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Pricing
15-2
Merchandise Management
BuyingSystems
PlanningMerchandiseAssortments
BuyingMerchandise
Pricing
RetailCommunication
Mix
15-3
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.
15-4
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
15-5
Considerations in Setting Retail Prices
15-6
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
15-7
Price Sensitivity and Demand
When increases
can decrease
as fewer customers feel the product is a good value
price
sales
15-8
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
15-9
Results of Price Experiments
15-10
Quantity Sold at Different Prices
15-11
Profit at Different Prices
15-12
Price Elasticity
Elasticity = percent change in quantity sold percent change in price
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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)
= (1100-1500)/1100 (10-9)/9
= -0.2667 .1111
= -2.4005
15-14
Price Elasticity
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
15-15
Competitive Price Data
15-16
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
15-17
Legal and Ethical Pricing Issues
Price Discrimination
Predatory Pricing
Resale Price Maintenance
Horizontal Price fixing
Bait and Switch tactics
Scanned vs. Posted PricesPhotoDisc/Getty Images
15-18
Example of Markups
Retail = Cost + Markup
100% = 70% + 30%
Retail = $10.00 and markup = 30%
Retail = Cost + Markup
$ 10.00 = $7.00 + $ 3.00
15-19
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
15-20
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%
15-21
Markups
Initial markup – retail selling price initially set for the merchandise minus the cost of the merchandise.
Maintained markup – the actual sales realized for themerchandise minus its costs
Rob Melnychuk/Getty Images
15-22
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
15-23
Example of Setting theInitial Retail Price
Cost = $100 Planned Initial Markup = 56.85%
Retail Price = $100 + (56.85% x Retail Price)
Solve for Retail Price
.4315 x retail price = 100
Retail Price = $100/.4315 = 231.75
Initial Retail Price = Cost of Merchandise (1-markup percentage)
15-24
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
15-25
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
Ph
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Lin
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Im
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15-26
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/UnitBreakeven point
15-27
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 $13.00. How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment?
15-28Cargo Pants Illustration of Breakeven Analysis
Breakeven Quantity = Fixed Cost
Unit Price – Variable Cost
40,040 units = $400,000
$24.99 - $15.00
RubberBall Productions/Getty Images
15-29Making 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
15-30
Making a Profit on Cargo Pants Illustration of Breakeven Analysis
Breakeven Quantity = Fixed Cost
Unit Price – Variable Cost
50,050 units = $500,000
$24.99 - $15.00
15-31Percent 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
15-32The Gap Considers a Price Cut of 16.67%
Breakeven % = 100 x (-%price change) Sales Change % initial margin -% price change
39.78% = 100 x – (-16.67) (7/12) + (-16.6)
The McGraw-Hill Companies, Inc/Ken Karp photographer
15-33
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
15-34
Retailer’s Income Statement
Net Sales $1,000,000
COGS 800,000 80%
Gross Margin 200,000 20%
Operating Expenses
Variable 100,000 10%
Fixed 80,000 8%
Profit 20,000 2%
15-35Retailer’s Variable and Fixed Operating Expenses
Variable Fixed
Wages & Salaries
Manager 20,000 20,000
Sales 60,000
Clerical 20,000 10,000
Rent 20,000
Maintenance 10,000
Total 100,000 60,000
15-36
Retailer’s Assets
Current Assets
Inventory $300,000
Accounts Receivable 75,000
Cash 25,000
Fixed Assets 100,000
Total $500,000
15-37
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
15-38What Is the Breakeven Sales To Move To New Location?
Rent Increases to $50,000
Break-even Sales = FC/(GM%-VC%)
Digital Vision / Getty Images
15-39What Is the Breakeven Sales To If the Retailer Wants to Reduce Prices?
Reduce Prices By 5%
Break-even Sales = FC/(GM%-VC%)
15-40
What Is the Breakeven Sales If the Retailer Wants to Make a Specific Income?
Make $50,000/Year
Break-even Sales = FC/(GM%-VC%)
15-41
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
15-42Solution 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
15-43
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
15-44
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
15-45
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.
15-46
Advantages of the Hi/low Pricing Strategy
Increases profits through price discrimination
Sales create excitement
Sells merchandise
PhotoLink/Getty Images
15-47
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
15-48
Advantages of EDLP Pricing Strategy
Assures customers of low pricesReduces advertising and operating expensesReduced stockouts and improved inventory management
The McGraw-Hill Companies, Inc./Luke David, photographer
15-49
• 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
Everyday Low Pricing
15-50
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
15-51
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:
Royalty-Free/CORBIS
Other information available to the customerWhen service cues to quality are readily accessibleWhen brand names provide evidence of a company’s reputationWhen the level of advertising communicates the company’s belief in the brandThe risk associated with the service purchase
15-52
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
15-53
Using Price to Stimulate Sales
• Leader Pricing
might attract cherry pickers
• Price Lining
• Odd Pricing
15-54
• 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.
Leader Pricing
Allan Rosenberg/Cole Group/Getty ImagesDennis Gray/Cole Group/Getty Images Ryan McVay/Getty Images
15-55
Price Lining
• A limited number of predetermined price points.
• Ex: $59.99 (good), $89.99 (better), and 129.99 (best)
• Benefits:– Eliminates confusion of many prices.– Merchandising task is simplified.– Gives buyers flexibility.– Can get customers to “trade up.”
15-56
Benefits of Price Lining
• Confusion that arises from multiple price choices is eliminated
• The merchandising talk is simplified• It gives buyers greater flexibility• It gives can be used to get customers to “trade
up” to a more expensive model
15-57
Guidelines for Price-ending Decisions
When the price sensitivity of the market is high, it is advantageous to raise or lower prices so they end in high numbers like 9.
When the price sensitivity of the market is NOT high, the risk to one’s image of using 9 is likely to outweigh the benefits. Even dollar prices and round numbers are appropriate.
Upscale retailers appeal to price-sensitive segments of the market through periodic discounting. Combination strategy works best: break from standard of using round number endings to use 9 endings when communicating discounts and special offers.
15-58
Odd Pricing
• A price that ends in an odd number ($.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
15-59
Internet and Price CompetitionThe 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.
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15-60
The Three Most Important Things in Retailing
Location, location, location
Now, it is more :
Information, information, information!!