retail pricing1
TRANSCRIPT
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Price is the value placed on what is exchanged,
it is the point at which the exchange between the
buyer &seller takes place, where supply&
demand are equal.Arriving at the right price for a product or
service is one of the most difficult task today
various factors need to be considered before
setting up an appropriate price.
Pricing is an integral part of retail strategy
and cannot work in isolation. Cost and
perating expenses need to be considered while
establishing the retail price.
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Price is an integral element of retailmarketing mix. it is the factor which is the
source of revenue for the retailer.
!he price of a merchandise alsocommunicates the image of the retail store tothe customers.
"arious factors like the target market,store policies competition and economiccondition need to be taken into considerationwhile setting up an appropriate price for a
product.
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ac ors o e cons ere w esetting up an appropriate price
are:The primary factor that need to be considered while
arriving at a pricing strategy is the business model that the
retailer has chosen to follow.
The next factor to be taken into consideration is the
demand for the product and the target market.
The store policies and the store image.
Competition for the product & competitors price for thesimilar products.
The economic conditions prevalent at times play a major
role in pricing policy.
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FACTORS TO BE CONSIDERED WHILE PRICING A PRODUCT.
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The first element to be considered inthe cost of goods which is the cost of
merchandise and various other
expenses, which are involved in the
movement of goods from the
manufacturer to the actual store. These
expenses may be fixed or variable.
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Fixed costs are referred to as
overhead are the expenses thatdont vary according to the
production amounts!such as rent
for office space officee"uipmentsinsuranceutilitiesetc.
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These are the expenses that do
vary with the amount of
service provided or goods
produced. They include costs
such as hourly pay for acontractor on a specific
project raw!materials etc.
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Legal and Ethical Pricing Issues
#rice $iscrimination
#redatory #ricing
%esale #rice aintenance
'ori(ontal #rice fixing
)ait and *witch tactics
*canned vs. #osted #rices
+,!-
PhotoDisc/Getty Imaes
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Ethical pricing issues#rice discrimination occurs when retailer charges diff
prices for the identical products/services sold to different
consumers. 0g %estaurant meals women haircuts.
'ori(ontal price fixing involves agreements between
retailers that are in direct competition with each other to
set the same prices
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Vertical Price Fixing 1ertical #rice Fixing!! 2greements to fix prices betweenparties at different levels of the same marketing channel.
1endors cant force retailers to sell at manufacturer
suggested retail price 3*%#4.%etailers can sell above *%#.
5ften vendors tie selling products are *%# with co!op
advertising allowance
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Predatory Pricing0stablishing merchandise prices to drive competitionfrom the marketplace.
6llegal7
%etailers can charge different prices at different locationsif costs are different.
#redatory pricing arises when a dominant retailer sets
prices below its costs to drive competitors out of
business. %etailer hopes to raise prices in the near future
and regain lost profits. 0g 8almart vs small retailers
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Comparative Price
AdvertisingCompares price of merchandise offered for sale with ahigher 9regular: price or *%#.
;ood because it gives consumers information about
what merchandise should sell for.6llegal if used to deceive consumer.
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Potential Deceptions ofComparative Price Advertising
Comparison price advertising inflates perceptions of savings and
value, and reduces search for lower prices.
Consumers use price to infer quality.
If advertised reference price is fictitious, then customer is deceived.
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Guidelines for Retailers to Avoid
Deception in Comparative Price Advertising
ave reference price in effect a!out one"third of the time.Disclose how #sale$ prices are set and how long they will !e offered.%ffer a #satisfaction guaranteed policy$.&e careful when using '()P.*se o!+ective terms.*se reference prices that can !e easily verified.
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Ethical pricing issues)ait and switch tactics deceptive practice wherein the
customers are lured into the stores by advt a product at
lower than normal price 3bait4 and once they are into the
store induce them to purchase a higher price model
3switch4. Can occur by having inade"uate inventory of the
advt product/salesperson disparage the "uality of advt
model and promote the superiority of higher priced model.
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ait!and!"witch
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ait and "witch #cont$%%etailers should'ave sufficient "uantities
;ive a 9rain check:
$ont disparage merchandise
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)efore determining the price of the
product one needs to determine the cost
of the product and take into considerationthe 9)reak!0ven: point.
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6t is the point at which the retailer neither
makes or loses money in producing a product
or delivering a service.6t is the process used to uncover the break
even numbers.
)efore calculating the break!even point it isnecessary to determine the fixed as well as the
incremental cost per unit=variable cost>
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To calculate the )reak!even point the point at which
the business will neither make a profit or a loss thefollowing formula can be used
)reak even revenue ? Fixed costs
+!1ariable cost per unit
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It is the difference between the cost of the product and the final sellingprice.
The mark up can be in rupee terms or in terms of percentage.
Mark ups can also be calculated on the cost of the product or the retailprice.
A markup can be expressed as an either a rupee amount or as apercentage of selling price.
A rupee markup occurs when the retailer adds a fixed amount to thecost of the product.
a) Markup% (at retail)=(retail selling pricemerchandise cost)
!etermines the retail selling price.
b) Markup% (at cost)=(retail selling pricemerchandise cost)
!etermines the merchandise cost.
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"umulati#e markup$
The cumulati#e markup is calculated for a group of products.
Initial markup$It is the difference between the cost price of the merchandiseand the initial retail price.
Maintained markup$It is the difference between the gross merchandise cost and theactual selling price.
& i i P (i h h
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&aximi'e Pro(its through
Price )iscrimination
8ant Charge 0very Customer the aximum They 2re
8illing to #ay
#roblem$ont know willingness to pay
8ith list prices cant prevent high willingness to pay
customers from buying at low price
+,!@A
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Price Ad*ustments%etailers adjust prices over time 3markdowns4 and for
different customer segments 3variable pricing4
8hy do retailers take markdownsB
'ow do they optimi(e markdown decisionsB
'ow do they reduce the amount of markdowns by working
with vendorsB'ow do they li"uidate markdown merchandiseB
8hat are the mechanics of taking markdownsB
+,!@,
easons or a ng
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easons or a ng&ar-downs
Clearance arkdownsto get rid ofslow!moving obsolete merchandise
#romotional arkdowns
To increase sales and promotemerchandise
To 6ncrease traffic flow and sale ofcomplementary products generateexcitement through a sale
To generate cash to buy additionalmerchandise
+,!@
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.ptimi'ing &ar-down )ecisionsTraditional 2pproach! Dse a set of arbitrary rules
*ell!Through 6dentifies markdown items when its weekly sell!
through percentages fall below a certain level
%ule!based Cuts prices on the basis of how long the merchandisehas been in the store
arkdown 5ptimi(ation
*oftware is used to determine when and how much markdowns
should be taken to produce the best results by continuallyupdating pricing forecasts on the basis of actual sales and
factoring in differences in price sensitivities
+,!@E
ar own p m 'a on
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ar own p m 'a on"o(tware
Pro(itLogic
+,!@
/u a ng ar own
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/u a ng ar own&erchandise
*ell the merchandise to another retailerConsolidate the unsold merchandise
#lace merchandise on 6nternet auction site
$onate merchandise to charity
Carry the merchandise over to the next season
+,!@-P
hotoLi!"/GettyImaes
Variable Pricing and Price
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Variable Pricing and Price
)iscrimination
%etailers use a variety of techni"ues to maximi(e profits bycharging different prices to different customers
6ndividuali(ed 1ariable #ricing 3First $egree of #rice$iscrimination4 G *et uni"ue price for each customer e"ual to
customers willingness to pay2uctions #ersonali(ed 6nternet #rices
*elf!*elected 1ariable #ricing 3*econd $egree of #rice$iscrimination4 G 5ffer the same price schedule to allcustomersHuantity discounts0arly )ird *pecial5ver 8eekend Travel $iscount
+,!IJ
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+,!I+
e&ay Auction on porsche
speeder -/0
(hoppers at *1rop2s use their loyalty card at a1ios1 and receive unadvertised personali3ed
coupons
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Variable Pricing and Price
)iscrimination ContinuedClearance arkdowns for Fashion erchandiseCoupons#rice )undlingc$onalds 1alue eal
ultiple!Dnit #ricing or Huantity $iscount1ariable #ricing by arket *egments 3Third $egree of #rice
$iscrimination4 G Charge different groups different prices*eniors $iscountsKids enu
Lone #ricing3Third $egree of #rice $iscrimination4 G Chargedifferent prices in different stores markets regions
+,!I@
o u on o ro ems n
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o u on o ro ems nImplementing Price )iscrimination
*et prices based on customer characteristics
related to willingness to pay
Fashion sensitive customers will pay more so
charge higher prices when fashion first
introduced G reduce price later in season#rice sensitive customers will expend effort to
get lower prices G coupons
0lderly customers eat earlier and are more
price sensitive so offer early bird specials
+,!II
C. Bo#$a!%/PhotoLi!"/Getty Imaes
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The pricing polic adopted b the retailer
can be$
"ostoriented pricing
!emandoriented pricing
"ompetitionoriented pricing
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Cost-oriented pricing:In "ostoriented pricing& A basic markup is added tothe cost of the merchandise to arri#e at a price.
'ere retail price is considered to be the function ofcost and markup.
Thus&
etail price = "ost Markup
Markup = etail price "ost
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Demand-oriented pricingThis polic focuses on the *uantities that thecustomers would bu at #arious prices.
It largel depends upon the percei#ed #alue attached
to the product b the customer.
As& sometimes high priced product is percei#ed as
being of high *ualit and a low priced product is
percei#ed as being of low*ualit.An understanding of the target market and the #alue
proposition is the ke to demand oriented pricing.
C i i i d
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Competition-oriented
pricing
+hen the prices adopted b the competitors pla a
ke role in determining the price of the product& then it
is said to be competition oriented pricing.
'ere the retailer ma price the product at par with the
competition.
That is, abo#e the competitor-s price or below the
price.
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Pricing "trategies
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Price
This is the only element in the marketing mix that
brings in the revenues. All the rest are costs
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P+ICI01 You pay rent for your apartment, tuition for your
education, and a fee to your dentist or physician.
The airline, railways, taxi and bus companies chargeyou a fare; the local utilities call their price a rate;
and the local bank charges you interest for the
money you borrow. The guest lecturer is paid an honorarium and the
government official takes a bribe to pass a file which
was his job anyway.
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Pricing "trategies: 2igh3Low
Pricing$iscount the initial prices through fre"uent sales promotions
2dvantages6ncreases profits through price discrimination
*ales create excitement
*ells merchandise
$isadvantagesTrain people to buy on deal and wait
'ave an adverse effect on profits
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Pricing "trategies: Everyday
Low Pricing0mphasi(es the continuity of retail prices at a level somewhere
between the regular none!sale price and the deep!discount sale
price of high/low retailers
$oesnt mean lowest price%etailers have adopted a low price guarantee policy to
reinforce their 0$
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Pricing "trategies
0$
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Pricing "trategies
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Penetration Pricing
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Penetration Pricing#rice set to Mpenetrate the market
M
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&ar-et "-imming
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&ar-et "-imming 'igh price
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Value Pricing
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Value Pricing#rice set in accordance with customer
perceptions about the value of the
product/service
0xamples include status
products/exclusive products
!ompanies may be able to set pricesaccording to perceived value.
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Loss Leader
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Loss Leader;oods/services deliberately sold below cost to encourage sales
elsewhere
Typical in supermarkets e.g. at Christmas selling bottles of gin at N I
in the hope that people will be attracted to the store and buy other
things
#urchases of other items more than covers Mloss on item sold
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Psychological Pricing
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Psychological Pricing
Dsed to play on consumer perceptions
Classic example G %s I---.-- instead of %s AJJJ7
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1oing +ate #Price Leadership%
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1oing +ate #Price Leadership%
6n case of price leader competitor have difficulty in competing on price G too
high and they lose market share too low and the price leader would match price
and force smaller rival out of market
8here competition is limited Mgoing rate pricing may be applicable G banks
petrol supermarkets electrical goods G find very similar prices in all outlets
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,ender Pricing
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,ender Pricing
any contracts awarded on a tender basis
Firm 3or firms4 submit their price for carrying out the work
#urchaser then chooses which represents best value
ostly done in secret
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Price )iscrimination
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Price )iscrimination
Charging a different price for the same
good/service in different markets
%e"uires different price elasticity of
demand in each market
"rices for rail travel differ for the samejourney at different times of the day
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)estroyer Pricing3Predatory
Pricing
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)estroyer3Predatory Pricing
$eliberate price cutting or offer of Mfree gifts/products to force
rivals 3normally smaller and weaker4 out of business or prevent new
entrants
2nti!competitive and illegal if it can be proved
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Absorption3Full Cost
Pricing
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Absorption3Full Cost Pricing
Full Cost #ricingG attempting to set price to cover
both fixed and variable costs
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&arginal Cost Pricing
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&arginal Cost Pricingarginal cost G the cost of producing 5O0 extra or 5O0 fewer item of
production
C pricing G allows flexibility
#articularly relevant in transport where fixed costs may be relatively high
2llows variable pricing structure G e.g. on a flight from
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&arginal Cost Pricing0xample
Aircraft flying from #ristol to $dinburgh % Total !ost &includingnormal profit' ( )*+, of which )*-, is fixed cost
/umber of seats ( *0, average price ( )1-.2+
! of each passenger ( 34*0 ( )*3.+
5f flight not full, better to offer passengers chance of flying at)*3.+ and fill the seat than not fill it at all6
*All figures are estimates only
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Contribution Pricing
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Contribution Pricing"ontribution = elling /rice 0 1ariable (direct costs)
#rices set to ensure coverage of variable costs and a Mcontribution to
the fixed costs
*imilar in principle to marginal cost pricing
)reak!even analysis might be useful in such circumstances
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,arget Pricing
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,arget Pricing
*etting price to Mtarget a specified profit level
0stimates of the cost and potential revenue at different
prices and thus the break!even have to be made to
determine the mark!up
ark!up ? #rofit/Cost x +JJ
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Cost!Plus Pricing
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Cost!Plus Pricing
Calculation of the average cost 32C4 plus a mark up
2C ? Total Cost/5utput
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In(luence o( Elasticity
+etailers View Price in
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+etailers View Price in
,erms o(:
+. #rofitability
@. *ales 1olume
I. Consumer traffic
A. *tore image
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"etting the +etail Price#rice!setting objectives *ales
#rofit
Competition
#rice!setting determinants $emand
Competition
Cost
#roduct
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Ad*usting the +etail Price$iscount adjustmentsarkon 2djustments
arkdown 2djustments
Causes of markdownsTiming of markdowns
*i(e of markdowns
arkdown strategies
#romotional
#rice!line
arkdown Control
Price Can be 4sed to
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Price Can be 4sed to
Communicate5
*tatus
*nob appeal
Huality
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&erchandise Cost: A &a*or
)eterminant o( Price;ross 6nvoice #rice G Trade $iscounts G Huantity $iscounts G*easonal $iscounts G 5ther $iscounts ? 2et In#oice /rice
Oet 6nvoice #rice G Cash $iscounts Q Transportation Charges Q8orkroom 0xpenses ? Merchandise "ost
#rice ? erchandise Cost Q #rofit
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Product Considerations$ifferent products have the ability to command differentprices at different times and in different locations.
ust consider
#erishability
#roduct "uality
#roduct uni"ueness
+etailers Compute &ar-up on
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+etailers Compute &ar-up on
+etail "elling Price (or "everal
+easons:
#sychological %easons
arkup on selling price is alwayslower than a markup on cost
Comparison %easons )etween store operations
8ith trade statistics
8ith expressions of financialoperating ratios which are
computed as a R of sales
6nventory %easons
)eginning!of!month 0nd!of!
month and purchases arecalculated at retail
0mphasis %easons
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&ar-up6nitial arkup 8hat you hope to receive7aintained arkup 8hat you actually receive7
;ross argin ? aintained markup
6nitial arkup R is the key element in guiding retailers
price setting decisions
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Ad*usting the +etail Price Three Types+. $iscounts reductions granted to employees and special customers
@. arkons arkups taken after the initial price is set
I. arkdowns $ownward adjustments in the original selling price
arkdown R ? 3original price G reduced price4 / reduced price
%emember %etail %eductions ? arkdowns Q shortages Q employeediscounts Q customer discounts
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Causes o( &ar-downs)uying related causes2ssortment error
Timing error late shipment or ordering too much
isjudging "uality
*upplier error late damaged or incorrect shipments
*elling related causes#ricing error hence little consumer interest
Dsing markdowns to stimulate sales2ggressive selling trading customer up misleading claims returns
Causes o( &ar-downs
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Causes o( &ar-downs
#cont$%5perationally related causes$amaged or dirty merchandise
5dd lots
arket shifts
Factors A((ecting ,iming o(
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Factors A((ecting ,iming o(
&ar-downsType of merchandise*tore image
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