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 decisions  Pricing objectives  Pricing policies LO 1

© 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. Exhibit Interaction Between a Retailer’s Pricing Objectives and Other Decisions LO 1

© 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 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. SkimmingPrice is initially set high on merchandise to skim the cream of demand before selling at more competitive prices. PenetrationPrice 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

© 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 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

© 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 Policies  Pricing at market levels  Price 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

© 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 Policies  Factors that permit retailers to price above market levels:  Merchandise offerings  Services provided  Convenient locations  Extended hours of operation LO 1

© 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. Specific Pricing Strategies Customary pricingThe retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time. Variable pricingRecognizes that differences in demand and cost necessitate that the retailer change prices in a fairly predictable manner. Flexible pricingEncourages 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 policyEstablishes 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

© 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.  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

© 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.  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

© 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. Specific Pricing Strategies Odd pricingPractice 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 PricingSelling 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

© 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. 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

© 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. 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

© 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. Exhibit Relationship of Markups Expressed on Selling Price and Cost LO 3

© 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. Exhibit Basic Markup Formulas LO 3

© 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. Initial Versus Maintained Markup  Initial markup = (original retail price – cost)/original retail price  Maintained markup = (actual retail price – cost)/actual retail price LO 3

© 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. 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. LO 3

© 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. 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

© 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. Planning Initial Markups  Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions) LO 3

© 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. Planning Initial Markups  Rules of markup determination  As 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

© 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. Planning Initial Markups  Rules of markup determination  The 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

© 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. 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

© 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. 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 errors  Pricing errors  Merchandising errors  Promotion errors LO 4

© 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. Markdown Policy  Early markdown policy  Advantages:  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

© 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. 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

© 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. Markdown Policy  Amount of markdown  Rule 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

© 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. Markdown Policy  Amount of markdown  Maintained markup = (actual selling price – cost) / actual selling price  Maintained markup percentage = initial markup percentage – [(reduction percentage) (100% - initial markup percentage)] Where: Reduction percentage = Amount of reductions/net sales LO 4