retail pricing1

8/12/2019 Retail Pricing1

1/87


2/87

Price is the value placed on what is exchanged,

it is the point at which the exchange between the

buyer &seller takes place, where supply&

demand are equal.Arriving at the right price for a product or

service is one of the most difficult task today

various factors need to be considered before

setting up an appropriate price.

Pricing is an integral part of retail strategy

and cannot work in isolation. Cost and

perating expenses need to be considered while

establishing the retail price.


3/87

Price is an integral element of retailmarketing mix. it is the factor which is the

source of revenue for the retailer.

!he price of a merchandise alsocommunicates the image of the retail store tothe customers.

"arious factors like the target market,store policies competition and economiccondition need to be taken into considerationwhile setting up an appropriate price for a

product.


4/87

ac ors o e cons ere w esetting up an appropriate price

are:The primary factor that need to be considered while

arriving at a pricing strategy is the business model that the

retailer has chosen to follow.

The next factor to be taken into consideration is the

demand for the product and the target market.

The store policies and the store image.

Competition for the product & competitors price for thesimilar products.

The economic conditions prevalent at times play a major

role in pricing policy.


5/87

FACTORS TO BE CONSIDERED WHILE PRICING A PRODUCT.


6/87

The first element to be considered inthe cost of goods which is the cost of

merchandise and various other

expenses, which are involved in the

movement of goods from the

manufacturer to the actual store. These

expenses may be fixed or variable.


7/87

Fixed costs are referred to as

overhead are the expenses thatdont vary according to the

production amounts!such as rent

for office space officee"uipmentsinsuranceutilitiesetc.


8/87

These are the expenses that do

vary with the amount of

service provided or goods

produced. They include costs

such as hourly pay for acontractor on a specific

project raw!materials etc.


9/87

Legal and Ethical Pricing Issues

#rice $iscrimination

#redatory #ricing

%esale #rice aintenance

'ori(ontal #rice fixing

)ait and *witch tactics

*canned vs. #osted #rices

+,!-

PhotoDisc/Getty Imaes


10/87

Ethical pricing issues#rice discrimination occurs when retailer charges diff

prices for the identical products/services sold to different

consumers. 0g %estaurant meals women haircuts.

'ori(ontal price fixing involves agreements between

retailers that are in direct competition with each other to

set the same prices


11/87

Vertical Price Fixing 1ertical #rice Fixing!! 2greements to fix prices betweenparties at different levels of the same marketing channel.

1endors cant force retailers to sell at manufacturer

suggested retail price 3*%#4.%etailers can sell above *%#.

5ften vendors tie selling products are *%# with co!op

advertising allowance


12/87

Predatory Pricing0stablishing merchandise prices to drive competitionfrom the marketplace.

6llegal7

%etailers can charge different prices at different locationsif costs are different.

#redatory pricing arises when a dominant retailer sets

prices below its costs to drive competitors out of

business. %etailer hopes to raise prices in the near future

and regain lost profits. 0g 8almart vs small retailers


13/87

Comparative Price

AdvertisingCompares price of merchandise offered for sale with ahigher 9regular: price or *%#.

;ood because it gives consumers information about

what merchandise should sell for.6llegal if used to deceive consumer.


14/87

Potential Deceptions ofComparative Price Advertising

Comparison price advertising inflates perceptions of savings and

value, and reduces search for lower prices.

Consumers use price to infer quality.

If advertised reference price is fictitious, then customer is deceived.


15/87

Guidelines for Retailers to Avoid

Deception in Comparative Price Advertising

ave reference price in effect a!out one"third of the time.Disclose how #sale$ prices are set and how long they will !e offered.%ffer a #satisfaction guaranteed policy$.&e careful when using '()P.*se o!+ective terms.*se reference prices that can !e easily verified.


16/87

Ethical pricing issues)ait and switch tactics deceptive practice wherein the

customers are lured into the stores by advt a product at

lower than normal price 3bait4 and once they are into the

store induce them to purchase a higher price model

3switch4. Can occur by having inade"uate inventory of the

advt product/salesperson disparage the "uality of advt

model and promote the superiority of higher priced model.


17/87

ait!and!"witch


18/87

ait and "witch #cont$%%etailers should'ave sufficient "uantities

;ive a 9rain check:

$ont disparage merchandise


19/87

)efore determining the price of the

product one needs to determine the cost

of the product and take into considerationthe 9)reak!0ven: point.


20/87

6t is the point at which the retailer neither

makes or loses money in producing a product

or delivering a service.6t is the process used to uncover the break

even numbers.

)efore calculating the break!even point it isnecessary to determine the fixed as well as the

incremental cost per unit=variable cost>


21/87

To calculate the )reak!even point the point at which

the business will neither make a profit or a loss thefollowing formula can be used

)reak even revenue ? Fixed costs

+!1ariable cost per unit


22/87

It is the difference between the cost of the product and the final sellingprice.

The mark up can be in rupee terms or in terms of percentage.

Mark ups can also be calculated on the cost of the product or the retailprice.

A markup can be expressed as an either a rupee amount or as apercentage of selling price.

A rupee markup occurs when the retailer adds a fixed amount to thecost of the product.

a) Markup% (at retail)=(retail selling pricemerchandise cost)

!etermines the retail selling price.

b) Markup% (at cost)=(retail selling pricemerchandise cost)

!etermines the merchandise cost.


23/87

"umulati#e markup$

The cumulati#e markup is calculated for a group of products.

Initial markup$It is the difference between the cost price of the merchandiseand the initial retail price.

Maintained markup$It is the difference between the gross merchandise cost and theactual selling price.

& i i P (i h h


24/87

&aximi'e Pro(its through

Price )iscrimination

8ant Charge 0very Customer the aximum They 2re

8illing to #ay

#roblem$ont know willingness to pay

8ith list prices cant prevent high willingness to pay

customers from buying at low price

+,!@A


25/87

Price Ad*ustments%etailers adjust prices over time 3markdowns4 and for

different customer segments 3variable pricing4

8hy do retailers take markdownsB

'ow do they optimi(e markdown decisionsB

'ow do they reduce the amount of markdowns by working

with vendorsB'ow do they li"uidate markdown merchandiseB

8hat are the mechanics of taking markdownsB

+,!@,

easons or a ng


26/87

easons or a ng&ar-downs

Clearance arkdownsto get rid ofslow!moving obsolete merchandise

#romotional arkdowns

To increase sales and promotemerchandise

To 6ncrease traffic flow and sale ofcomplementary products generateexcitement through a sale

To generate cash to buy additionalmerchandise

+,!@


27/87

.ptimi'ing &ar-down )ecisionsTraditional 2pproach! Dse a set of arbitrary rules

*ell!Through 6dentifies markdown items when its weekly sell!

through percentages fall below a certain level

%ule!based Cuts prices on the basis of how long the merchandisehas been in the store

arkdown 5ptimi(ation

*oftware is used to determine when and how much markdowns

should be taken to produce the best results by continuallyupdating pricing forecasts on the basis of actual sales and

factoring in differences in price sensitivities

+,!@E

ar own p m 'a on


28/87

ar own p m 'a on"o(tware

Pro(itLogic

+,!@

/u a ng ar own


29/87

/u a ng ar own&erchandise

*ell the merchandise to another retailerConsolidate the unsold merchandise

#lace merchandise on 6nternet auction site

$onate merchandise to charity

Carry the merchandise over to the next season

+,!@-P

hotoLi!"/GettyImaes

Variable Pricing and Price


30/87


)iscrimination

%etailers use a variety of techni"ues to maximi(e profits bycharging different prices to different customers

6ndividuali(ed 1ariable #ricing 3First $egree of #rice$iscrimination4 G *et uni"ue price for each customer e"ual to

customers willingness to pay2uctions #ersonali(ed 6nternet #rices

*elf!*elected 1ariable #ricing 3*econd $egree of #rice$iscrimination4 G 5ffer the same price schedule to allcustomersHuantity discounts0arly )ird *pecial5ver 8eekend Travel $iscount

+,!IJ


31/87

+,!I+

e&ay Auction on porsche

speeder -/0

(hoppers at *1rop2s use their loyalty card at a1ios1 and receive unadvertised personali3ed

coupons


32/87


)iscrimination ContinuedClearance arkdowns for Fashion erchandiseCoupons#rice )undlingc$onalds 1alue eal

ultiple!Dnit #ricing or Huantity $iscount1ariable #ricing by arket *egments 3Third $egree of #rice

$iscrimination4 G Charge different groups different prices*eniors $iscountsKids enu

Lone #ricing3Third $egree of #rice $iscrimination4 G Chargedifferent prices in different stores markets regions

+,!I@

o u on o ro ems n


33/87

o u on o ro ems nImplementing Price )iscrimination

*et prices based on customer characteristics

related to willingness to pay

Fashion sensitive customers will pay more so

charge higher prices when fashion first

introduced G reduce price later in season#rice sensitive customers will expend effort to

get lower prices G coupons

0lderly customers eat earlier and are more

price sensitive so offer early bird specials

+,!II

C. Bo#$a!%/PhotoLi!"/Getty Imaes


34/87

The pricing polic adopted b the retailer

can be$

"ostoriented pricing

!emandoriented pricing

"ompetitionoriented pricing


35/87

Cost-oriented pricing:In "ostoriented pricing& A basic markup is added tothe cost of the merchandise to arri#e at a price.

'ere retail price is considered to be the function ofcost and markup.

Thus&

etail price = "ost Markup

Markup = etail price "ost


36/87

Demand-oriented pricingThis polic focuses on the *uantities that thecustomers would bu at #arious prices.

It largel depends upon the percei#ed #alue attached

to the product b the customer.

As& sometimes high priced product is percei#ed as

being of high *ualit and a low priced product is

percei#ed as being of low*ualit.An understanding of the target market and the #alue

proposition is the ke to demand oriented pricing.

C i i i d


37/87

Competition-oriented

pricing

+hen the prices adopted b the competitors pla a

ke role in determining the price of the product& then it

is said to be competition oriented pricing.

'ere the retailer ma price the product at par with the

competition.

That is, abo#e the competitor-s price or below the

price.


38/87

Pricing "trategies


39/87

Price

This is the only element in the marketing mix that

brings in the revenues. All the rest are costs


40/87

P+ICI01 You pay rent for your apartment, tuition for your

education, and a fee to your dentist or physician.

The airline, railways, taxi and bus companies chargeyou a fare; the local utilities call their price a rate;

and the local bank charges you interest for the

money you borrow. The guest lecturer is paid an honorarium and the

government official takes a bribe to pass a file which

was his job anyway.


41/87

Pricing "trategies: 2igh3Low

Pricing$iscount the initial prices through fre"uent sales promotions

2dvantages6ncreases profits through price discrimination

*ales create excitement

*ells merchandise

$isadvantagesTrain people to buy on deal and wait

'ave an adverse effect on profits

+,!A+


42/87

Pricing "trategies: Everyday

Low Pricing0mphasi(es the continuity of retail prices at a level somewhere

between the regular none!sale price and the deep!discount sale

price of high/low retailers

$oesnt mean lowest price%etailers have adopted a low price guarantee policy to

reinforce their 0$


43/87

Pricing "trategies

0$


44/87

Pricing "trategies


45/87

Penetration Pricing


46/87

Penetration Pricing#rice set to Mpenetrate the market

M


47/87

&ar-et "-imming


48/87

&ar-et "-imming 'igh price


49/87

Value Pricing


50/87

Value Pricing#rice set in accordance with customer

perceptions about the value of the

product/service

0xamples include status

products/exclusive products

!ompanies may be able to set pricesaccording to perceived value.


51/87

Loss Leader


52/87

Loss Leader;oods/services deliberately sold below cost to encourage sales

elsewhere

Typical in supermarkets e.g. at Christmas selling bottles of gin at N I

in the hope that people will be attracted to the store and buy other

things

#urchases of other items more than covers Mloss on item sold


53/87

Psychological Pricing


54/87

Psychological Pricing

Dsed to play on consumer perceptions

Classic example G %s I---.-- instead of %s AJJJ7


55/87

1oing +ate #Price Leadership%


56/87

1oing +ate #Price Leadership%

6n case of price leader competitor have difficulty in competing on price G too

high and they lose market share too low and the price leader would match price

and force smaller rival out of market

8here competition is limited Mgoing rate pricing may be applicable G banks

petrol supermarkets electrical goods G find very similar prices in all outlets


57/87

,ender Pricing


58/87

,ender Pricing

any contracts awarded on a tender basis

Firm 3or firms4 submit their price for carrying out the work

#urchaser then chooses which represents best value

ostly done in secret


59/87



60/87


Charging a different price for the same

good/service in different markets

%e"uires different price elasticity of

demand in each market

"rices for rail travel differ for the samejourney at different times of the day


61/87

)estroyer Pricing3Predatory

Pricing


62/87

)estroyer3Predatory Pricing

$eliberate price cutting or offer of Mfree gifts/products to force

rivals 3normally smaller and weaker4 out of business or prevent new

entrants

2nti!competitive and illegal if it can be proved


63/87

Absorption3Full Cost

Pricing


64/87

Absorption3Full Cost Pricing

Full Cost #ricingG attempting to set price to cover

both fixed and variable costs


65/87

&arginal Cost Pricing


66/87

&arginal Cost Pricingarginal cost G the cost of producing 5O0 extra or 5O0 fewer item of

production

C pricing G allows flexibility

#articularly relevant in transport where fixed costs may be relatively high

2llows variable pricing structure G e.g. on a flight from


67/87

&arginal Cost Pricing0xample

Aircraft flying from #ristol to $dinburgh % Total !ost &includingnormal profit' ( )*+, of which )*-, is fixed cost

/umber of seats ( *0, average price ( )1-.2+

! of each passenger ( 34*0 ( )*3.+

5f flight not full, better to offer passengers chance of flying at)*3.+ and fill the seat than not fill it at all6

*All figures are estimates only


68/87

Contribution Pricing


69/87

Contribution Pricing"ontribution = elling /rice 0 1ariable (direct costs)

#rices set to ensure coverage of variable costs and a Mcontribution to

the fixed costs

*imilar in principle to marginal cost pricing

)reak!even analysis might be useful in such circumstances


70/87

,arget Pricing


71/87

,arget Pricing

*etting price to Mtarget a specified profit level

0stimates of the cost and potential revenue at different

prices and thus the break!even have to be made to

determine the mark!up

ark!up ? #rofit/Cost x +JJ


72/87

Cost!Plus Pricing


73/87

Cost!Plus Pricing

Calculation of the average cost 32C4 plus a mark up

2C ? Total Cost/5utput


74/87

In(luence o( Elasticity

+etailers View Price in


75/87

+etailers View Price in

,erms o(:

+. #rofitability

@. *ales 1olume

I. Consumer traffic

A. *tore image


76/87

"etting the +etail Price#rice!setting objectives *ales

#rofit

Competition

#rice!setting determinants $emand

Competition

Cost

#roduct


77/87

Ad*usting the +etail Price$iscount adjustmentsarkon 2djustments

arkdown 2djustments

Causes of markdownsTiming of markdowns

*i(e of markdowns

arkdown strategies

#romotional

#rice!line

arkdown Control

Price Can be 4sed to


78/87

Price Can be 4sed to

Communicate5

*tatus

*nob appeal

Huality


79/87

&erchandise Cost: A &a*or

)eterminant o( Price;ross 6nvoice #rice G Trade $iscounts G Huantity $iscounts G*easonal $iscounts G 5ther $iscounts ? 2et In#oice /rice

Oet 6nvoice #rice G Cash $iscounts Q Transportation Charges Q8orkroom 0xpenses ? Merchandise "ost

#rice ? erchandise Cost Q #rofit


80/87

Product Considerations$ifferent products have the ability to command differentprices at different times and in different locations.

ust consider

#erishability

#roduct "uality

#roduct uni"ueness

+etailers Compute &ar-up on


81/87

+etailers Compute &ar-up on

+etail "elling Price (or "everal

+easons:

#sychological %easons

arkup on selling price is alwayslower than a markup on cost

Comparison %easons )etween store operations

8ith trade statistics

8ith expressions of financialoperating ratios which are

computed as a R of sales

6nventory %easons

)eginning!of!month 0nd!of!

month and purchases arecalculated at retail

0mphasis %easons


82/87

&ar-up6nitial arkup 8hat you hope to receive7aintained arkup 8hat you actually receive7

;ross argin ? aintained markup

6nitial arkup R is the key element in guiding retailers

price setting decisions


83/87

Ad*usting the +etail Price Three Types+. $iscounts reductions granted to employees and special customers

@. arkons arkups taken after the initial price is set

I. arkdowns $ownward adjustments in the original selling price

arkdown R ? 3original price G reduced price4 / reduced price

%emember %etail %eductions ? arkdowns Q shortages Q employeediscounts Q customer discounts


84/87

Causes o( &ar-downs)uying related causes2ssortment error

Timing error late shipment or ordering too much

isjudging "uality

*upplier error late damaged or incorrect shipments

*elling related causes#ricing error hence little consumer interest

Dsing markdowns to stimulate sales2ggressive selling trading customer up misleading claims returns

Causes o( &ar-downs


85/87

Causes o( &ar-downs

#cont$%5perationally related causes$amaged or dirty merchandise

5dd lots

arket shifts

Factors A((ecting ,iming o(


86/87

Factors A((ecting ,iming o(

&ar-downsType of merchandise*tore image


87/87

retail pricing1

Documents