8/23/2011. Chapter 10 Retail Pricing. Learning Objectives. Pricing Objectives and Policies

Transcription

1 Chapter 10 Retail Pricing Learning Objectives Discuss the factors a retailer should consider when establishing pricing objectives and policies. Describe the differences between the various pricing strategies available to the retailer. Describe how retailers calculate the various markups. Discuss why markdown management is so important in retailing and describe some of the errors that cause markdowns. Pricing Objectives and Policies Interactive pricing decisions Pricing objectives Pricing policies 1

2 Exhibit Interaction Between a Retailer s Pricing Objectives and Other Decisions Pricing Objectives Profit oriented objectives Target return objective Profit maximization Skimming Penetration Sales-oriented objectives Status quo objectives Achieve either a certain rate of return or maximizing profits. States a specific level of profit, such as percentage of sales or return on capital invested. Seeks to obtain as much profit as possible. Price is initially set high on merchandise to skim the cream of demand before selling at more competitive prices. Price is set at a low level in order to penetrate the market and establish a loyal customer base. Seek some level of unit sales, dollar sales, or market share but do not mention profit. Adopted by retailers who are happy with their market share and level of profits. Pricing Policies Rules of action, or guidelines, that ensure uniformity of pricing decisions within a retail operation. Below-market pricing policy - Regularly discounts merchandise from the established market price in order to build store traffic and generate high sales and gross margin dollars per square foot of selling space. 2

3 Pricing Policies Pricing at market levels Price zone - Range of prices for a particular merchandise line that appeals to customers in a certain market segment. Above-market pricing policy - Retailers establish high prices because nonprice factors are more important to their target market than price. Pricing Policies Factors that permit retailers to price above market levels: Merchandise offerings Services provided Convenient locations Extended hours of operation Specific Pricing Strategies Customary pricing The retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time. Variable pricing Flexible pricing One-price policy Recognizes that differences in demand and cost necessitate that the retailer change prices in a fairly predictable manner. Encourages offering the same products and quantities to different customers at different prices; used for personal selling; costs can dramatically increase, and revenues decrease, as customers begin to bargain for everything. Establishes that the retailer will charge all customers the same price for an item; speeds up transactions and reduces the need for highly skilled salespeople. LO 2 3

4 Specific Pricing Strategies Price lining - Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification. Trading up - Occurs when a retailer uses price lining and a salesperson moves a customer from a lower priced line to a higher one. Trading down - Occurs when a retailer uses price lining, and a customer initially exposed to higherpriced lines expresses the desire to purchase a lowerpriced line. LO 2 Specific Pricing Strategies Retailers select price lines that have the strongest consumer demand. Price lining helps buying more efficiently, simplifying inventory control, and accelerating inventory turnover. LO 2 Specific Pricing Strategies Odd pricing Practice of setting retail prices that end in the digits 5, 8, 9 such as $29.95, $49.98, or $9.99. Multiple-unit pricing Bundle Pricing Bait-and-switch pricing Private-label brand pricing Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually. Selling distinct multiple items offered together at a special price. Advertising or promoting a product at an unrealistically low price to serve as bait and then trying to switch the customer to a higher-priced product. A private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand. LO 2 4

5 Specific Pricing Strategies Leader pricing - High-demand item is priced low and is heavily advertised in order to attract customers into the store. Loss leader - Extreme form of leader pricing where an item is sold below a retailer s cost. High low pricing - Use of high every day prices and low leader specials on items typically featured in weekly ads. LO 2 Using Markups Markup - Selling price of the merchandise less its cost, which is equivalent to gross margin. The basic markup equation: SP = C + M Where: C - dollar cost of merchandise per unit M - dollar markup per unit SP - selling price per unit Exhibit Relationship of Markups Expressed on Selling Price and Cost 5

6 Exhibit Basic Markup Formulas Initial Versus Maintained Markup Initial markup = (original retail price cost)/original retail price Maintained markup = (actual retail price cost)/actual retail price Initial Versus Maintained Markup Reasons for the difference between initial and maintained markups: The need to balance demand with supply. Stock shortages. Employee and customer discounts. Cost of alterations. Initial markup may be different from maintained markup is cash discounts. 6

7 Planning Initial Markups Initial markup percentage = (operating expenses + net profit + markdowns + stock shortages + employee and customer discounts + alterations costs - cash discounts)/ (net sales + markdowns + stock shortages + employee and customer discounts) OR Initial markup percentage = (gross margin + alterations costs - cash discounts + reductions)/ (net sales + reductions) OR Planning Initial Markups Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions) Planning Initial Markups Rules of markup determination As goods are sold through more retail outlets, the markup percentage decreases and vice versa. The higher the handling and storage costs of the goods, the higher the markup. 7

8 Planning Initial Markups Rules of markup determination The greater the risk of a price reduction due to the seasonality of the goods, the greater the magnitude of the markup percentage early in the season. The higher the demand inelasticity of price for the goods, the greater the markup percentage. Markdown Management Markdown - Any reduction in the price of an item from its initially established price. Markdown percentage = Amount of reduction / original selling price Markdown Management Retailers do not possess perfect information about supply and demand factors; as a result, the entire merchandising process is subject to error, which makes pricing difficult. Buying errors Pricing errors Merchandising errors Promotion errors 8

9 Markdown Policy Early markdown policy Advantages: Speeds the movement of merchandise. Enables the retailer to take less of a markdown per unit to dispose of the goods. Markdowns are offered quickly on goods that some consumers still think of as fashionable, and the store has the appearance of having fresh merchandise. Allows the retailer to replenish lower-priced lines from the higher ones that have been marked down. Markdown Policy Late-markdown policy - Allowing goods to have a long trial period before a markdown is taken. Avoids disrupting the sale of regular merchandise by too frequently marking goods down. The bargain hunters or low-end customers will be attracted only at infrequent intervals. Markdown Policy Amount of markdown Rule of thumb for early markdowns is that prices should be marked down at least 20 percent in order for the consumer to notice. Retailers are able to have their suppliers supplement their markdown losses with markdown money or some other type of price reductions. 9

10 Markdown Policy Amount of markdown Maintained markup = (actual selling price cost) / actual selling price Maintained markup percentage = initial markup percentage [(reduction percentage) (100% - initial markup percentage)] Where: Reduction percentage = Amount of reductions/net sales 10