1. Retail Travel Services (TM 334) Lecture 3 OPERATIONS

2. 1- Retail Pricing

3. Retail pricing:
The pricing technique used by most retailers is cost-plus pricing. This involves adding a mark-up amount (or percentage) to the retailer's cost.
Another common technique is suggested retail pricing
This simply involves charging the amount suggested by the manufacturer and usually printed on the product by the manufacturer.

4. Pricing Strategies EDLP vs HIGH/LOW
Everyday Low Pricing (EDLP)
Prices are set between regular non-sale price and deep discount sale prices
May consider it as “Everyday Stable Prices”
High/Low Pricing
Prices are higher than EDLP competitors, but promote frequent sales featuring lower prices
Makes the consumer’s purchase decision time-dependent
Adapted from Levy/Weitz

5. Pricing Strategies EDLP vs HIGH/LOW
EDLP Strategy
4 Advantages
Reduced Price Wars
Reduced Advertising
Improved In-Stock Levels
Reduced Stockouts & Improved Inventory Management
High/Low Strategy
4 Advantages
Same Merchandise Appeals to Multiple Markets
Creates Excitement
Moves Merchandise
Emphasis on Quality or Service OR
Source: Adapted from Levy and Weitz

6. Pricing INTERNAL FACTORS
Category/Item Role/Strategy
Does the item draw shoppers to the store?
Does the item offer one-stop-shopping convenience?
Product Characteristics
Demand Patterns
Perishable
Seasonal?
Easily obsolete?
Product Line
Variable Cost
Per Unit
Manufacturer’s price per unit
Allocated:
Transportation
Labor
“Shrinkage”
Item Price

7. How Does Item Pricing Affect Sales of a Brand or Product Line?
The relative price of each item within a brand affects total brand sales
Price per unit varies based on:
Different sizes
Different quality levels or features
Consumers are pretty effective at identifying and selecting the “best buys”

8. Pricing PRODUCT
Product Line Pricing refers to pricing items within the product line, or brand, so that as the price per unit decreases as quantity increases
Is important because the consumer is confused if the price per unit does not decline as the quantity increases – “irrational” pricing
Failure to price rationally is likely to result in low sales volumes for larger sizes, making them less profitable based on ABC

9. Items with more (features) are priced too high
Pricing PRODUCT
There are two major causes of product line pricing problems:
The manufacturer does not price so that cost per unit drops with increased features or quantity
Pricing base models, or popular sizes, aggressively (at low margins) requires other items within the brand to be priced at higher margin
Items with more (features) are priced too high

10. Pricing PRODUCT To avoid product line pricing problems:
Buyers/category managers (or pricing specialists) should be careful when making price changes
A “price simulator,” or some other tool, can be developed by which relative prices for items within a brand are determined automatically
Items that are not properly priced by vendors, i.e., items that have higher unit costs as quality/quantity increases, should be dropped from the product line
It can irritate and upset customers, reducing satisfaction and loyalty

11. Pricing COMPETITION
The most common form of competitive pricing is price matching
Must be able to monitor competitors’ prices
Easy to implement
Applied more often to frequently purchased items
In packaged goods, may also maintain a percentage spread relative to other formats on key SKUs
e.g., spread between national brands and private labels
Price matching guarantee
The effect of competition is muted by exclusive products or when comparison is difficult

12. Pricing COMPETITION
However, if competitors price a category at too low a gross margin, it does not mean that their prices should be matched
Category pricing should take into account the following, along with competitor prices:
Consumer price sensitivity
Importance of the category to the chain’s price image
Strategic importance of the category (i.e., is it a “Destination” category?)

13. Pricing CONSUMER PRICE SENSITIVITY
Product categories are not uniformly responsive to prices – some are more sensitive to price levels than others
Consumers also may respond differently than one another to price levels
Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

14. Consumer Price Sensitivity RETAILER CONSEQUENCES
Price sensitivity can have different consequences for the retailer:
Price image - How do item prices and category price levels affect how consumers feel about the prices in the store
Product substitutability - How willing are consumers to substitute one product for another in the category

15. Consumer Price Sensitivity PRICE IMAGE
Specific types of categories have a greater impact on price image than others:
Frequently purchased categories
Categories in which consumers spend a lot of money
Categories which are important to price image can be identified by analyzing categories’ frequency of purchase and actual expenditure
Products within a category also have different effects on price image:
Leading, high-share brands have a major impact on price image
Aggressive pricing of private label does not as pronounced an impact on price image

16. Consumer Price Sensitivity PRICE IMAGE
The best evidence available indicates that consumers use different mechanisms to determine the price image of a retailer
Source: Center for Retail Management, Northwestern University

17. Consumer Price Sensitivity PRODUCT SUBSTITUTABILITY
Product substitutability can be measured by:
Price elasticities - the effect of price changes of an item on sales of that particular item.
Cross-price elasticities - the effect of price changes of one item on other items in the category.
If a brand has high brand equity, it has low cross-price elasticities
If a brand has little brand equity, it has high cross-price elasticities
Suppliers may be able to measure price elasticities, but can seldom produce cross-price elasticities

18. Consumer Price Sensitivity FACTORS AFFECTING PRICE SENSITIVITY
Size of household expenditure per year
Size of item expenditure per trip
Perceived substitutability of products within category
Degree of competition in category between retail
Use of category by competitors to generate traffic

19. Consumer Price Sensitivity MEASUREMENT TOOL
This measurement tool is may be augmented with price elasticity information

20. Pricing CONSUMER PRICE AWARENESS
Mindless Shopping for Packaged Goods:
Average time between arriving and departing from product category is 12 seconds
In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size
21% could not offer a price estimate when asked
Only 50% were able to state correct price
93% did know relative price (i.e., higher, lower or the same as other brands in category)
Source: Dickson and Sawyer (1990)

21. Pricing CONSUMER REFERENCE PRICES
Consumers Evaluate the Prices They See Compared to…
External
List prices / sale prices
Other products on the shelf
Retailers use shelf tags to “help” consumers make comparisons
Internal
Prices during recent visits to this and other retailers
Memory of price may not be accurate
If brand is frequently discounted, consumers tend to lower their internal reference
Consumers use external and internal information to determine whether they are getting a good deal

22. Pricing PRICE AS A SIGNAL
Price not only exercises its traditional economic role of reducing demand, but also offers the customer information about product quality
When is price used to signal quality?
When there is little information about product quality available
Examples
“Credence” goods
Fashion items

23. Pricing LAWS - PRICE DISCRIMINATION
Occurs when vendor sells same product to two or more customers at different prices.
Generally illegal from vendor to retailer except when:
costs are different
quantity and functional discounts are offered
changing market conditions
Generally legal from retailer to consumer

24. Pricing LAWS – PREDATORY PRICING
Pricing under cost so as to drive competition from the marketplace
Illegal!
Retailers can charge different prices at different locations if costs are different

25. Pricing LAWS – BAIT-AND-SWITCH
Lure customers into store by advertising a product at a lower than usual price (the bait) and then induces customer to switch to higher-priced model (the switch).
Can occur if
Retailer out of advertised model
Retailer has advertised model, but disparages it
Retailers should:
Have sufficient quantities on hand
Give a “rain check”
Don’t disparage merchandise

26. OPERATIONS (Cont.) Staffing :
Because patronage at a retail outlet varies flexibility in scheduling is desirable. Employee scheduling software is sold which, using known patterns of customer patronage, more or less reliably predicts the need for staffing for various functions at times of the year, day of the month or week, and time of day

27. OPERATIONS (Cont.) Transfer mechanisms :
There are several ways in which consumers can receive goods from a retailer:
Counter service
Delivery
Door-to-door
Self-service
Digital delivery