1. Merchandising Theory
Grace Kunz

2. Copyright ©2010 Fairchild Books
All rights reserved. No part of this presentation covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems–without written permission of the publisher.
ISBN:
GST R

3. Merchandising Perspectives on Pricing
Chapter Six
Merchandising Perspectives on Pricing

4. ©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.

5. 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.

6. ©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.

7. ©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.

8. ©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.

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Perceptions of Price
Retailers 50% or keystone markup represents a retail price that is based on retail, e.g.;
retail price = cost / % cost
$ = $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.

10. ©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.

11. ©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.

12. 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.

13. ©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
$ = $ $42
Kunz
Chapter 6
©2010 Fairchild Books, A Division of Condé Nast Publications.

14. ©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.

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First Price
First price is the original retail price and/or the base price for retail price planning
Kunz
Chapter 6
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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.

17. ©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
$ = $ %20
Kunz
Chapter 6
©2010 Fairchild Books, A Division of Condé Nast Publications.

18. ©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.

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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.

20. ©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.

21. 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.

22. ©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.

23. ©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.

24. ©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.

25. ©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.

26. 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.

27. 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.

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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.

29. 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.

30. 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.

31. 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.

32. ©2010 Fairchild Books, A Division of Condé Nast Publications.
Table 6.10
Kunz
Chapter 6
©2010 Fairchild Books, A Division of Condé Nast Publications.