extra credit
Moudhi
chapter_14_slides.pptxRetail Pricing
CHAPTER 14
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Learning objectives
14-1 What is the difference between high-low pricing and EDLP?
14-2 What are the advantages/disadvantages of high-low/EDLP pricing?
14-3 What do retailers have to consider when setting prices?
14-4 What does it mean to be “price sensitive?”
14-5 What is the difference between elastic demand and inelastic demand?
14-6 How do retailers set retail prices?
14-7 How do you calculate markup as a dollar amount and a percentage?
14-8 How do you calculate retail price when a certain markup % is desired?
14-9 What is a markdown?
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Learning objectives (continued)
14-10 What is the difference between an initial markup and a maintained markup?
14-11 How do you calculate a maintained markup as a % of actual sales?
14-12 How do you calculate an initial markup %?
14-13 How do you calculate initial retail price?
14-14 What are the different types of markdowns?
14-15 What are the different types of variable pricing & price discrimination?
14-16 Which pricing techniques can retailers use for increasing sales?
14-17 What are some of the legal and ethical pricing issues?
Why is Pricing Important?
Pricing decision is important because customers have alternatives to choose from and are better informed
Customers are in a position to seek good value
Customer Value = Benefits – Costs
Price cannot be set higher than the value perceived by the customer!
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14-1 what is the difference between high-low pricing and edlp?
PRICING STRATEGIES
High-Low Pricing
Discount the initial prices through frequent sales promotions
Everyday Low Price (EDLP)
Emphasizes the continuity of retail prices at a level somewhere between the regular non-sale price and the deep-discount sale price of high/low retailers
Doesn’t mean lowest price
14-2 WHAT ARE THE ADVANTAGES/DISADVANTAGES OF… High-Low Pricing?
Advantages
Increases profits through price discrimination
Sales create excitement
Sells merchandise
Increases traffic to the store (or website)
Disadvantages
Trains customers to buy and wait on “deals”
Has an adverse effect on gross margins
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14-2 what are the advantages/disadvantages of…Everyday Low Pricing (EDLP)
Retailers have adopted a low price guarantee policy to reinforce EDLP strategy
Advantages:
Assures customers of low prices
Reduces advertising and operating expenses
Better supply chain management
Reduces stockouts
Improves inventory management
Disadvantages:
Customers have access to pricing info for retailers anywhere (online)
Lack excitement of deals and specials (cannot offer discounts)
May have to sell a product at a loss
Limited service
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14-3 what do retailers have to Consider in Setting Retail Prices?
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14-4 what does it mean to be “price sensitive?”
As the increases
decrease
because fewer customers feel the product is good value
price
sales
Generally,
Price Sensitivity – the degree to which the price of a product affects purchasing behaviors
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14-5 what’s the difference between elastic demand and inelastic demand?
ELASTIC DEMAND – a situation in which consumer demand is sensitive to price changes
INELASTIC DEMAND – an increase or decrease in price will not significantly affect demand for the product
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Price sensitivity of customers (demand curve)
Quantity Sold at Different Prices
If customers are very price sensitive,
sales decrease significantly
with price increase
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Price sensitivity of customers (demand curve)
Quantity Sold at Different Prices
If customers are not very price sensitive,
the quantity sold will remain relatively
constant with price increase
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14-5 what’s the difference between elastic demand and inelastic demand?
ELASTIC DEMAND – a situation in which consumer demand is sensitive to price changes
INELASTIC DEMAND – an increase or decrease in price will not significantly affect demand for the product
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Factors that affect price sensitivity:
The number of product options/substitutes
Price relative to their total income (or budget)
Product durability
Purchasing luxury goods vs. everyday items
A product’s other uses
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Profit at Different Prices
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14-5 how do retailers Set Retail Prices?
Theoretically, retailers maximize their profits by setting prices based on the price sensitivity of customers and the cost of merchandise and considering the prices being charged by competitors.
In reality, retailers need to set price for over 50,000 SKUs many times during year
Utilize merchandise cost and pre-determined markups
Adjustments based on customer price sensitivity and competition
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what do retailers have to Consider in Setting Retail Prices?
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What is a markup?
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14-7 how do you calculate markup as a dollar amount? (Tennis Racket)
Retail Price $125
Cost of Tennis Racket
$75
Markup ($)
Retail Selling Price = cost + markup
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14-7 how do you calculate markup as a percentage?
14-7 how do you calculate markup as a percentage?
Retail Price $125
Cost of Merchandise $75
Markup $
Markup % of Retail Selling Price
Markup % of Cost
Retail Selling Price = cost + markup
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Example Problem:
If the retailer buys a product for $40 and sells it to customers for $65
What is the markup in dollars?
What is the markup as a percentage of the selling price?
What is the markup as a percentage of the cost?
Example Problem:
If the retailer buys a product for $180 and sells it to customers for $225, what is the markup as a percentage of the selling price?
14-8 how do you calculate retail selling price when a certain markup% is desired?
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Example Problem:
If the retailer can sell an item at $35 and needs a 20 percent markup on retail price to meet profit objectives, what is the maximum amount that the retailer should pay for the item?
14-8 how do you calculate retail selling price when a certain markup % is required?
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Example Problem:
A retail buyer for BestBuy purchases BluRay players for $60 each and needs a 40% markup on the selling price. What should the retail selling price be for each BluRay player?
14-9 what is a markdown?
Reductions in the retail selling price
To clear out (or dispose of) merchandise
For promotional reasons (create excitement
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14-10 what is the difference between an initial markup and a maintained markup?
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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14-11 how do you calculate maintained markup as a % of actual sales?
Initial Retail Price $1.00
Cost of Merchandise $.60
Maintained Markup
Maintained Markup as a Percent of Actual Sales
Reductions $.10
Initial Markup
Initial Markup as a Percent of Initial Retail Price
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14-12 how do you calculate Initial Markup %? 14-13 how do you calculate the initial retail price?
Maintained markup %
(as a percent of actual sales)
Reductions %
(as a percent of actual sales)
+
Initial markup %
=
Reductions %
(as a percent of actual sales)
100%
+
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Initial Markup and Initial Retail Price
Merchandise costs $.60. If the buyer planned on reductions of 10% of sales and wanted a maintained markup of 33% for the merchandise,
Initial markup %
Maintained markup % + Reductions % of actual sales
100% + Reductions % of actual sales
=
Initial retail price =
Cost
1 – Initial markup %
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Price Adjustments
Retailers adjust prices over time (markdowns) and for different customer segments (variable pricing / price discrimination)
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14-14 what are the different types of markdowns?
Clearance Markdowns to get rid of slow-moving, obsolete merchandise
Promotional Markdowns
To increase sales and promote merchandise
To Increase traffic flow and sale of complementary products generate excitement through a sale
To generate cash to buy additional merchandise
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Price Optimization Software
Traditional Approach – Use a set of arbitrary rules
Sell-Through: Identifies markdown items when its weekly sell-through percentages fall below a certain level
Rule-based: Cuts prices on the basis of how long the merchandise has been in the store
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Optimizing markdown decisions
Markdown Optimization
Software is used to determine when and how much markdowns should be taken to produce the best results by continually updating pricing forecasts on the basis of actual sales and factoring in differences in price sensitivities
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14-15 what are the different types of variable pricing & price discrimination?
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Retailers adjust prices over time (markdowns) and for different customer segments (variable pricing / price discrimination)
Price discrimination
1st degree – individualized (auction bidding)
2nd degree – self-selected (markdowns, coupons, etc.)
3rd degree – different prices to different consumer groups
14-15 what are the different types of Variable Pricing and Price Discrimination?
Clearance Markdowns for Fashion Merchandise
Coupons
Price Bundling
McDonald’s Value Meal
Multiple-Unit Pricing or Quantity Discount
Variable Pricing by Market Segments – Charge different groups different prices
Seniors Discounts
Kids Menu
Zone Pricing – Charge different prices in different stores, markets, regions
2nd degree price discrimination
3rd degree
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14-16 which Pricing Techniques can retailers use for increasing sales?
Leader Pricing
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
Allan Rosenberg/Cole Group/Getty Images
Dennis Gray/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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Odd Pricing
A price that ends in an odd number (.9)
$2.99
Assumption:
Consumers perceive as $2 without noticing the digits
9 endings signal low prices
Retailers believe the practice increases sales, but probably doesn’t
Does delineate:
Type of store (downscale store might use it.)
Sale
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14-17 what are some of the Legal and Ethical Pricing Issues?
Predatory Pricing
Resale Price Maintenance
Horizontal Price fixing
Bait and Switch tactics
Scanned vs. Posted Prices
Deceptive Reference Prices
PhotoDisc/Getty Images
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