chapter 10 retail pricing. © 2011 cengage learning. all rights reserved. may not be scanned, copied...
TRANSCRIPT
Chapter 10
Retail Pricing
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 10.1 - Interaction Between a Retailer’s Pricing Objectives and Other Decisions
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing Objectives
Profit oriented objectives
Achieve either a certain rate of return or maximizing profits.
Target return objective
States a specific level of profit, such as percentage of sales or return on capital invested.
Profit maximization
Seeks to obtain as much profit as possible.
Skimming Price is initially set high on merchandise to skim the cream of demand before selling at more competitive prices.
Penetration Price is set at a low level in order to penetrate the market and establish a loyal customer base.
Sales-oriented objectives
Seek some level of unit sales, dollar sales, or market share but do not mention profit.
Status quo objectives
Adopted by retailers who are happy with their market share and level of profits.
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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.
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing Policies
Pricing at market levelsPrice 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.
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing Policies
Factors that permit retailers to price above market levels:Merchandise offeringsServices providedConvenient locations Extended hours of operation
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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 Recognizes that differences in demand and cost necessitate
that the retailer change prices in a fairly predictable
manner.
Flexible pricing 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.
One-price policy 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
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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 higher-priced lines expresses the desire to purchase a lower-priced line.
Specific Pricing Strategies
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Retailers select price lines that have the strongest consumer demand.
Price lining helps buying more efficiently, simplifying inventory control, and accelerating inventory turnover.
Specific Pricing Strategies
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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
Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually.
Bundle Pricing Selling distinct multiple items offered together at a special price.
Bait-and-switch
pricing
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.
Private-label brand pricing
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.
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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.
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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
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Exhibit 10.3 - Relationship of Markups Expressed on Selling Price and Cost
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Exhibit 10.4 - Basic Markup Formulas
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Initial Versus Maintained Markup
Initial markup = (original retail price – cost)/original retail price
Maintained markup = (actual retail price – cost)/actual retail price
LO 3
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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.
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Planning Initial Markups start
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
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Planning Initial Markups
Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions)
LO 3
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Planning Initial Markups
Rules of markup determinationAs 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.
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Planning Initial Markups
Rules of markup determinationThe 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. What will the market bear
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Markdown Management
Markdown - Any reduction in the price of an item from its initially established price.
Markdown percentage = Amount of reduction / original selling price
LO 4
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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 errorsPricing errorsMerchandising errorsPromotion errors
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Markdown Policy
Early markdown policyAdvantages:
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.
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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.
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Markdown Policy
Amount of markdownRule of thumb for early markdowns is that prices
should be marked down at least 20 percent in order for the consumer to notice. Just noticeable difference important.
Retailers are able to have their suppliers supplement their markdown losses with markdown money or some other type of price reductions.
LO 4
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Markdown Policy
Amount of markdownMaintained markup = (actual selling price – cost) /
actual selling priceMaintained markup percentage = initial markup
percentage – [(reduction percentage) (100% - initial markup percentage)]
Where: Reduction percentage = Amount of reductions/net sales
LO 4
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Compute the markup on selling price for an item that retails for $49.95 and costs $31.20
What is the necessary formula?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 10.4 - Basic Markup Formulas
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Compute the markup on selling price for an item that retails for $49.95 and costs $31.20
What is the necessary formula?(SP-C)/SPWork it out
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Compute the markup on selling price for an item that retails for $49.95 and costs $31.20
What is the necessary formula?(SP-C)/SPWork it out(49.95-31.2)/49.95 = 18.75/49.95 = 37.5%
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Compute the markup on selling price for an item that retails for $49.95 and costs $31.20
What is the necessary formula?(SP-C)/SPWork it out(49.95-31.2)/49.95 = 18.75/49.95 = 37.5%What would the markup on cost be (the cost
plus)?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Compute the markup on selling price for an item that retails for $49.95 and costs $31.20What is the necessary formula?(SP-C)/SPWork it out(49.95-31.2)/49.95 = 18.75/49.95 = 37.5%What would the markup on cost be (the cost
plus)?18.75/31.2 = 60% So, cost of 31.20 plus 60% of 31.20 = 49.95 (some
rounding error might exist)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Complete the following (11):
Dress Shirt Sport Shirt Belt
Selling Price ($) 40.00 49.99 15.00
Cost ($) 23.00 25.35 6.50
Markup in Dollars ($)
Markup Percentage
on Cost (%)
Markup Percentage on
Selling Price (%)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Complete the following (11):
Dress Shirt Sport Shirt Belt
Selling Price ($) 40.00 49.99 15.00
Cost ($) 23.00 25.35 6.50
Markup in Dollars ($) 40-23=17 24.64 8.50
Markup Percentage 17/23 24.64/25.35 8.5/6.5
on Cost (%) =.739 = 97.2 = 1.31
Markup Percentage on
Selling Price (%) 17/40 24.64/49.99 8.5/15
42.5 49.3 56.7
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost her
What formula do we need?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 10.4 - Basic Markup Formulas
LO 3
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost her
What formula do we need? (I’m great on manipulation)
R-C=50 50/R = .25 .25R=50 50/.25 = 200
R = 200 Cost = 200-50 = 150
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point?
SP = 45 MU on SP = .45
It doesn’t say MU on SP – in which case I would assume SP (should I not say – tell me which you assume)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point?
SP = 45 MU on SP = .45
(45-C)/45= .45 45-C = .45*45 45-C = 20.25 45-20.25 = 24.75
(45-24.75)/45 = .45
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 10.4 - Basic Markup Formulas
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