1. Chapter 14 Retail Pricing McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Questions What factors do retailers consider when pricing merchandise?
What are the legal restrictions on retail pricing?
How do retailers set retail prices?
How do retailers make adjustments to prices over time and for different market segments?
Why do some retailers have frequent sales while others attempt to maintain an everyday-low-price strategy?
What pricing tactics do retailers use to influence consumer purchases?
I did not assign all of ch. 15

3. Why is Pricing Important?
Pricing decision is important because customers have alternatives to choose from and are better informed
Customers are in a position to seek good value
Value = perceived benefits
price
So, retailers can increase value and stimulate sales by increasing benefits or reducing price.
Pricing important not just in terms of reg. prices but also in terms of your promo strategy – search for value more important than ever

4. Considerations in Setting Retail Prices
5th consideration: Your own margin and “profit path” requirements (GROUPON)

5. Two Major Pricing Strategies
EDLP (Everyday Low)
Assures customers low prices
Reduces advertising and operating expenses
Better supply chain management
Fewer stockouts
Higher inventory turns
High-Low
Higher profits through price discrimination
More excitement
Build short-term sales and generates traffic
Credibility of this strategy sometimes in question…are regular prices “real”?
EDLP (WMT) vs. High-Low (KSS)

6. Pricing Strategies: High/Low Pricing
Discount the initial prices through frequent sales promotions
Advantages
Increases profits through price discrimination
Sales create excitement
Sells merchandise
Disadvantages
Train people to buy on deal and wait
Have an adverse effect on profits
Why do stores like dept. stores, JCP etc. follow this kind of strategy? Do you feel their sale prices are credible?

7. Pricing Strategies: Everyday Low Pricing
Emphasizes the continuity of retail prices at a level somewhere between the regular non-sale price and the deep-discount sale price of high/low retailers
Doesn’t necessarily mean lowest price
Retailers have adopted a low price guarantee policy to reinforce their EDLP strategy (Walmart guarantee)
Advantages:
Assures customers of low prices
Reduces advertising and operating expenses
Reduces stockouts and improves inventory management
JCP SWITCHED FROM HIGH/LO TO EDLP: WHAT HAPPENED?
Why do stores like Walmart mostly pursue EDLP strategy? What are the benefits to them? (e.g. credibility of “low price leader” image, predictability of demand…what else?)

8. How Can Retailers Reduce Price Competition?
Develop lines of private label and exclusive merchandise
Negotiate with national brands manufacturers for exclusive distribution rights
Have vendors make unique products for the retailer
Example: Exclusive “models” at Best Buy
WHAT IS “SHOWROOMING” AND HOW
CAN RETAILERS REACT TO IT?
This gets back to the issue we discussed…the margin benefits of exclusive brands and/or exclusive products help you avoid direct price competition. But you still have to have “the right price” on key items at the right time (see polo Father’s Day)
PhotoLink/Getty Images

9. Legal and Ethical Pricing Issues
Price Discrimination
Predatory Pricing
Resale Price Maintenance
Horizontal Price fixing
Bait and Switch tactics
Scanned vs. Posted Prices
A particular issue for stores doing “high-low” pricing, to be compliant with legal requirements as well as being credible
PhotoDisc/Getty Images

10. Setting Retail Prices How Do Retailers Set Retail Prices?
Theoretically, retailers maximize their profits by setting prices based on the price sensitivity of customers and the cost of merchandise and considering the prices being charged by competitors.
In reality, Retailers need to set price for over 50,000 SKUs many times during year
Often set prices based on pre-determined markup and merchandise cost
Make adjustments to markup price based on customer price sensitivity and competition
Often driven by mfr’s suggested retail but also driven by decisions about “what is the appropriate everyday and/or promotional price”

11. Customer Price Sensitivity and Cost
Relationship between Price Sensitivity and Demand
When increases
can decrease
as fewer customers feel the product is a good value
price
sales
This is an issue (ELASTICITY OF DEMAND) that a lot of apparel retailers struggled with during 2011 as they faced higher costs of cotton and other raw materials. How much of a price increase is the consumer willing to pay after many years of flat or falling prices?

12. Retail Price and Initial Markup (IMU)
Margin $50
Cost of Merchandise $75
Markup as a Percent of Retail Price % = $50/$125
Review this concept, already covered week 5 – here through slide 15 also covered on page
Retail Price = cost + markup
IMU% = retail price – cost
retail price

13. Markups
Initial markup – retail selling price initially set for the merchandise minus the cost of the merchandise.
Maintained markup – the actual sales realized for the
merchandise minus its costs
(like gross margin per item)
EXPLAIN ON WHITEBOARD – important to differentiate between these two ideas
Rob Melnychuk/Getty Images

14. Reductions all affect gross margin
Markdowns (Sales)
Discounts to employees
Inventory shrinkage due to shoplifting and employee theft
All of these reductions have an impact on the maintained (gross) margin that an item actually produces regardless of its IMU

15. Initial Markup and Initial Retail Price
Merchandise costs $.60. If the buyer planned on reductions of 10% of sales and wanted a maintained markup of 33% for the merchandise ,
33% + ($0.10/$0.90 = 11.11%)
100% %
Initial markup %
40% = =
Initial retail price =
Cost
1 – Initial markup %
$ – 0.40
$1.00 = =
This is an illustration

16. Markdown Optimization Software
Setting prices by simply marking up merchandise cost neglect other factors (e.g., price sensitivity, competition, the sales of complementary products)
Merchandising Optimization Software
Utilize a set of algorithms that analyzes past and current merchandise sales prices
Estimates the relationship between prices and sales generated
Determines the optimal (most profitable) price for the merchandise and size and timing for markdowns
(THIS MAY VARY BY REGION)
This is a new development among big stores like Kohl’s .Ties back to the importance of IS (Chapter 10) in running the business.
--Concept helps determine the “right” sale price as well as the “right” clearance price to make old goods disappear more profitably.

17. Profit Impact of Setting a Retail Price: The Use of Break-Even Analysis
A retailer might want to know
Break-even sales to generate a target profit
Break-even volume and dollars to justify introducing a new product, product line, or department
Break-even sales change needed to cover a price change
Break-even analysis
Determines, on the basis of fixed and variable costs, how much merchandise needs to be sold to achieve a break-even profit
Fixed costs: don’t change with the quantity of product produced and sold
Variable costs: vary directly with the quantity of product produced and sold (e.g., direct labor and materials used in producing a product)
BOTTOM LINE: HOW MUCH (AND AT WHAT PRICE) DO YOU NEED TO SELL IN ORDER TO BREAK EVEN OR MAKE MONEY
To simplify, breakeven analysis helps determine at what price you need to sell what kind of qty. to break even and make money (covering fixed costs)

18. Breakeven Analysis Contribution/Unit Breakeven point Fixed Costs
Understanding the Implication of Fixed and Variable Cost
Contribution/Unit
Breakeven point
Fixed Costs
Unit Sales
Don’t get bogged down
Break-even quantity
Fixed cost =
Actual unit sales price - Unit variable cost
The quantity at which total revenue equals total cost, and then profit
occurs for additional sales

19. Price Adjustments
Retailers adjust prices over time (markdowns) and for different customer segments (variable pricing)
Why do retailers take markdowns?
How do they optimize markdown decisions?
How do they reduce the amount of markdowns by working with vendors? (“Markdown money”)
How do they liquidate markdown merchandise?
Do EDLP stores take markdowns? Why?
DISCUSS these questions

20. Reasons for Taking Markdowns
Clearance Markdowns to get rid of slow-moving, obsolete merchandise
Promotional Markdowns
To increase sales and promote merchandise
To Increase traffic flow and sale of complementary products through a sale
(“CALL TO ACTION”)
To generate OTB to buy additional merchandise
DISCUSS: What other reasons? (be specific to your type of store) – reduces inventory levels, increases your OTB as it also drives sales

21. Optimizing Markdown Decisions
Traditional Approach- Use a set of arbitrary rules
Sell-Through: Identifies markdown items when its weekly sell-through percentages fall below a certain level
Rule-based: Cuts prices on the basis of how long the merchandise has been in the store
Markdown Optimization
Software is used to determine when and how much markdowns should be taken to produce the best results by continually updating pricing forecasts on the basis of actual sales and factoring in differences in price sensitivities
MD optimization helps provide a more rigorous, objective way to decide when to MD goods and to what price instead of “one size fits all”

22. Liquidating Markdown Merchandise
Sell the merchandise to another retailer
Consolidate the unsold merchandise
Place merchandise on Internet auction site
Donate merchandise to charity
Carry the merchandise over to the next season
Options for dealing with “end of the road” clearance
PhotoLink/Getty Images

23. Internet and Price Competition
The Internet offers unlimited shopping experience
Seeking lowest price? Use shopping bots or search engines
These programs search for and provide lists of sites selling what interests the consumer
Multichannel retailers can reduce customer emphasis on price by providing services and better information.
HOW DO RETAILERS DEAL WITH
THE EMPOWERED CONSUMER
AND PRICING TRANSPARENCY?
23. Close with DISCUSSION about the impact of the internet on stores’ pricing strategies and (esp.) consumer behavior
(c) image100/PunchStock