EVERYDAY LOW PRICING ( EDLP ) PRICING STRATEGIES EVERYDAY LOW PRICING ( EDLP ) This Strategy stresses continuity of retail prices at a level between the regular non sale price and the deep discount price of the retailer’s competitors. This is not the lowest price but is stable price. Some retailers adopt low price guarantee policy and make refunds for the extra amount collected. Advantages - Reduced price wars Increased and frequent buying Reduced advertising cost Improved and focussed customer service Stable demand resulting in reduced stock outs and improved inventory management Increased profit margins as no markdowns

PRICING STRATEGIES HIGH / LOW PRICING The retailers offer prices that are sometimes above their competition’s EDLP, but they use advertisement to promote frequent sales. They offer low prices during the sale. Advantages - Same merchandise to attract multiple markets. It creates excitement It moves merchandise. Emphasis is on quality or service It’s hard to maintain EDLP

GUIDELINES FOR PRICING STRATEGY EDLP may be used for Brands that enjoy high consumer loyalty and have a high market share in a category with relatively few players. For them it is difficult to increase their market share through promotions. (Huggies Diapers ) Shampoos on the other hand with lots of highly competitive products would have good response to advertisement. Some retailers reduce the number of items to make believe that items are becoming scarce inducing customers to buy more at full price instead of waiting for sale. The retailers adopt strategy of increasing the perception in the customer’s mind. The sales cannot be avoided altogether.

PRICING STRATEGIES Discount Coupons - Important sales promotional toll as they induce customers to try new products, convert first time users to regular users, encourage increased usage and large purchases and protect market share against competition. Rebate - Useful when sales value is high as compared to administration cost. For retailer this is more advantage as they don’t have to incur the cost as the manufacturer incurs the cost. This allows the manufacturer to control the inventories without actually cutting the prices. The benefit is passed directly to consumers. Customer data base can be build based on forms filled by them. Leader pricing - Certain items ( purchased frequently ) are priced lower than normal to increase customers’ traffic flow and increase sale of complementary products.

PRICING STRATEGIES Price Bundling - It is a practice of offering 2 or more different products or services for sale at one price. The strategy is used to move less desirable merchandise by including it in package with merchandise in high demand. Multiple-unit Pricing - The similar products are offered by bundling them together. Price Lining - Retailers offer a limited number of predetermined price points within a classification ( 49 & 99 ). Simplifies the merchandising. Customers can be induced to buy more expensive models. Odd Pricing - Price that is just under a round number or which ends in odd number. This was initially used to reduce thefts and also to track markdowns. Used for impulse purchases.

COST - ORIENTED PRICING Under the cost-oriented pricing, the retail price is determined by adding fixed percentage to the cost of merchandise. The retailer’s financial goals are governed by gross margin hence the retailer’s set the price under this method based on Gross margin goal. Maintained Markup Percentage - It is the amount of profit a retailer plans to maintain on a particular category of merchandise after providing for markdowns and alteration costs. Initial markup = Retail selling price initially placed - Cost of Goods Sold. Maintained Markup = Actual sales - Cost of Goods Sold Initial Markup = ( Maintained Markup + Reductions ) / ( Net sales + Reductions ) Retail = Cost + Markup

COST - ORIENTED PRICING Adjustments to the Initial Retail Price Markdowns - Can be done for clearance ( slow moving, end of season, obsolete, priced higher than competitors’ goods ) If markdown planned is too low, the retailer prices the merchandise too low or not taking enough risk. Markdown may increase customers’ traffic flow and also sale of complementary product. The optimal markdown can be ensured by proper budgeting. Timely deliveries should be ensured to reduce markdowns. ( Neither early nor too late ) Past data for sell through analysis helps reduce markdowns. With Early markdowns, price reductions need not be deep and traffic improvement and better cash flow can be seen with increase in space. With late markdown ( end of season ) the discounts are high but the merchandise can be sold at regular price for longer time. Highly perishable merchandise require more substantial markdowns than staple merchandise.

COST - ORIENTED PRICING Adjustments to the Initial Retail Price The items remaining unsold even after markdown can be liquidated in following ways : “job-out” the remaining merchandise to another retailer - this gives relatively smaller markdown period and eliminates the unappealing sale atmosphere but the effective markdown will be very low. Consolidate the marked-down merchandise into one or few of the retailer’s regular locations or into another retail chain or store under the same ownership or can be sent to a rented space or convention center. Internet auction site Give the merchandise to charity Carry the merchandise over to the next season.

COST - ORIENTED PRICING Profit Impact of adjustments to Retail Pricing Break-Even Point : Quantity where the Fixed cost is equal to the gross margin. BEQ = Fixed cost / ( Unit Price - Unit variable Cost ) Break- Even sales : Change in sale quantity if the price is reduced. % Break-Even sales change = % Price change / ( % CM + % Price change ) CM = Contribution Margin = Gross margin - Direct costs. Unit Break-Even Sales Change = % Break-even sales change X Sale Quantity

COMPETITION ORIENTED PRICING Prices are based on competitors prices. Retailers can price either above,below or at parity with competition based on their overall strategy and image of premium, low cost , reasonable price provider. They can distinguish themselves with their brand equity, , high quality, better service, elegant locations, unique merchandise etc. Bigger stores can afford to price higher than competition but for smaller stores it becomes essential to keep prices at par with larger stores or below them. This will hit their gross margin as bigger stores would be getting benefits of scale. The smaller retailers then would have to price the items which are price sensitive and more visible at prices on par with market leaders and keep more margins on items that cannot be easily compared.

DEMAND ORIENTED PRICING In this method, retailers not only consider their profit structure but also consider the impact of price change on sales. For price sensitive items , demand increases with price cut and decreases with price increase. If customers are insensitive to price then increase in price increases profit. Factors affecting the customers’ sensitivity to price : Substitute Awareness effect Total expenditure effect ( High value / low value products ) Difficult comparison effect Benefits/ Price effect Customer perception Situation effect For determining the effect of change in price, many retailers conduct experiments to measure the effect on sales volume.

ISSUES IN RETAIL PRICING Price discrimination - Vendor sells the same product to two or more retailers at different prices. This is done as a result of difference in the cost of manufacture, sale or delivery resulting from the differing methods or quantities in which the merchandise are sold or delivered. This could occur in terms of quantity discount , functional discount (wholesalers / retailers ) The price discrimination may also be done to meet competitor’s low price. The price discrimination can be done in response to changing market conditions. The level of negotiation also results in price discrimination. Vertical Price Fixing - This involves agreements to fix prices between parties at different levels of the same marketing channel.

ISSUES IN RETAIL PRICING Horizontal Price Fixing - This involves agreements between retailers that are in direct competition to have the same prices. This suppresses competition while often raising the cost to the consumer. Predatory Pricing - This is the price used to drive competition out from the market place. Comparative Price advertising - This method compares the offer price for sale with higher regular price or manufacturer’s list price. Bait-and-Switch tactics - This is a deceptive practice that lures customers into a store by advertising a product at a lower than usual price and then induces the customer to switch to a higher-priced model. This can happen in two ways - The retailer doesn’t stock sufficient and the merchandise is out of stock when customer wants to buy or the retailer starts to point out the disadvantages of the model.