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Retail Pricing
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Everyday Low Price versusHigh/Low Pricing Strategies
Everyday Low Prices (EDLP)
Set between regular non-sale price and deepdiscount sale prices.
Similar to Everyday Stable Prices.
High/Low Pricing
Prices are lower than EDLP competitors, but use
promote frequent sales.
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Pricing Strategies
EDLP Strategy
5 Advantages
Reduced Price Wars
Reduced Advertising
Improved CustomerService
Reduced Stockouts &Improved InventoryManagement
Increased ProfitMargins
High/Low Strategy
5 Advantages
Same MerchandiseAppeals to Multiple
MarketsCreates Excitement
Moves Merchandise
Emphasis on Quality orService
Difficult to MaintainEDLP
OR
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Pricing Guidelines
EDLP should not be used for all productcategories.
Wean customers off high/low strategy slowly
Must really have EDLP
Retailers cant avoid sales altogether
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Coupons
Documents that entitle the holder to a reducedprice or X cents off a product or service.
Purpose
Induce customer to try products for first time
Convert first time users to regulars
Encourage large purchases
Increase usage
Protect market share
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Coupons: The Disadvantages
Since coupons encourage larger purchases,may be stealing sales from future.
Coupons may annoy, alienate, and confuse
customers
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Rebates
Money returned to the customer based on aportion of the purchase price.
Retailers perspective: more advantageous
than coupons since they increase demand, butretailer has no handling costs.
Manufacturers like rebates because:
Many customers dont redeem.
They can offer price cuts to customers directly.
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Leader Pricing
Certain items are priced lower than normal toincrease customers traffic flow and/or boostsales of complementary products.
Best items: purchased frequently, primarily byprice-sensitive shoppers.
Examples: bread, eggs, milk, disposable
diapers.
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Price Bundling andMultiple-unit Pricing
Price Bundling: practice of offering two ormore different products or services at one price.
Multiple-unit pricing: similar to price bundling
except products or services are similar ratherthan different.
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Price Lining
A limited number of predetermined price points.
Ex: $59.99, $89.99, and 129.99
Benefits: Eliminates confusion of many prices.
Merchandising task is simplified.
Gives buyers flexibility.
Can get customers to trade up.
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Odd Pricing
A price that ends in an odd number ($.57)or justunder a round number ($98).
Retailers believe practices increases sales, but
probably doesnt.
Does delineate:
Type of store (downscale store might use it.)
Sale
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Methods of Setting Retail Price
Cost-oriented: adding a fixed percentage tothe cost of the merchandise.
Demand-oriented: prices based on what
customer will pay.
Competition-oriented: what competition isdoing.
Combine all three.
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Sample Income StatementShowing Gross Margin
Net Sales $ 120,000
- Cost of goods sold 58,000
= Maintained markup 62,000
- Alteration costs + cash discounts 3,000
= Gross margin $ 59,000
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Initial and Maintained Markups
Initial markup = retail selling price initiallyplaced on the merchandise - cost of goods sold
Maintained markup = Actualsales that you get
for the merchandise - cost of goods sold
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Determining Initial Markupfrom Maintained Markup
Maintained markup = net sales - invoice costs + cash discounts
Gross margin = maintained markup - alteration costs + cash discounts
initial markup = ($maintained markup + $ reductions)($ net sales + $ reductions)
or
Initial markup = (maintained markup + reductions) 100% + reductions
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Setting Up the Problem
Retail = Cost + Markup
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Determining the Initial Retail PriceUnder Cost-Oriented Pricing
Example of markup as a % of retail: . Retail = Cost + Markup 100% =70% + 30%
Example of markup as a % of cost: . Retail = Cost + Markup 130% =100% + 30%
Example of markup as a % of cost: where cost = $5.00 and markup as a% of cost = 33% . Retail = cost + markup, or, $ 6.66 = $5.00 + $ 1.66( $1.66 = $ 5.00 X 33%)
Example of markup as a % of retail: where retail = $10.00 and markupas a % of retail = 30% . Retail = Cost + Markup, or, $ 10.00 = $7.00 + $3.00
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Determining the Initial Retail PriceUnder Cost-Oriented Pricing (Con.)
Example of markup as a % of retail with cost given: where cost =$5.00 and markup and markup as a % of retail = 50% Retail = Cost +Markup, or $5.00 + 50% retail
since we dont know retail, we must convert markup as a % of retailto markup as a % of cost using the formula: Markup % cost =markup % retail / 100% - markup % retail, 100% = 50% / 50%
So, Retail = cost + Markup, or,
$ 10.00 = $ 5.00 + $ 5.00 ( 100% of $ 5.00 = $ 5.00 )
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Determining the Initial Retail PriceUnder Cost-Oriented Pricing (Con.)
An alternative method of solution is :
Retail = Cost + Markup
R = $ 5.00 + .5R
.5R = $ 5.00
R = $ 10
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Determining the Initial Retail PriceUnder Cost-Oriented Pricing (Con.)
A third method of solution is:
Retail = Cost z (1-markup)
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Reasons for Taking Markdowns
Get Rid of Slow-Moving, Obsolete,Uncompetitively Priced Merchandise
Increase Sales
Generate Cash
Increase Traffic Flow
Increase Sale ofComplementaryProducts
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How To Reduce Markdowns
Have A Good Merchandising Plan
Insist On Timely Deliveries
Work With Vendors
Obtain Markdown Money
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Liquidating Markdown Merchandise
Auction on Internet (eBay), have specialclearance location on own webpage, or utilizespecial Internet liquidation sites
They can job out the remaining merchandiseto another retailer
They can consolidate the marked-down
merchandise They can carry the merchandise over to the
next season
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Clearance CenterLiquidates Markdowns
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Calculating Break-Even Volume
BEPquantityFixed cost
=
Unit price - Unit variable cost
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Factors That Affect CustomersSensitivity to Price
Substitute Awareness Effect
Total Expenditure Effect
Difficult Comparison Effect
Benefits/Price Effect
Situation Effect
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A Pricing Experiment
Before After
Store 1 10 units @ $100 21 units @ $80
Gross margin = $500 Gross margin = $630
Store 2 12 units @ $100 13 units @ $100
Gross margin = $600 Gross margin = $650
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Price Discrimination
Occurs when vendor sells same product to twoor more customers at different prices.
Generally illegal from vendor to retailer except:
costs are different
quantity and functional discounts
changing market conditions
Generally legal from retailer to consumer .
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Vertical Price Fixing
Agreements to fix prices between parties atdifferent levels of the same marketing channel.
Vendors cant force retailers to sell at MSRP.
Retailers can sell above MSRP.
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Predatory Pricing
Establishing merchandise prices to drivecompetition from the marketplace.
Illegal!
Retailers can charge different prices at differentlocations if costs are different.
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Comparative Price Advertising
Compares price of merchandise offered for salewith a higher regular price or MSRP.
Good because it gives consumers information
about what merchandise should sell for.
Illegal if used to deceive consumer.
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Potential Deceptions ofComparative Price Advertising
Comparison price advertising inflatesperceptions of savings and value, andreduces search for lower prices.
Consumers use price to infer quality.
If advertised reference price is fictitious, then
customer is deceived.
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Guidelines for Retailers to AvoidDeception in Comparative Price Advertising
Have reference price in effect about one-third ofthe time.
Disclose how sale prices are set and how longthey will be offered.
Offer a satisfaction guaranteed policy.
Be careful when using MSLP.
Use objective terms.
Use reference prices that can be easilyverified.
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Bait-and-Switch
Attract customers into store by advertising aproduct at a lower than usual price (the bait)and then induces customer to switch to higher-priced model (the switch).
Can occur by
Retailer out of advertised model.
Retailer has advertised model, but disparages it.