1. RETAIL PRICING

2. Concept of Retail Pricing Price is an integral part of the retail marketing mix – source of revenue Importance of Pricing due to many alternatives available for today’s customers – therefore important for retailers to increase value and stimulate sales

3. What is Value here ? Value is the ration of what customers receive (the perceived benefit of the product and services offered by the retailer) to what they have to pay for it. Value = Perceived Benefits Value = Perceived Benefits Price Price

4. Factors to be considered before arriving at the price of a product – ex:- electronics – price related to quality, designer clothes etc Demand for the product and the target market – ex:- electronics – price related to quality, designer clothes etc Store Policies – image to be created ex:- prestige image, penetrate the market policy Store Policies – image to be created ex:- prestige image, penetrate the market policy Competition for the product Competition for the product Economic condition Economic condition Cost Cost Legal Constraint Legal Constraint Customer Price sensitivity Customer Price sensitivity

5. Types of Price Discrimination First Degree – Set unique price for each customer equal to customer’s willingness to pay 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 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 Third Degree – Charge different groups different prices –Kids Menu –Seniors Discounts

6. Price Sensitivity and Demand When increases can decrease as fewer customers feel the product is a good value price sales Price Sensitivity of customers determines how many units will be sold at different Price levels. One approach that can be used to measure the price sensitivity of customers is a Price experiment.

7. Situation :- A movie theater chain wants to determine how many movie tickets Will be sold at different price levels. 6 theaters – with similar trading areas -Prices at different levels in each of the theaters for a week -Assume variable cost per ticket - $5 -Fixed cost of operating the theater (rent,labor etc) $8,000 (1) (2) (3) (4) (5) (6) As prices increase, the fixed cost remain same, sales and VC both decrease

8. Quantity Sold at Different Prices Profit at Different Prices So the highest profit level occurs at a $ 7.00 price

9. Price Elasticity Elasticity = percent change in quantity sold percent change in price 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) = (1100-1500)/1100 (10-9)/9 = -0.2667.1111 = -2.4005 A commonly used measure of price sensitivity is price elasticity. Illust :- A retailer originally priced a private-label DVD player at $9 and raised the price To $10. Prior to raising the price, the retailer was selling 1500 units a week. When the priced was increased, sales dropped to 1,100 units per week. The calculation of the price Elasticity is as follows :-

10. Because the quantity sold usually decreases when prices increase, price elasticity is a negative number. PE > -1 (Price insensitive = Price inelastic) PE < -1 (Price Sensitive = Price elastic ) Other factors affect price sensitivity : 1.Substitutes of product 2.Products and services that are necessary, ex:- petrol, medical services 3.Products expensive relative to consumers income – cars – price elaastic movie tickets – price inelastic

11. 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

12. COMPETITION Retailers can price above, below, or at parity with the competition. The chosen pricing policy must be consistent with the retailer’s overall strategy and its relative market position.

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

14. Legal and Ethical Pricing Issues Price Discrimination- hair salon price differently for women as compared to men Predatory Pricing- when a dominant retailer sets prices below its costs to drive competitive retailers out of business ex:- Wal-mart. Resale Price Maintenance- Vendors often encourage retailers to sell their merchandise at a specific price, known as the manufacturer’s suggested retail price (MSRP). Although this is not legal now. Horizontal Price fixing- agreement between retailers that are in direct competition with each other to set the same prices. Bait and Switch tactics- unlawful deceptive practice that lures customers into a store by advertising a product at a lower –than- normal price (bait) and then, once customers are in the store, induces them to purchase a higher –priced model (the switch) Scanned vs. Posted Prices- scanned price is below the posted price

15. Retail Price and Markup The markup is the difference between the retail price and the cost of an item. Markup = Retail price – Cost of an item Markup is determined to cover all of the retailers operating expenses (labor costs, rent, utilities, advertising etc)

16. Retail Price and Markup Retail Price $125 Cost of Merchandise $75 Margin $50 Markup as a Percent of Retail Price 40% = $50/$125 Retail Price = cost + markup Example :- Sporting goods retailer buys a tennis racket for $75 and sets the retail price at $ 125, the markup is $50. the retail price at $ 125, the markup is $50.

17. Markup Percent 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%

18. 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 Retailers rarely sell all items at the initial price. They frequently reduce the Price of items for special promotions or to get rid of excess inventory at The end of a season. Factors that reduce the actual selling price from the Initial sales price are called REDUCTIONS

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

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

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

22. Use of Break-Even Analysis Retailers want to know the number of units they need to sell to begin making a profit. - The formula for calculating the sales quantity needed to break even is :- Break-even quantity = Total fixed costs Actual unit sales price - Unit variable cost Actual unit sales price - Unit variable cost

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

24. Illustration of Breakeven Analysis American Eagle Outfitter is interested in developing private label cargo pants that will sell for $24.99. 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 $15.00. How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment? American Eagle Outfitter is interested in developing private label cargo pants that will sell for $24.99. 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 $15.00. How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment?

25. Cargo Pants Illustration of Breakeven Analysis Breakeven Quantity = Fixed Cost Unit Price – Variable Cost Unit Price – Variable Cost 50,040 units = $400,000 50,040 units = $400,000 $24.99 - $15.00 $24.99 - $15.00

26. 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? 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

27. The Gap Considers a Price Cut of 16.67% Breakeven % = 100 x (-%price change) Sales Change % initial margin -% price change Breakeven % = 100 x (-%price change) Sales Change % initial margin -% price change 39.78% = 100 x – (-16.67) (7/12) + (-16.6) 39.78% = 100 x – (-16.67) (7/12) + (-16.6) 12-5 =7 (margin)

28. Price Adjustments Markdowns Markdowns - Price reductions or discounts from the initial retail price. Variable Pricing Variable Pricing - Charging different prices to different customers

29. Reasons for taking Markdowns Clearance Markdowns Clearance Markdowns Promotional Markdowns Promotional 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

30. Liquidating Markdown Merchandise if after best of planning some items may not be sold after end of season also Place merchandise on Internet auction site Place merchandise on Internet auction site Sell the remaining merchandise to another retailer Sell the remaining merchandise to another retailer Consolidate the unsold merchandise Consolidate the unsold merchandise Give merchandise to charity Give merchandise to charity Carry the merchandise over to the next season Carry the merchandise over to the next season PhotoLink/Getty Images

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

32. PRICING STREATEGIES

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

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

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

36. 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: Royalty-Free/CORBIS 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

37. PRICING TECHNIQUES FOR INCREASING SALES

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

39. Price Lining A limited number of predetermined price points. A limited number of predetermined price points. Ex: $59.99 (good), $89.99 (better), and 129.99 (best) Ex: $59.99 (good), $89.99 (better), and 129.99 (best) Benefits: Benefits: –Eliminates confusion of many prices. –Merchandising task is simplified. –Gives buyers flexibility. –Can get customers to “trade up.”

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

41. 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

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

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