they are to changes in price. In
addition to gathering data on the size of markets, companies must try
to determine how price sensitive customers are. Will customers buy
the product, given its price? Or will they believe the value is not equal
to the cost and choose an alternative or decide they can do without
the product or service? Equally important is how much buyers are
willing to pay for the offering. Figuring out how consumers will
respond to prices involves judgment as well as research. Price
elasticity, or people’s sensitivity to price changes, affects the demand
for products. Think about a pair of sweatpants with an elastic waist.
You can stretch an elastic waistband like the one in sweatpants, but
it’s much more difficult to stretch the waistband of a pair of dress
slacks. Elasticity refers to the amount of stretch or change. For
example, the waistband of sweatpants may stretch if you pull on it.
Similarly, the demand for a product may change if the price changes.
Imagine the price of a twelve-pack of sodas changing to $1.50 a pack.
People are likely to buy a lot more soda at $1.50 per twelve-pack
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 than they are at $4.50 per twelve-pack. Conversely, the waistband on
a pair of dress slacks remains the same (doesn’t change) whether you
pull on it or not. Likewise, demand for some products won’t change
even if the price changes. The formula for calculating the price
elasticity of demand is as follows.
Price elasticity = percentage change in quantity demanded ÷ percentage change
in price

When consumers are very sensitive to the price change of a product—that is, they
buy more of it at low prices and less of it at high prices—the demand for it is price
elastic. Durable goods such as TVs, stereos, and freezers are more price elastic
than necessities. People are more likely to buy them when their prices drop and
less likely to buy them when their prices rise. By contrast, when the demand for a
product stays relatively the same and buyers are not sensitive to changes in its
price, the demand is price inelastic. Demand for essential products such as many
basic food and first-aid products is not as affected by price changes as demand for
many nonessential goods. The number of competing products and substitutes
available affects the elasticity of demand. Whether a person considers a product a
necessity or a luxury and the percentage of a person’s budget allocated to
different products and services also affect price elasticity. Some products, such as
cigarettes, tend to be relatively price inelastic since most smokers keep purchasing
them regardless of price increases and the fact that other people see cigarettes as
unnecessary. Service providers, such as utility companies in markets in which they
have a monopoly (only one provider), face more inelastic demand since no
substitutes are available.
2. Competitors- How competitors price and sell their products will have
a tremendous effect on a firm’s pricing decisions. If you wanted to
buy a certain pair of shoes, but the price was 30 percent less at one
store than another, what would you do? Because companies want to
establish and maintain loyal customers, they will often match their
competitors’ prices. Some retailers, such as Home Depot, will give
you an extra discount if you find the same product for less
somewhere else. Similarly, if one company offers you free shipping,
you might discover other companies will, too. With so many products
sold online, consumers can compare the prices of many merchants
before making a purchase decision. The availability of substitute
products affects a company’s pricing decisions as well. If you can find
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 a similar pair of shoes selling for 50 percent less at a third store,
would you buy them? There’s a good chance you might.
3. The Economy and Government Laws and Regulations- The economy
also has a tremendous effect on pricing decisions. When the
economy is weak and many people are unemployed, companies often
lower their prices. In international markets, currency exchange rates
also affect pricing decisions. Pricing decisions are affected by federal
and state regulations. Regulations are designed to protect consumers,
promote competition, and encourage ethical and fair behavior by
businesses. For example, the Robinson-Patman Act limits a seller’s
ability to charge different customers different prices for the same
products. The intent of the act is to protect small businesses from
larger businesses that try to extract special discounts and deals for
themselves in order to eliminate their competitors. However, cost
differences, market conditions, and competitive pricing by other
suppliers can justify price differences in some situations. In other
words, the practice isn’t illegal under all circumstances. You have
probably noticed that restaurants offer senior citizens and children
discounted menus. The movies also charge different people different
prices based on their ages and charge different amounts based on
the time of day, with matinees usually less expensive than evening
shows. These price differences are legal. We will discuss more about
price differences later in the chapter. Price fixing, which occurs when
firms get together and agree to charge the same prices, is illegal.
Usually, price fixing involves setting high prices so consumers must
pay a high price regardless of where they purchase a good or service.
Video systems, LCD (liquid crystal display) manufacturers, auction
houses, and airlines are examples of offerings in which price fixing
existed. When a company is charged with price fixing, it is usually
ordered to take some type of action to reach a settlement with
buyers. Price fixing isn’t uncommon. Nintendo and its distributors in
the European Union were charged with price fixing and increasing the
prices of hardware and software. Sharp, LG, and Chungwa
collaborated and fixed the prices of the LCDs used in computers, cell
phones, and other electronics. Virgin Atlantic Airways and British
Airways were also involved in price fixing for their flights. Sotheby’s
and Christie’s, two large auction houses, used price fixing to set their
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 commissions. By requiring sellers to keep a minimum price level for
similar products, unfair trade laws protect smaller businesses. Unfair
trade laws are state laws preventing large businesses from selling
products below cost (as loss leaders) to attract customers to the
store. When companies act in a predatory manner by setting low
prices to drive competitors out of business, it is a predatory
pricing strategy. Similarly, bait-and-switch pricing is illegal in many
states. Bait and switch, or bait advertising, occurs when a business
tries to “bait,” or lure in, customers with an incredibly low-priced
product. Once customers take the bait, sales personnel attempt to
sell them more expensive products. Sometimes the customers are
told the cheaper product is no longer available. You perhaps have
seen bait-and-switch pricing tactics used to sell different electronic
products or small household appliances. While bait-and-switch
pricing is illegal in many states, stores can add disclaimers to their ads
stating that there are no rain checks or that limited quantities are
available to justify trying to get you to buy a different product.
However, the advertiser must offer at least a limited quantity of the
advertised product, even if it sells out quickly.
4. Product Costs- The costs of the product—its inputs—including the
amount spent on product development, testing, and packaging
required have to be taken into account when a pricing decision is
made. So do the costs related to promotion and distribution. For
example, when a new offering is launched, its promotion costs can be
very high because people need to be made aware that it exists. Thus,
the offering’s stage in the product life cycle can affect its price. Keep
in mind that a product may be in a different stage of its life cycle in
other markets. For example, while sales of the iPhone remain fairly
constant in the United States, the Koreans felt the phone was not as
good as their current phones and was somewhat obsolete. Similarly,
if a company has to open brick-and-mortar storefronts to distribute
and sell the offering, this too will have to be built into the price the
firm must charge for it. The point at which total costs equal total
revenue is known as the breakeven point (BEP). For a company to be
profitable, a company’s revenue must be greater than its total costs.
If total costs exceed total revenue, the company suffers a loss. Total
costs include both fixed costs and variable costs. Fixed costs, or
UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma
 overhead expenses, are costs that a company must pay regardless of
its level of production or level of sales. A company’s fixed costs
include items such as rent, leasing fees for equipment, contracted
advertising costs, and insurance. As a student, you may also incur
fixed costs such as the rent you pay for an apartment. You must pay
your rent whether you stay there for the weekend or not. Variable
costs are costs that change with a company’s level of production and sales. Raw
materials, labor, and commissions on units sold are examples of variable costs.
You, too, have variable costs, such as the cost of gasoline for your car or your
utility bills, which vary depending on how much you use. Consider a small
company that manufactures specialty DVDs and sells them through different retail
stores. The manufacturer’s selling price (MSP) is $15, which is what the retailers
pay for the DVDs. The retailers then sell the DVDs to consumers for an additional
charge. The manufacturer has the following charges:
Copyright and distribution charges for the titles $150,000

Package and label designs for the DVDs $10,000

Advertising and promotion costs $40,000

Reproduction of DVDs $5 per unit

Labels and packaging $1 per unit

Royalties $1 per unit

In order to determine the breakeven point, you must first calculate the fixed and
variable costs. To make sure all costs are included, you may want to highlight the
fixed costs in one color (e.g., green) and the variable costs in another color (e.g.,
blue). Then, using the formulas below, calculate how many units the manufacturer
must sell to break even.
The formula for BEP is as follows:
BEP = total fixed costs (FC) ÷ contribution per unit (CU)
contribution per unit = MSP – variable costs (VC)
BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to break even
To determine the breakeven point in dollars, you simply multiply the number of
units to break even by the MSP. In this case, the BEP in dollars would be 25,000
units times $15, or $375,000.

UNIT-2 RETAIL MGMT NOTES BY Dr Hemendra Sharma