1. Chapter 15
Pricing

2. Merchandise Management
Planning Merchandise Assortments
Retail Communication Mix
Pricing
Buying Merchandise
Buying Systems

3. Why is Pricing Important?
Pricing decisions 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.

4. Considerations in Setting Retail Prices
The four factors retailers consider in setting retail prices:
The price sensitivity of consumers
The cost of the merchandise and services
Competition
Legal restrictions

5. Considerations in Setting Retail Prices

6. Price Setting Approach Used by Retailers
Need to set price for 1000’s of products many times during year
Set prices based on pre-determined markup and merchandise cost
Make adjustments to markup price based on customer price sensitivity and competition

7. Price Sensitivity and Demand
When increases
can decrease
as fewer customers feel the product is a good value
price
sales

8. Types of Price Discrimination
First Degree – Set unique price for each customer equal to customer’s willingness to pay
Auctions, Personalized Internet Prices
Second Degree – Offer the same price schedule to all customers
Quantity discounts
Coupons
Markdowns Late in Season
Early Bird Special
Over Weekend Travel Discount
Third Degree – Charge different groups different prices
Kids Menu
Seniors Discounts

9. Results of Price Experiments

10. Quantity Sold at Different Prices

11. Profit at Different Prices

12. Price Elasticity Elasticity = percent change in quantity sold
percent change in price

13. Price Elasticity Elasticity = percent change in quantity sold
percent change in price
= (new quantity sold – old quantity sold)/old quantity sold
(new price – old price)/(old price)
= ( )/1100
(10-9)/9 =
.1111 =

14. Price Elasticity Profit maximizing price = price elasticity x cost
For products with price elasticities less than -1, the price that maximizes
profits can be determined by the following formula:
Profit maximizing price = price elasticity x cost
price elasticity +1

15. Competitive Price Data

16. How Can Retailers Reduce Price Competition?
Develop lines of private label merchandise
Negotiate with national brands manufacturers for exclusive distribution rights
Have vendors make unique products for the retailer
PhotoLink/Getty Images

17. Legal and Ethical Pricing Issues
Price Discrimination
Predatory Pricing
Resale Price Maintenance
Horizontal Price fixing
Bait and Switch tactics
Scanned vs. Posted Prices
PhotoDisc/Getty Images

18. Example of Markups Retail = Cost + Markup 100% = 70% + 30%
Retail = $10.00 and markup = 30%
$ = $ $ 3.00

19. Retail Price and Markup
Margin $50
Cost of Merchandise $75
Markup as a Percent of Retail Price % = $50/$125
Retail Price = cost + markup

20. Markup Percent Markup percent = retail price – cost of merchandise
Markup percent is a markup as a percentage of the retail price.
Markup percent = retail price – cost of merchandise
retail price
= 125 – 75
125
= 40%

21. 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
Rob Melnychuk/Getty Images

22. Initial and Maintained Markup
Initial Retail Price $1.00
Reductions $.10
Maintained Markup $.30
Cost of Merchandise $.60
Maintained Markup as a Percent of Retail Price % = $.30/$1.00

23. Example of Setting the Initial Retail Price
Cost = $ Planned Initial Markup = 56.85%
Retail Price = $ (56.85% x Retail Price)
Solve for Retail Price
.4315 x retail price = 100
Retail Price = $100/.4315 =
Initial Retail Price = Cost of Merchandise (1-markup percentage)

24. Reasons for Taking Markdowns
Get rid of slow-moving, obsolete, uncompetitive priced merchandise
Increase sales and promote merchandise
Generate cash to buy additional merchandise
Increase traffic flow and sale of complementary products generate excitement through a sale

25. Liquidating Markdown Merchandise
Place merchandise on Internet auction site
Sell the remaining merchandise to another retailer
Consolidate the unsold merchandise
Give merchandise to charity
Carry the merchandise over to the next season
PhotoLink/Getty Images

26. Breakeven Analysis
Understanding the Implication of Fixed and Variable Cost
Contribution/Unit
Breakeven point
Fixed Costs
Unit Sales
BEP quantity
Fixed cost =
Actual unit sales price - Unit variable cost

27. Illustration of Breakeven Analysis
American Eagle Outfitter is interested in developing private label cargo pants that will sell for $ The cost of developing the pants is $400,000. This includes the cost of salaries, benefits, space for the members of the design team. The variable cost of manufacturing the pants is $ How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment?

28. Cargo Pants Illustration of Breakeven Analysis
Breakeven Quantity = Fixed Cost
Unit Price – Variable Cost
40,040 units = $400,000
$ $15.00
RubberBall Productions/Getty Images

29. Making a Profit on Cargo Pants Illustration of Breakeven Analysis
What if American Eagle Outfitter does want to just break even. It wants to make a profit of $100,000 on the cargo pants. How many units does American Eagle Outfitter need to sell then?
PhotoLink/Getty Images

30. Making a Profit on Cargo Pants Illustration of Breakeven Analysis
Breakeven Quantity = Fixed Cost
Unit Price – Variable Cost
50,050 units = $500,000
$ $15.00

31. Percent Sales Increase Needed to Breakeven on a Price Decrease
The Gap has bought 60,000 women’s tee shirts at $5 a unit. It was originally going to price the tee shirts at $12.00, but is considering reducing the retail price to $10.00 – a 16.67% price reduction. How much does sales have to increase for The Gap to make the same profit at the lower price?
© Digital Vision

32. The Gap Considers a Price Cut of 16.67%
Breakeven % = x (-%price change) Sales Change % initial margin -% price change
39.78% = x – (-16.67) (7/12) + (-16.6)
The McGraw-Hill Companies, Inc/Ken Karp photographer

33. Using Breakeven Analysis for Other Retail Investment Decisions
An independent retailers with one store is using breakeven analysis to consider several options. The retailer wants to know what the breakeven sales she will needs if she:
Move to a new location with higher rent
Reduces prices by 5%
Wants to make a $50,000 profit

34. Retailer’s Income Statement
Net Sales $1,000,000
COGS , %
Gross Margin , %
Operating Expenses
Variable , %
Fixed , %
Profit , %

35. Retailer’s Variable and Fixed Operating Expenses
Variable Fixed
Wages & Salaries
Manager 20,000 20,000
Sales 60,000
Clerical 20,000 10,000
Rent ,000
Maintenance 10,000
Total 100,000 60,000

36. Retailer’s Assets Current Assets Inventory $300,000
Accounts Receivable ,000
Cash ,000
Fixed Assets ,000
Total $500,000

37. Sales $ Retailer Needs to Break Even
Profit = Sales - COGS-Var Cost - Fixed Cost
0 = Sales - COGs% * Sales - VC%*Sales - FC
Break-even Sales * (1-COGS% -VC%) = FC
Break-even Sales = FC/(1-COGS% -VC%)
Break-even Sales = FC/(GM%-VC%)
= $80,000/(.2-.1)
= $888,888

38. What Is the Breakeven Sales To Move To New Location?
Rent Increases to $50,000
Break-even Sales = FC/(GM%-VC%)
Digital Vision / Getty Images

39. What Is the Breakeven Sales To If the Retailer Wants to Reduce Prices?
Reduce Prices By 5%
Break-even Sales = FC/(GM%-VC%)

40. What Is the Breakeven Sales If the Retailer Wants to Make a Specific Income?
Make $50,000/Year
Break-even Sales = FC/(GM%-VC%)

41. Maximize Profits through Price Discrimination
Want Charge Every Customer the Maximum They Are Willing to Pay
Problem
Don’t know willingness to pay
With list prices, can’t prevent high willingness to pay customers from buying at low price

42. Solution to Problems in Implementing Price Discrimination
Set prices based on customer characteristics related to willingness to pay
Fashion sensitive customers will pay more so charge higher prices when fashion first introduced – reduce price later in season
Price sensitive customers will expend effort to get lower prices – coupons
Elderly customers eat earlier and are more price sensitive so offer early bird specials

43. Types of Price Discrimination
First Degree – Set unique price for each customer equal to customer’s willingness to pay
Auctions
Second Degree – Offer the same price schedule to all customers, but customers have to do something to get lower price
Third Degree – Charge different groups different prices
Markdowns Late in Season
Seniors Discounts

44. Price Discrimination through Coupons
Documents that entitle the holder to a reduced price or X cents off a product or service.
Purpose
Reduce price to price sensitive customers who will spend the effort to clip coupons
Induce customer to try products for first time
Convert first time users to regulars
Encourage large purchases
Increase usage
Protect market share
C. Borland/PhotoLink/Getty Images

45. Markdowns Are a Form of Price Discrimination
Occurs when a firm sells the same product to two or more customers at different prices.
Generally illegal with a vendors sells to retailers except:
costs are different
quantity and functional discounts
changing market conditions
Generally legal when retailer sells to consumers.

46. Advantages of the Hi/low Pricing Strategy
Increases profits through price discrimination
Sales create excitement
Sells merchandise
PhotoLink/Getty Images

47. Hi-Lo Pricing Most Department Stores, Publix, Kmart
Benefits to Consumer
Spend Time to Find Lowest Price
Benefits to Retailer
Maximize Profits -- Price Discrimination
Problem: Trains People to Buy on Deal

48. Advantages of EDLP Pricing Strategy
Assures customers of low prices
Reduces advertising and operating expenses
Reduced stockouts and improved inventory management
The McGraw-Hill Companies, Inc./Luke David, photographer

49. Everyday Low Pricing
Wal-Mart, Category Specialists, Dillards, Food Lion
Benefits to Consumers
Assured of Low Price on Every Visit
Less Stockouts
Benefits to Retailer
Lower Advertising Expense
Lower Labor Costs

50. Pricing Strategies EDLP
Builds loyalty – guarentees low prices to customers
Lower advertising costs
Better supply chain management
Fewer stockouts
Higher inventory turns
Hi-Lo
Higher profits – price discrimination
More excitement
Build short-term sales and generates traffic

51. Determining Service Quality
Customers are likely to use price as an indicator of both service costs and service quality. This can depend on several factors:
Other information available to the customer
When service cues to quality are readily accessible
When brand names provide evidence of a company’s reputation
When the level of advertising communicates the company’s belief in the brand
The risk associated with the service purchase
Royalty-Free/CORBIS

52. Variable Pricing Application of price discrimination
By location – zone pricing
Early Bird Special
Seniors Discounts
Over Weekend Travel Discount
Quantity Discount
Electronic channel has potential for charging a different price to each customer

53. Using Price to Stimulate Sales
Leader Pricing
might attract cherry pickers
Price Lining
Odd Pricing

54. Leader Pricing
Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products.
Best items: purchased frequently, primarily by price-sensitive shoppers.
Examples: bread, eggs, milk, disposable diapers.
Dennis Gray/Cole Group/Getty Images
Allan Rosenberg/Cole Group/Getty Images
Ryan McVay/Getty Images

55. Price Lining A limited number of predetermined price points.
Ex: $59.99 (good), $89.99 (better), and (best)
Benefits:
Eliminates confusion of many prices.
Merchandising task is simplified.
Gives buyers flexibility.
Can get customers to “trade up.”

56. Benefits of Price Lining
Confusion that arises from multiple price choices is eliminated
The merchandising talk is simplified
It gives buyers greater flexibility
It gives can be used to get customers to “trade up” to a more expensive model

57. Guidelines for Price-ending Decisions
When the price sensitivity of the market is high, it is advantageous to raise or lower prices so they end in high numbers like 9.
When the price sensitivity of the market is NOT high, the risk to one’s image of using 9 is likely to outweigh the benefits. Even dollar prices and round numbers are appropriate.
Upscale retailers appeal to price-sensitive segments of the market through periodic discounting. Combination strategy works best: break from standard of using round number endings to use 9 endings when communicating discounts and special offers.

58. Odd Pricing
A price that ends in an odd number ($.57)or just under a round number ($98).
Retailers believe practices increases sales, but probably doesn’t.
Does delineate:
Type of store (downscale store might use it.)
Sale

59. 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.
Retailers using the electronic channel can reduce customer emphasis on price by providing services and better information.
(c) image100/PunchStock

60. The Three Most Important Things in Retailing
Location, location, location
Now, it is more :
Information, information, information!!