Chapter 15 Retail Pricing McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

15-2 Questions ■What factors do retailers consider when pricing merchandise? ■What is customer price sensitivity and how is it measured? ■What are the legal restrictions on retail pricing? ■How do retailers set retail prices using the mark up method? ■How do retailers make adjustments to prices over time? ■What pricing tactics do retailers use to influence consumer purchases?

15-3 Why is Pricing Important? ■Consumers consistently rank price as one of the most important variables driving purchase decisions. ■Consumers seek good value Value = perceived benefits price ■Pricing directly affects how much the retailer can sell and ultimately profits

15-4 Considerations in Setting Retail Prices

Customer Price Sensitivity Price sensitivity of customers determines how many units will be sold at different price levels. Price Elasticity – a measure of the change in quantity sold in response to a change in price. Elastic Demand – the percentage change in quantity sold exceeds the percentage change in price. Inelastic Demand – the percentage change in price exceeds the percentage change in quantity sold What factors affect price elasticity? 15-5

15-6 An approach used to measure the price sensitivity of customers Price Experiment Results of Price Experiments Number of movie tickets sold at difference prices

Slide Clothing vs. Gasoline Which is more sensitive to prices changes?

Competition ■Retailers can: Price above Price below Price at the same level (status quo) ■Pricing policy must be consistent with the retailer’s overall strategy 15-8

15-9 Collecting and Using Competitive Price Data Most retailers routinely collect price data about their competitors to adjust their prices to remain competitive

15-10 Legal Pricing Issues ■Predatory Pricing ■Resale Price Maintenance ■Horizontal Price fixing ■Bait and Switch tactics PhotoDisc/Getty Images

15-11 Setting Retail Prices 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 ■Set prices based on pre-determined markup and merchandise cost ■Make adjustments to markup price based on customer price sensitivity and competition

15-12 Retail Price and Markup (MU) Retail Price $125 Cost of Merchandise $75 Margin $50 Markup as a Percent of Retail Price 40% = $50/$125 Retail Price = cost + markup MU% = retail price – cost retail price

Markup and Reductions ■Retailers rarely sell all items at the initial price. ■Retailers frequently incur reductions Merchandise Markdowns Employee discounts Shrinkage ■Retailers try to take this into account and set initial markups high enough so that after markdowns and other reductions, they are still able to achieve their gross margin objective

15-14 Markups Initial markup – the actual markup originally placed on the merchandise. Maintained markup – The amount of markup that the retailer plans to maintain on a particular category of merchandise Rob Melnychuk/Getty Images

15-15 Initial and Maintained Markup Initial Retail Price $1.00 Cost of Merchandise $.60 Maintained Markup $.30 Maintained Markup as a Percent of Actual Sales 33% = $.30/$.90 Reductions $.10

15-16 Initial markup Maintained markup Reductions + Initial markup = Reductions Net Sales +

15-17 Initial Markup and Initial Retail Price A department store’s maintained markup is 38% on retail, reductions are $560, and net sales are $28,000. What is the initial markup percentage? Initial markup % 10, ___ 28, = =39%

15-18 Price Adjustments Retailers adjust prices over time (markdowns) ■What are markdowns? ■Why do retailers take markdowns? ■When and how much of a markdown should retailers take? ■How do they liquidate markdown merchandise?

15-19 Reasons for Taking 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

15-20 When and How Much Decisions ■Markdowns early in season Relatively modest markdowns Taken frequently throughout selling season Frees up selling space, generates traffic ■Storewide clearance twice a year Relatively large markdowns Taken infrequently, usually at end of selling season Gives a longer period to sell merchandise at regular prices Combination Approach

15-21 Liquidating Markdown Merchandise ■Sell the merchandise to another retailer ■Consolidate the unsold merchandise ■Place merchandise on Internet auction site ■Donate merchandise to charity ■Carry the merchandise over to the next season PhotoLink/Getty Images

15-22 Pricing Techniques for Increasing Sales ■Price Bundling ■Multiple-Unit Pricing ■Price Lining ■Odd Pricing

Price Bundling and Multiple Unit Pricing ■Bundling – is the practice of offering two or more different products or services for sale at one price. ■Multiple-unit – is the practice of offering the same products or services for sale at one price

15-24 ■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 Leader Pricing Allan Rosenberg/Cole Group/Getty ImagesDennis Gray/Cole Group/Getty ImagesRyan McVay/Getty Images

15-25 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

15-26 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 one’s image of using 9 is likely to outweigh the benefits. Even dollar prices and round numbers are appropriate.

15-27 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