Merchandising Theory Grace Kunz

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Merchandising Perspectives on Pricing Chapter Six Merchandising Perspectives on Pricing

©2010 Fairchild Books, A Division of Condé Nast Publications. Learning Objectives Analyze the pricing language Examine the relationships among manufacturer pricing, retailer pricing, and customer perceptions of pricing Evaluate components of pricing strategies Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Pricing Relationships in the Trade Matrix Merchandise price – amount asked for or received in exchange of product Merchandise cost – amount invested to have a product or service Gross margin – relationship between selling price and merchandise cost Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Effective Pricing Effective pricing assists in Meeting gross margin goals Meeting volume goals Covering other costs Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. A Language of Price Strategy of a company includes the price range it plans to compete Low-end Budget Moderate Better Bridge Designer Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Price – Quality When customers are not well informed about product attributes, they may use price as a surrogate for quality Customers may assume if price is high, quality is also high Positioning well-known brands at different price levels allow companies to supply many different types of retailers Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Perceptions of Price Retailers 50% or keystone markup represents a retail price that is based on retail, e.g.; retail price = cost / % cost $100 = $50 / 50% Merchandise cost is 50% of the retail price Retail is double the billed cost of the merchandise Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Perceptions of Price Customers usually do not see first price What customers perceive as bargain price may be retailers’ planned average selling price Clearance price will still cover the cost of merchandise and make contribution towards business expenses Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Pricing Mechanics Merchandisers set and manipulate prices within the context of a firm’s pricing strategy Merchandisers negotiate purchase contracts for materials to be made into merchandise to be sold at retail Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Retail Pricing Policies When establishing merchandise prices and price changes ---- Merchandisers must consider; employer’s pricing policy planned cost amount of markup needed to achieve gross margin goals perceived value customers will place on the merchandise Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Retail Prices Retail prices are set before merchandise is delivered Price planning considers planned cost Retail Price = Planned Cost + Markup $70 = $28 + $42 Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Price Lining If a retailer includes price lining in its pricing policy, groups of styles with different wholesale prices are sold at the same retail price Retail prices of the merchandise are predetermined and the merchandise is selected to fit into the price lines Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. First Price First price is the original retail price and/or the base price for retail price planning Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Markups Initial markup (IMU) establishes the difference between wholesale price (planned cost) and first price IMU is planned and reported in $ and % To interpret IMU, the method of calculation must be known --- based on cost or retail Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Markups Initial markup (IMU) establishes the difference between wholesale price (planned cost) and first price Additional markup (AMU) = difference between first price and premium price Premium Price = First Price + % Add Mup $67.20 = $56 + %20 Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Markups Initial markup (IMU) establishes the difference between wholesale price (planned cost) and first price Additional markup (AMU) = difference between first price and premium price From a merchandiser’s perspective all price changes are based on first price Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Markdowns Markdowns are calculated as % decrease in first price Temporary markdowns Stimulate customer traffic and sales during selected times of selling period Price returns to first price Permanent markdowns Clearance of inventory Original markdown is cancelled and a greater markdown is applied Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Markdowns Temporary markdowns Permanent markdowns First price as the base price for all price changes provides a systematic, logical method of price change safeguards against incorrect markdown cancellations Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Pricing in Relation to the Merchandising Calendar A complete pricing plan includes planned merchandise cost dollar and percent initial markup first price percent temporary markdowns and promotional prices permanent markdowns clearance prices Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Strategic Pricing Pricing strategy is a key business decision determined by executive management with input from merchandising and marketing constituencies GOAL: Build price image consistent with target customer needs Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Strategic Pricing Merchandisers Determine first price Determine subsequent price changes Marketers Develop and manage advertising and promotions Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Strategic Pricing Consistent pricing strategy: Stimulates regular shopping by target customers Optimizes sale of available merchandise Provides guidelines for consistent administration of price Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. New Trends Trend #1: Modifying merchandise assortments to appeal to customers while using fewer price promotions Trend #2: Offering designer merchandise at modest prices for short selling periods Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Strategic Pricing Fundamentals Pricing strategies face the economic reality of a downward-sloping demand curve How high should the price be set? How much and often should the price change? What will happen to unsold merchandise? Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Strategic Pricing Fundamentals Setting Prices price elasticity of demand Changing Prices Rate of fashion change and the variety of products available increased over time Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Changing Prices A retail buyer faces greater uncertainty in product selection and price setting when dealing with fashion/seasonal goods Fashion goods require higher rates of markdowns Merchandisers decide How much to order Where to set the price When and how much to reorder When to markdown Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Strategic Pricing Fundamentals Setting Prices price elasticity of demand Changing Prices Rate of fashion change and the variety of products available increased over time Handling Unsold and Distressed Merchandise clearance sales --- take space liquidate or job-off leftover merchandise to a diverter or wholesaler Other alternatives: consolidate in few stores, outlet stores, carry over to next periods – fashion/basic Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Components of Pricing Strategies Market Price Position Above market, at market, below market Price Lining Price Endings Role of First Price Role of Markdowns Basic/staple: one price; fashion/seasonal: regular + clearance Price Advertising Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Types of Pricing Strategies Prestige Pricing Everyday-Low Pricing (EDLP) High-Low (Promotional) Pricing Quick Markdown Pricing Penetration Pricing Cost-Plus Pricing Other Pricing Strategies and Combinations of Pricing Strategies Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Table 6.10 Kunz Chapter 6 ©2010 Fairchild Books, A Division of Condé Nast Publications.