chapter eleven: pricing in retailing• various products/services are priced to match competitor’s...
TRANSCRIPT
Chapter Eleven:
Pricing in Retailing
People want economy and they'll pay almost any price to get it.
Lee Iacocca Chairman,
Chrysler Corporation
11-2
Integrated Retail Management Flowchart
11-3
Objectives
• Explain and create pricing objectives for retailers.
• Outline the main types of pricing policies.
• Develop retail prices for products and services.
• Explain why and how prices are adjusted.
11-4
Pricing
• Variables that influence price
– Pricing objectives
– Price flexibility
– Pricing policies
– Competition
– Demand
– Price adjustments
11-5
Types of Pricing Objectives
• Product quality
• Skimming
• Market penetration
• Market share
• Survival
• Return on Investment
• Profit
• Status quo
• Cash flow
• Increasing traffic
• Moving older products
• Enhancing image
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Figure 11.2: Pricing Ranges Based on Demand and Cost
• Pricing Flexibility-
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Determining Price Flexibility
1. Determine the costs of running the business
2. Estimate the demand for products
3. Estimate the elasticity of price for products and product lines
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Price Elasticity
• Price inelasticity (Ep<1)
• Price elasticity (Ep>1)
• Unitary Elasticity
11-9
price Old / price in change Absolute
price old at Demand / pricenew at demand in change Absolute• Ep =
Factors Affecting Elasticity
• Availability of substitute products
• Time period under consideration
• Price points
• Permanent vs. temporary price changes
• Proportion of consumer’s budget to purchase item
• Whether it is a necessity or luxury
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Determining Pricing Strategy and Policies
• Pricing policies help create an overall strategy
• Policies and strategy must be consistent with other areas of the Integrated Retail Management Flowchart
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Pricing Policies
• Price Variability
• Promotional Pricing
• Price Leveling
• Life Cycle Pricing
• Price Lining
• Price Stability
• Psychological Pricing
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Price Variability
• Different prices are charged to different customers
• Must follow laws that impose limitation on price variability
• Laws discourage retailers from varying prices for “classes” of buyers
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Promotional Pricing
• Pricing becomes integrated with IMC and tied to promotions
• Leader pricing
• Special event pricing
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Price Leveling
• Also called customary pricing
• Difficult to change price strategy once customers are used to it
• Typically set at market, below market or above market
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Life Cycle Pricing
• Pricing set to coincide with movement through the product life cycle stages
• Prices typically higher during introduction and growth
• Prices start to decline at maturity
• Prices discounted at decline
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Price Lining
• Various products/services are priced to match competitor’s offerings
• Goal is to maximize profits for the whole line instead of focusing on only 1 product
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Price Stability
• One price policy
• No need to run sales
• Must adhere to price-fixing laws
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Psychological Pricing
• Types of Psychological Pricing
• Odd/even pricing-
• Reference pricing-
• Prestige pricing-
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Methods for Establishing Price
• Cost-oriented pricing
• Competition-oriented pricing
• Demand-oriented pricing
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Cost-oriented Pricing
• Two approaches
– Markup pricing
– Breakeven pricing
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Markup Pricing
• Markup based on retail or selling price
– Markup = Selling price (retail price) – Cost
– Markup % = Amount of markup/Selling price
• Markup based on cost
– Retail price = Cost + Markup
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Breakeven Pricing
• The level of sales required to cover costs of selling the product is determined
• BEP (in quantity)= Fixed cost/Unit price - Unit variable cost
• BEP (in dollars) = BEP (in quantity) x Selling Price
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Competition-Oriented Pricing
• Retailer identifies the industry leader and copies
• Assumes that costs, demand, and competition remain fairly constant
• Must “shop” the competition
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Demand-Oriented Pricing
• Prices set based on consumer demand
• Unusual environmental changes can result in price changes
• Must avoid price gouging
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Types of Demand-Oriented Pricing
• Modified breakeven
• Consumer market approach
• Industrial market approach
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Initial Markup Percentage
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Reductions sales Net
Reductions profit Planned expenses Planned
• Initial markup percentage
=
sales net Actual
profit Actual (actual) expenses operations Retail
• Maintained markup percentage
=
• Gross margin in dollars = Net sales – COGS
Initial Markup Percentage (cont’d)
• Variables that affect initial markup percentage
– Influence of other channel members
– Quantity discounts and shipping arrangements
– Pricing for Internet activities vs. brick and mortar
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Price Adjustments
• Additional Markups (markons) often placed on
– Trendy or fad items
– Items with demand
– Holiday season item
• Markdowns help to
– Move older products
– Clear inventory for a move to a new location
– Markdown (in $) = Retail selling price – New selling price
11-29