Pricing

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Merchandise Management
Retail Communication Mix Planning Merchandise Assortments

Pricing Buying Systems Buying Merchandise

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Why is Pricing Important?

Pricing decisions is important because customers have alternatives to choose from and are better informed Customers are in a position to seek good value Value = perceived benefits price So, retailers can increase value and stimulate sales by increasing benefits or reducing price.

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Considerations in Setting Retail Prices

The four factors retailers consider in setting retail prices:

The price sensitivity of consumers The cost of the merchandise and services Competition Legal restrictions

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Considerations in Setting Retail Prices

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Price Setting Approach Used by Retailers

Need to set price for 1000s of products many times during year Set prices based on pre-determined markup and merchandise cost Make adjustments to markup price based on customer price sensitivity and competition

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Price Sensitivity and Demand

When price increases

sales can decrease as fewer customers feel the product is a good value

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Types of Price Discrimination

First Degree Set unique price for each customer equal to customers willingness to pay Auctions, Personalized Internet Prices Second Degree Offer the same price schedule to all customers Quantity discounts Coupons Markdowns Late in Season Early Bird Special Over Weekend Travel Discount Third Degree Charge different groups different prices Kids Menu Seniors Discounts

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Results of Price Experiments

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Quantity Sold at Different Prices

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Profit at Different Prices

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Price Elasticity

Elasticity = percent change in quantity sold percent change in price

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Price Elasticity
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

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Price Elasticity

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

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Competitive Price Data

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How Can Retailers Reduce Price Competition?

Develop lines of private label merchandise Negotiate with national brands manufacturers for exclusive distribution rights Have vendors make unique products for the retailer
PhotoLink/Getty Images

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Legal and Ethical Pricing Issues

Price Discrimination Predatory Pricing Resale Price Maintenance Horizontal Price fixing Bait and Switch tactics Scanned vs. Posted Prices
PhotoDisc/Getty Images

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Example of Markups

Retail = Cost + Markup 100% = 70% + 30%

Retail = $10.00 and markup = 30% Retail = Cost + Markup $ 10.00 = $7.00 + $ 3.00

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Retail Price and Markup

Retail Price $125 Margin $50

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

Cost of Merchandise $75

Retail Price = cost + markup

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Markup 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%

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Markups
Initial markup retail selling price initially set for the merchandise minus the cost of the merchandise. Maintained markup the actual sales realized for the merchandise minus its costs
Rob Melnychuk/Getty Images

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Initial and Maintained Markup

Reduction s $.10 Maintained Markup $.30 Maintained Markup as a Percent of Retail Price 30% = $.30/$1.00 Initial Retail Price $1.00

Cost of Merchandise $.60

Example of Setting the Initial Retail Price

Cost = $100 Planned Initial Markup = 56.85% + (56.85% x Retail Price)

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Retail Price = $100

Solve for Retail Price .4315 x retail price = 100 Retail Price = $100/.4315 = 231.75

Initial Retail Price = Cost of Merchandise (1-markup percentage)

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Reasons for Taking Markdowns

Get rid of slow-moving, obsolete, uncompetitive priced merchandise Increase sales and promote merchandise Generate cash to buy additional merchandise Increase traffic flow and sale of complementary products generate excitement through a sale

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Liquidating Markdown Merchandise

Place merchandise on Internet auction site Sell the remaining merchandise to another retailer Consolidate the unsold merchandise Give merchandise to charity Carry the merchandise over to the next season

PhotoLink/Getty Images

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Breakeven Analysis
Understanding the Implication of Fixed and Variable Cost Contribution/Unit Fixed Costs Unit Sales

Breakeve n point

BEP

quantity

Fixed cost
Actual unit sales price - Unit variable cost

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Illustration of Breakeven Analysis

American Eagle Outfitter is interested in developing private label cargo pants that will sell for $24.99. The cost of developing the pants is $400,000. This includes the cost of salaries, benefits, space for the members of the design team. The variable cost of manufacturing the pants is $13.00. How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment?

Cargo Pants Illustration of Breakeven Analysis

Breakeven Quantity = Fixed Cost Unit Price Variable Cost $400,000 $24.99 - $15.00

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40,040 units =

RubberBall Productions/Getty Images

Making a Profit on Cargo Pants Illustration of Breakeven Analysis

What if American Eagle Outfitter does want to just break even. It wants to make a profit of $100,000 on the cargo pants. How many units does American Eagle Outfitter need to sell then?

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PhotoLink/Getty Images

Making a Profit on Cargo Pants Illustration of Breakeven Analysis

Breakeven Quantity = Fixed Cost Unit Price Variable Cost $500,000 $24.99 - $15.00

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50,050 units =

Percent Sales Increase Needed to Breakeven on a Price Decrease

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

The Gap Considers a Price Cut of 16.67%

Breakeven % = 100 x (-%price change) Sales Change % initial margin -% price change 39.78% = 100 x (-16.67) (7/12) + (-16.6)

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The McGraw-Hill Companies, Inc/Ken Karp photographer

Using Breakeven Analysis for Other Retail Investment Decisions

An independent retailers with one store is using breakeven analysis to consider several options. The retailer wants to know what the breakeven sales she will needs if she: Move to a new location with higher rent Reduces prices by 5% Wants to make a $50,000 profit

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Retailers Income Statement

Net Sales $1,000,000 COGS 800,000 Gross Margin 200,000 Operating Expenses Variable 100,000 Fixed 80,000 Profit 20,000 80% 20%

10% 8% 2%

Retailers Variable and Fixed Operating Expenses

Variable Wages & Salaries Manager Sales Clerical Rent Maintenance Total 20,000 60,000 20,000 Fixed 20,000 10,000 20,000 10,000 60,000

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100,000

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Retailers Assets
Current Assets Inventory Accounts Receivable Cash Fixed Assets Total

$300,000 75,000 25,000 100,000 $500,000

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Sales $ Retailer Needs to Break Even

Profit = Sales - COGS-Var Cost - Fixed Cost 0 = Sales - COGs% * Sales - VC%*Sales - FC Break-even Sales * (1-COGS% -VC%) = FC Break-even Sales = FC/(1-COGS% -VC%) Break-even Sales = FC/(GM%-VC%) = $80,000/(.2-.1) = $888,888

What Is the Breakeven Sales To Move To New Location?

Rent Increases to $50,000 Break-even Sales = FC/(GM%-VC%)

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Digital Vision / Getty Images

What Is the Breakeven Sales To If the Retailer Wants to Reduce Prices?

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Reduce Prices By 5% Break-even Sales = FC/(GM%-VC%)

What Is the Breakeven Sales If the Retailer Wants to Make a Specific Income?

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Make $50,000/Year Break-even Sales = FC/(GM%-VC%)

Maximize Profits through Price Discrimination

Want Charge Every Customer the Maximum They Are Willing to Pay Problem
Dont know willingness to pay With list prices, cant prevent high willingness to pay customers from buying at low price

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Solution to Problems in Implementing Price Discrimination

Set prices based on customer characteristics related to willingness to pay Fashion sensitive customers will pay more so charge higher prices when fashion first introduced reduce price later in season Price sensitive customers will expend effort to get lower prices coupons Elderly customers eat earlier and are more price sensitive so offer early bird specials

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Types of Price Discrimination

First Degree Set unique price for each customer equal to customers willingness to pay Auctions Second Degree Offer the same price schedule to all customers, but customers have to do something to get lower price Third Degree Charge different groups different prices Markdowns Late in Season Seniors Discounts

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Price Discrimination through Coupons

Documents that entitle the holder to a reduced price or X cents off a product or service.
Purpose Reduce price to price sensitive customers who will spend the effort to clip coupons Induce customer to try products for first time Convert first time users to regulars Encourage large purchases Increase usage Protect market share

C. Borland/PhotoLink/Getty Images

Markdowns Are a Form of Price Discrimination

Occurs when a firm sells the same product to two or more customers at different prices. Generally illegal with a vendors sells to retailers except: costs are different quantity and functional discounts changing market conditions Generally legal when retailer sells to consumers.

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Advantages of the Hi/low Pricing Strategy

Increases profits through price discrimination Sales create excitement Sells merchandise

PhotoLink/Getty Images

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Hi-Lo Pricing
Most Department Stores, Publix, Kmart Benefits to Consumer
Spend Time to Find Lowest Price

Benefits to Retailer
Maximize Profits -- Price Discrimination Problem: Trains People to Buy on Deal

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Advantages of EDLP Pricing Strategy

Assures customers of low prices Reduces advertising and operating expenses Reduced stockouts and improved inventory management

The McGraw-Hill Companies, Inc./Luke David, photographer

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Everyday Low Pricing

Wal-Mart, Category Specialists, Dillards, Food Lion Benefits to Consumers
Assured of Low Price on Every Visit Less Stockouts

Benefits to Retailer
Lower Advertising Expense Lower Labor Costs

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Pricing Strategies
EDLP Builds loyalty guarentees low prices to customers Lower advertising costs Better supply chain management
Fewer stockouts Higher inventory turns

Hi-Lo Higher profits price discrimination More excitement Build short-term sales and generates traffic

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Determining Service Quality

Customers are likely to use price as an indicator of both service costs and service quality. This can depend on several factors:
Other information available to the customer When service cues to quality are readily accessible When brand names provide evidence of a companys reputation When the level of advertising communicates the companys belief in the brand The risk associated with the service purchase
Royalty-Free/CORBIS

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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 for charging a different price to each customer

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Using Price to Stimulate Sales

Leader Pricing might attract cherry pickers Price Lining Odd Pricing

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Leader Pricing
Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products. Best items: purchased frequently, primarily by price-sensitive shoppers. Examples: bread, eggs, milk, disposable diapers.

Dennis Gray/Cole Group/Getty Images

Allan Rosenberg/Cole Group/Getty Images

Ryan McVay/Getty Images

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Price Lining
A limited number of predetermined price points. Ex: $59.99 (good), $89.99 (better), and 129.99 (best) Benefits:
Eliminates confusion of many prices. Merchandising task is simplified. Gives buyers flexibility. Can get customers to trade up.

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Benefits of Price Lining

Confusion that arises from multiple price choices is eliminated The merchandising talk is simplified It gives buyers greater flexibility It gives can be used to get customers to trade up to a more expensive model

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Guidelines for Price-ending Decisions

When the price sensitivity of the market is high, it is advantageous to raise or lower prices so they end in high numbers like 9. When the price sensitivity of the market is NOT high, the risk to ones image of using 9 is likely to outweigh the benefits. Even dollar prices and round numbers are appropriate. Upscale retailers appeal to price-sensitive segments of the market through periodic discounting. Combination strategy works best: break from standard of using round number endings to use 9 endings when communicating discounts and special offers.

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Odd Pricing
A price that ends in an odd number ($.57)or just under 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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Internet and Price Competition

The 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.

(c) image100/PunchStock

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The Three Most Important Things in Retailing

Location, location, location

Now, it is more :

Information, information, information!!