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Retailpricingv3 PDF

Retailers consider many factors when setting prices, including costs, competition, and customer demand. Pricing is important because it influences customer value and sales. Retailers use various strategies like everyday low pricing, sales, bundling, and odd pricing. They analyze costs and target profits using break-even analysis to determine optimal pricing. Retailers make price adjustments over time through markdowns to clear slow-moving inventory or promote sales. How they market and liquidate markdowns also impacts their pricing approach.

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130 views20 pages

Retailpricingv3 PDF

Retailers consider many factors when setting prices, including costs, competition, and customer demand. Pricing is important because it influences customer value and sales. Retailers use various strategies like everyday low pricing, sales, bundling, and odd pricing. They analyze costs and target profits using break-even analysis to determine optimal pricing. Retailers make price adjustments over time through markdowns to clear slow-moving inventory or promote sales. How they market and liquidate markdowns also impacts their pricing approach.

Uploaded by

Supratik Datta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Retail Pricing

Questions

■ What factors do retailers consider when pricing


merchandise?
■ How do retailers set retail prices?
■ How do retailers make adjustments to prices over time
and for different market segments?
■ Why do some retailers have frequent sales while others
attempt to maintain an everyday-low-price strategy?
■ What pricing tactics do retailers use to influence
consumer purchases?
Why is Pricing Important?

■ Pricing decision 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.
Customer Price sensitivity and Cost

Relationship between Price Sensitivity and Demand

When price increases

sales can decrease

as fewer customers feel the product is a good value


Factors effecting Prices

Store
Policies

Target Retail Competitor


market Price Prices
and DD

Economic
Condition
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 Im ages
Elements of Retail Prices

■ Cost of merchandise
■ Opex
■ Capex
Retail Price and Markup (MU)

Retail Price Rs
125

Margin
Rs 50
Cost of
Markup as a Percent Merchandise
of Retail Price Rs 75
40% = Rs50/Rs125

Retail Price = cost + markup


MU% = retail price – cost
retail price
Retail Price

Retail price = Cost of merchandise + Markup

Retail price = Cost of merchandise + Retail price x Markup %

Retail price = Cost of merchandise


1 – Markup % (as a fraction)
Developing Pricing Strategy

■ Cost-oriented pricing:
a basic mark up is added to the cost of the merchandise,
to arrive at the price.
Here, retail price is considered to be function of the cost and
the mark up.

■ Demand-oriented pricing:
focuses on the quantities that the customers would buy at
various prices.
It largely depends on the perceived value attached to the
product by the customer.

■ Competition oriented pricing:


Competition is the criteria for fixing prices
Approaches to Pricing strategy

 Market skimming The strategy here is to charge high prices initially


and then to reduce them gradually, if at all. A skimming price policy is
a form of price discrimination over time and for it to be effective,
several conditions must be met.
 Market Penetration This strategy is the opposite of market
skimming and aims at capturing a large market share by charging
low prices. The low prices charged stimulate purchases sand can
discourage competitors from entering the market, as the profit
margins per time are low. To be effective, it needs economies of
scale, either in manufacturing, retail or both. It also depends upon
potential customers being price sensitive about particular item and
perhaps, not perceiving much difference between brands.
 Price Bundling Here, the retailer bundles a few products together and
offers them at a particular price. For example, a company may sell a PC
at a fixed price and the package may include a printer and a web
camera.
 Multi-unit Pricing In multi-unit pricing, the retails offers discounts to
customers who buy in large quantities or who buy a product bundle. This
involves value pricing for more than one of the same item. For example,
a retailer may offer one T-shirt for Rs 255.99 and two T- shirts for Rs
355.99. Multi-unit pricing usually helps move products that are slow
moving.
 Discount pricing It is used as a strategy by outlet stores who offer
merchandise at the lowest market prices.
 Every Day Low Pricing Every Day Low Pricing or EDLP as it is
popularly known, is a strategy adopted by retailers who continually price
their products lower than the other retailers in the area. Two famous
examples of EDLP are Wal- Mart and Toys ―R‖ Us, who regularly follow
this strategy.
 Odd Pricing Retail prices are set in such a manner that the prices end
in odd numbers, such as Rs 99.99 or Rs 199, Rs 299,etc.
Profit Impact of Setting a Retail Price:
The Use of Break-Even Analysis

■ A retailer might want to know


 Break-even sales to generate a target profit
 Break-even volume and dollars to justify introducing a new
product, product line, or department
 Break-even sales change needed to cover a price change
■ Break-even analysis
 Determines, on the basis of a consideration of fixed and variable
costs, how much merchandise needs to be sold to achieve a
break-even (zero) profit
 Fixed costs: don’t change with the quantity of product produced
and sold
 Variable costs: vary directly with the quantity of product produced
and sold (e.g., direct labor and materials used in producing a
product)
Breakeven Analysis

Understanding the Implication of Fixed and Variable Cost

Contribution/Unit
Breakeven
point
Fixed Costs
Unit Sales

Break-even Fixed cost


=
quantity Actual unit sales price - Unit variable cost

The quantity at which total revenue equals total cost, and then profit
Occurs for additional sales
Illustration of Breakeven Analysis:
Break-even volume of a new private-label product

PETsMART is interested in developing private label, dry


dog food targeting owners of older dogs that will sell for
$12 a bag. The cost of developing the dog food is
$700,000. This includes salaries for the design team
and testing the product. The variable cost of purchasing
the product from a private-label manufacturer is $5.
How many cargo pants does American Eagle Outfitter
have to sell to breakeven on its $400,000 investment?
Illustration of Breakeven Analysis:
Break-even volume of a new private-label product

Fixed cost
Break-even quantity =
Actual unit sales price – Unit variable cost

$700,000
=
$12 – $5

Now assume that PETsMART wants to make $100,000 profit from it

= $700,000 + $100,000
$12 – $5

= 114,286 bags
Illustration of Breakeven Analysis:
Break-even Sales of a new private-label product

Now PETsMART is considering lowering the price to $10 with the same
profit goal. How many units does PETsMART need sell then to make
the same profit from the price cut?

Fixed cost
Break-even quantity =
Actual unit sales price – Unit variable cost

= $700,000 + $100,000
$10 – $5

= 160,000 bags

Unit sales must increase by 40%


Price Adjustments

Retailers adjust prices over time (markdowns) and


for different customer segments (variable
pricing)

■ Why do retailers take markdowns?


■ How do they optimize markdown decisions?
■ How do they reduce the amount of markdowns by
working with vendors?
■ How do they liquidate markdown merchandise?
■ What are the mechanics of taking markdowns?
Reasons for Taking Markdowns

■ Clearance Markdowns to get


rid of slow-moving, obsolete
merchandise

■ Promotional Markdowns
 To increase sales and promote
merchandise
 To Increase traffic flow and sale
of complementary products
generate excitement through a
sale

■ To generate cash to buy


additional merchandise
Liquidating Markdown Merchandise

■ Sell the merchandise to another retailer


■ Consolidate the unsold merchandise
■ Place merchandise on Internet auction site
■ Donate merchandise to charity
■ Carry the merchandise over to the next season

PhotoLink/Getty Im ages

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