chapter 10 retail pricing. © 2011 cengage learning. all rights reserved. may not be scanned, copied...

Chapter 10

Retail Pricing

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives

Discuss the factors a retailer should consider when establishing pricing objectives and policies.

Describe the differences between the various pricing strategies available to the retailer.

Describe how retailers calculate the various markups.

Discuss why markdown management is so important in retailing and describe some of the errors that cause markdowns.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Objectives and Policies

Interactive pricing decisionsPricing objectivesPricing policies

LO 1

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Exhibit 10.1 - Interaction Between a Retailer’s Pricing Objectives and Other Decisions

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Pricing Objectives

Profit oriented objectives

Achieve either a certain rate of return or maximizing profits.

Target return objective

States a specific level of profit, such as percentage of sales or return on capital invested.

Profit maximization

Seeks to obtain as much profit as possible.

Skimming Price is initially set high on merchandise to skim the cream of demand before selling at more competitive prices.

Penetration Price is set at a low level in order to penetrate the market and establish a loyal customer base.

Sales-oriented objectives

Seek some level of unit sales, dollar sales, or market share but do not mention profit.

Status quo objectives

Adopted by retailers who are happy with their market share and level of profits.

LO 1

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Pricing Policies

Rules of action, or guidelines, that ensure uniformity of pricing decisions within a retail operation.

Below-market pricing policy - Regularly discounts merchandise from the established market price in order to build store traffic and generate high sales and gross margin dollars per square foot of selling space.

LO 1

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Pricing Policies

Pricing at market levelsPrice zone - Range of prices for a particular

merchandise line that appeals to customers in a certain market segment.

Above-market pricing policy - Retailers establish high prices because nonprice factors are more important to their target market than price.

LO 1

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Pricing Policies

Factors that permit retailers to price above market levels:Merchandise offeringsServices providedConvenient locations Extended hours of operation

LO 1

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Specific Pricing Strategies

Customary pricing The retailer sets prices for goods and services and seeks to

maintain those prices over an extended period of time.

Variable pricing Recognizes that differences in demand and cost necessitate

that the retailer change prices in a fairly predictable

manner.

Flexible pricing Encourages offering the same products and quantities to

different customers at different prices; used for personal

selling; costs can dramatically increase, and revenues

decrease, as customers begin to bargain for everything.

One-price policy Establishes that the retailer will charge all customers the

same price for an item; speeds up transactions and reduces

the need for highly skilled salespeople.

LO 2

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Price lining - Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification.Trading up - Occurs when a retailer uses price lining

and a salesperson moves a customer from a lower priced line to a higher one.

Trading down - Occurs when a retailer uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line.

Specific Pricing Strategies

LO 2

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Retailers select price lines that have the strongest consumer demand.

Price lining helps buying more efficiently, simplifying inventory control, and accelerating inventory turnover.

Specific Pricing Strategies

LO 2

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Specific Pricing Strategies

Odd pricing Practice of setting retail prices that end in the digits 5, 8, 9—such as $29.95, $49.98, or $9.99.

Multiple-unit pricing

Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually.

Bundle Pricing Selling distinct multiple items offered together at a special price.

Bait-and-switch

pricing

Advertising or promoting a product at an unrealistically low price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a higher-priced product.

Private-label brand pricing

A private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand.

LO 2

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Specific Pricing Strategies

Leader pricing - High-demand item is priced low and is heavily advertised in order to attract customers into the store.Loss leader - Extreme form of leader pricing where an

item is sold below a retailer’s cost.High–low pricing - Use of high every day prices and

low leader ‘‘specials’’ on items typically featured in weekly ads.

LO 2

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Using Markups

Markup - Selling price of the merchandise less its cost, which is equivalent to gross margin.

The basic markup equation: SP = C + M

Where: C - dollar cost of merchandise per unit

M - dollar markup per unit

SP - selling price per unit

LO 3

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Exhibit 10.3 - Relationship of Markups Expressed on Selling Price and Cost

LO 3

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Exhibit 10.4 - Basic Markup Formulas

LO 3

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Initial Versus Maintained Markup

Initial markup = (original retail price – cost)/original retail price

Maintained markup = (actual retail price – cost)/actual retail price

LO 3

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Initial Versus Maintained Markup

Reasons for the difference between initial and maintained markups:The need to balance demand with supply.Stock shortages.Employee and customer discounts.Cost of alterations.Initial markup may be different from maintained

markup is cash discounts.

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Planning Initial Markups

Initial markup percentage = (operating expenses + net profit + markdowns + stock shortages + employee and customer discounts + alterations costs - cash discounts)/ (net sales + markdowns + stock shortages + employee and customer discounts) OR

Initial markup percentage = (gross margin + alterations costs - cash discounts + reductions)/ (net sales + reductions) OR

LO 3

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Planning Initial Markups

Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions)

LO 3

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Planning Initial Markups

Rules of markup determinationAs goods are sold through more retail outlets, the

markup percentage decreases and vice versa.The higher the handling and storage costs of the

goods, the higher the markup.

LO 3

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Planning Initial Markups

Rules of markup determinationThe greater the risk of a price reduction due to the

seasonality of the goods, the greater the magnitude of the markup percentage early in the season.

The higher the demand inelasticity of price for the goods, the greater the markup percentage.

LO 3

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Markdown Management

Markdown - Any reduction in the price of an item from its initially established price.

Markdown percentage = Amount of reduction / original selling price

LO 4

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Markdown Management

Retailers do not possess perfect information about supply and demand factors; as a result, the entire merchandising process is subject to error, which makes pricing difficult. Buying errorsPricing errorsMerchandising errorsPromotion errors

LO 4

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Markdown Policy

Early markdown policyAdvantages:

Speeds the movement of merchandise.Enables the retailer to take less of a markdown per unit to

dispose of the goods.Markdowns are offered quickly on goods that some

consumers still think of as fashionable, and the store has the appearance of having fresh merchandise.

Allows the retailer to replenish lower-priced lines from the higher ones that have been marked down.

LO 4

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Markdown Policy

Late-markdown policy - Allowing goods to have a long trial period before a markdown is taken.Avoids disrupting the sale of regular merchandise by

too frequently marking goods down.The bargain hunters or low-end customers will be

attracted only at infrequent intervals.

LO 4

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Markdown Policy

Amount of markdownRule of thumb for early markdowns is that prices

should be marked down at least 20 percent in order for the consumer to notice.

Retailers are able to have their suppliers supplement their markdown losses with markdown money or some other type of price reductions.

LO 4

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Markdown Policy

Amount of markdownMaintained markup = (actual selling price – cost) /

actual selling priceMaintained markup percentage = initial markup

percentage – [(reduction percentage) (100% - initial markup percentage)]

Where: Reduction percentage = Amount of reductions/net sales

LO 4