Retail Travel Services

(TM 334)

Lecture 4

OPERATIONS

1- Retail Pricing1- Retail Pricing

Retail pricing:

The pricing technique used by most retailers is cost-plus pricing.

This involves adding a mark-up amount (or percentage) to the

retailer's cost.

Another common technique is suggested retail pricing

This simply involves charging the amount suggested by the

manufacturer and usually printed on the product by the

manufacturer.

Pricing StrategiesEDLP vs HIGH/LOW

■ Everyday Low Pricing (EDLP) Prices are set between regular non-sale price and

deep discount sale prices May consider it as “Everyday Stable Prices”

■ High/Low Pricing Prices are higher than EDLP competitors, but

promote frequent sales featuring lower prices Makes the consumer’s purchase decision time-

dependent

Adapted from Levy/Weitz

EDLP Strategy

4 Advantages

Reduced Price Wars

Reduced Advertising

Improved In-Stock Levels

Reduced Stockouts & Improved Inventory Management

High/Low Strategy

4 Advantages

Same Merchandise

Appeals to Multiple

Markets

Creates Excitement

Moves Merchandise

Emphasis on Quality or Service

OR

Pricing StrategiesEDLP vs HIGH/LOW

Source: Adapted from Levy and Weitz

Pricing INTERNAL FACTORS

Item Price

Variable CostPer Unit

• Manufacturer’s price per unit

Allocated:• Transportation• Labor• “Shrinkage”

Product Characteristics

• Demand Patterns- Perishable- Seasonal?- Easily obsolete?

• Product Line

Category/Item Role/Strategy

• Does the item draw shoppers to the store?

• Does the item offer one-stop-shopping convenience?

How Does Item Pricing Affect Sales of a Brand or Product Line?

■ The relative price of each item within a brand affects total brand sales

■ Price per unit varies based on: Different sizes Different quality levels or features

Consumers are pretty effective at identifying and selecting the “best buys”

PricingPRODUCT

■ Product Line Pricing refers to pricing items within the product line, or brand, so that as the price per unit decreases as quantity increases

■ Is important because the consumer is confused if the price per unit does not decline as the quantity increases – “irrational” pricing

■ Failure to price rationally is likely to result in low sales volumes for larger sizes, making them less profitable based on ABC

PricingPRODUCT

■ There are two major causes of product line pricing problems:

The manufacturer does not price so that cost per unit drops with increased features or quantity

Pricing base models, or popular sizes, aggressively (at low margins) requires other items within the brand to be priced at higher margin

Items with more (features) are priced too high

PricingPRODUCT

■ To avoid product line pricing problems: Buyers/category managers (or pricing specialists) should be

careful when making price changes A “price simulator,” or some other tool, can be developed by

which relative prices for items within a brand are determined automatically

■ Items that are not properly priced by vendors, i.e., items that have higher unit costs as quality/quantity increases, should be dropped from the product line

It can irritate and upset customers, reducing satisfaction and loyalty

PricingCOMPETITION

■ The most common form of competitive pricing is price matching

Must be able to monitor competitors’ prices Easy to implement Applied more often to frequently purchased items

■ In packaged goods, may also maintain a percentage spread relative to other formats on key SKUs

e.g., spread between national brands and private labels

■ Price matching guarantee

The effect of competition is muted by exclusive products or when comparison is difficult

PricingCOMPETITION

■ However, if competitors price a category at too low a gross margin, it does not mean that their prices should be matched

■ Category pricing should take into account the following, along with competitor prices:

Consumer price sensitivity Importance of the category to the chain’s price image Strategic importance of the category (i.e., is it a “Destination”

category?)

PricingCONSUMER PRICE SENSITIVITY

■ Product categories are not uniformly responsive to prices – some are more sensitive to price levels than others

■ Consumers also may respond differently than one another to price levels

Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

Consumer Price SensitivityRETAILER CONSEQUENCES

■ Price sensitivity can have different consequences for the retailer:

Price image - How do item prices and category price levels affect how consumers feel about the prices in the store

Product substitutability - How willing are consumers to substitute one product for another in the category

Consumer Price SensitivityPRICE IMAGE

■ Specific types of categories have a greater impact on price image than others:

Frequently purchased categories Categories in which consumers spend a lot of money

■ Categories which are important to price image can be identified by analyzing categories’ frequency of purchase and actual expenditure

■ Products within a category also have different effects on price image:

Leading, high-share brands have a major impact on price image Aggressive pricing of private label does not as pronounced an

impact on price image

Consumer Price SensitivityPRICE IMAGE

■ The best evidence available indicates that consumers use different mechanisms to determine the price image of a retailer

Rule How Consumers Make Decision

Implication for Retail Pricing

Frequency Based on frequency of your prices beating competitor’s prices

Beat competitors on a large number of items by a small difference

Comparable Key Items

Based on comparison of items shopped for which price levels are known

Be low only on key items

Discounts Depth of discounts for categories/items shopped

Price high but offer consumers value through heavy discounting

Source: Center for Retail Management, Northwestern University

Consumer Price SensitivityPRODUCT SUBSTITUTABILITY

■ Product substitutability can be measured by:

Price elasticities - the effect of price changes of an item on

sales of that particular item.

Cross-price elasticities - the effect of price changes of one item

on other items in the category.

• If a brand has high brand equity, it has low cross-price elasticities

• If a brand has little brand equity, it has high cross-price elasticities

Suppliers may be able to measure price elasticities, but can seldom produce cross-price elasticities