1. Chapter 10 Merchandise Pricing

2. Controllable Factors in Pricing
Many retailers focus too much on price.
This conditions their customers to only purchase on sale.
Overlooks the relationship price has with the other variables of the retailing mix.
Two controllable factors in pricing are:
Cost paid for the goods
Desired gross margin

3. Pricing Objectives and Policies
Should be made after careful consideration of the retailer’s…
Mission statement,
Goals/objectives,
Strategy, and
Operational mix
Merchandise planning
Promotional mix
Building and fixtures
Service levels

4. Interactive Pricing Decisions

5. Pricing Objectives
Pricing objectives can fall into one of three general categories.
Profit Oriented objectives
Sales Oriented objectives
Status Quo objectives

6. Profit Oriented Objectives
Two types:
Target Return
Sets a specific level of profit or GM as an objective
Note: This is the reason we calculate MU as a percentage of sales, rather than costs, a topic to be elaborated upon shortly
Profit Maximization
Seeks to obtain as much profit as possible
Not simply where MC = MR
Skimming
Penetration Pricing

7. Sales Oriented Objectives
Seek some specified level of unit sales, dollar sales, or market share, but does not mention profit.
Important to remember though that market share is not always positively tied to profit.
One can focus too much on merely pushing product and sacrifice GM to gain additional market share.

8. Status Quo Objectives Occur because the retailer is:
Happy with the current trends
(e.g., market share or profit levels)
Too afraid of competitor retaliation
Competing on something other than price

9. Pricing Policies
Rules of action, or guidelines, that ensure uniformity of pricing decisions within a retail operation.
Three general classes of pricing policies:
Pricing “Below the Market”
Pricing “At the Market”
Pricing “Above the Market”

10. Pricing “Below the Market”
Policies designed to regularly discount merchandise from the established market price.
Leverage consumers’ price recall capabilities
Studies have shown that roughly 50 – 60% of customers can recall prices within 5% of the actual price paid* (e.g., Dickson and Sawyer 1990)
Goals:
Build store traffic
Generate higher levels of Gross Margin per Sq. Foot

11. Pricing “At the Market”
A policy where retailer establish prices so as to remain competitive with one another on the pricing variable.
Comparison shoppers
Often requires having employees visit & shop competitors’ stores
Comparison shopping enables the retailer to better understand consumers’ ranges of price acceptability.
Price Zone
A range of prices for a particular merchandise line that appeals to customers in a certain market segment.

12. Price Zones Reference Prices and Ranges*
Can be affected by internal (memory) or external (POP signage highlighting “Distinctiveness” or “Consistency”) stimuli (e.g., Bolton et al. 2003; Pechmann 1996)
Prospect Theory* (Kahneman and Tversky 1979)
States that people are dramatically more effected by losses than by gains and become more risk adverse to perceived losses
Prices perceived as higher than one’s “zone” are likely to be viewed as dramatically worse than the “gain” one would receive if they had fallen just within one’s acceptable zone.

13. Graphical Depiction of Prospect Theory
Positive Affect Y
“Loss”
Expected or Perceived
“Gain”
Expected or Perceived X
Given X is greater than Y for the same amount of gain or loss…
Losses loom larger than gains…
Negative Affect

14. Pricing “Above the Market”
A policy where retailers establish high prices because non-price factors are perceived as more important by the target market.
Cost structure
High costs can force this
Sales Volume
Low volume coupled with high costs force this, and one should then focus on services offered or convenience
Merchandise Offerings
Services Offered
Convenience & Hours of Operation

15. Specific Pricing Strategies
Although not exhaustive, some of the more common pricing strategies used by retailers include:
Customary pricing Multiple-unit pricing
Variable pricing Bundle pricing
Flexible pricing Bait-and-switch pricing
One-price policies Private label pricing
Odd pricing High-low pricing
Price lining Leader pricing

16. Specific Pricing Strategies
Customary pricing
The retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
Variable pricing
Recognizes that differences in demand and cost necessitate
that the retailer change prices in a fairly predictable
manner.
Flexible pricing
Encourages offering the same products and quantities to
different customers at different prices (common for products sold using personal selling).
One-price policy
Establishes that the retailer will charge all customers the
same price for an item. Not only does it speed up transactions, but also it reduces the need for highly skilled salespeople.
Odd pricing
Practice of setting retail prices that end in the digits 5, 8, 9—such as $29.95, $49.98, or $9.99.

17. Specific Pricing Strategies
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.

18. Specific Pricing Strategies
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 Pricing
Selling 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.
High-low pricing
Use of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads.

19. Specific Pricing Strategies
Leader pricing
Used when a high-demand item is priced low and 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.

20. Using Markups Markup Selling price of the merchandise less its cost
Equivalent to the good’s gross margin.
The basic markup equation: SP = C + MU
Where:
C = Dollar cost of merchandise (per unit)
MU = Dollar markup (per unit)
SP = Selling price (per unit)

21. Basic Markup Formulas

22. Initial Versus Maintained Markup
Initial markup
The original markup of the good
IM = (Original SP - C)/OSP
Maintained markup
The actual markup received upon the sale of the good
MM = (Actual SP – C)/ASP

23. Initial Versus Maintained Markup
Differences will often exist because:
The need to balance demand with supply (e.g., taking a markdown to make the merchandise attractive).
Stock shortages from theft by employees or customers, or by mis-marking the price when the goods were received.
Employee or customer discounts.
Cost of alterations not fully covered by fee charged to the customer.
Cash discounts offered by suppliers to retailers to encourage prompt payment of bills decreases the cost of merchandise and cause the maintained markup to be higher than the initial markup.

24. Planning Initial Markup
IM percentage
(gross margin + alterations costs + reductions)
(net sales + reductions)
Markup determinants:
As goods are sold through more retail outlets, the markup percentage decreases.
The higher the handling, alteration/customization, and storage costs of the goods, the higher the markup should be.
The greater the risk of a price reduction due to the seasonality of the good, the greater the magnitude of the markup percentage early in the season.
The higher the demand inelasticity of price for the good, the greater the markup percentage.

25. Markdown Management Markdown
Any reduction in the price of an item from its initially established price.
Markdown percentage = Amount of reduction / original selling price

26. 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.
Enables customers to still think of the good 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.

27. Markdown Policy Late-markdown policy Advantages:
Allows 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.
Curtails the frequency of the pure “bargain shopper” who is not the ideal customer.

28. Maintained Markup
After planning, managing, & implementing markdowns, this is the “experienced” or “realized” markup.
It is calculated as follows:
MM = IM% – [(Red %) x (100% - IM%)]
Red % = reduction percentage, or the amount of reductions taken divided by net sales

29. What You Should Have Learned… Chapter’s Learning Objectives
The factors a retailer should consider when establishing pricing objectives and policies.
The differences between the various pricing strategies available to the retailer.
How retailers calculate the various markups.
Why markdown management is so important in retailing and describe some of the errors that cause markdowns.