Retail Pricing

Chapter 11: Retail Pricing

Learning Objectives

  • LO1: Explore the factors retailers consider when pricing merchandise.
  • LO2: Examine the various pricing strategies retailers can use to influence consumer purchases.
  • LO3: Look at how the Internet is changing the way retailers price their merchandise.

Key Terms and Concepts

What is Value?

Value represents the relationship of what a customer receives (goods/services) to what they must pay for it. This value perception varies among consumers and can be influenced by several factors, including:

  • Quality: Refers to the best materials and workmanship involved in the product.
  • Price: The amount charged, which can be high or low.
  • Service: Refers to the treatment, assistance, and benefits provided to customers.
  • Convenience: Pertains to the time and place of purchase.
Approaches in Setting Prices

When setting prices, retailers should consider multiple factors, including:

  • Cost of Merchandise and Services
  • Demand: The price sensitivity of consumers.
  • Competition: The various choices available for consumers.
  • Legal Considerations: Compliance with relevant laws and regulations.

Cost-Oriented Method of Setting Retail Prices

Retail prices are often based on the cost of the merchandise. The difference between the retail price and the cost is termed markup.
Formula for Retail Price:
extRetailPrice=extCostofMerchandise+extMarkupext{Retail Price} = ext{Cost of Merchandise} + ext{Markup}
Markup must sufficiently cover the retailer’s operating expenses, which include labor costs, rent, utilities, and advertising.

Markup Defined
  • Markup is a key concept in retail operations, describing the difference between the cost of merchandise and its retail price. It is fundamental in cost-oriented pricing.
  • Retailers either adopt the MSRP (Manufacturer’s Suggested Retail Price) or set their prices by marking up the item’s cost to achieve a profitable gross margin.
Calculating Markup Percentages

There are different methods to calculate markup depending on whether you are focusing on retail price or cost:

  1. Markup Percentage at Retail:
    ext{Markup percentage (at retail)} = rac{ ext{Markup}}{ ext{Retail Price}}
    (Markup is the difference between the Retail Price and the Cost of Merchandise)
  2. Retail Price Calculation from Cost and Markup Percentage:
    ext{Retail Price} = ext{Cost of Merchandise} imes rac{1}{(1 - ext{Markup Percentage})}
Determining Initial and Maintained Markups
  • Initial Markup can be computed as the total of expenses, profit, reductions, and alterations minus cash against net sales adjusted for reductions:
    extInitialMarkup=extExpenses+extProfit+extReductions+extAlterations−extCashextNetSales+extReductionsext{Initial Markup} = ext{Expenses} + ext{Profit} + ext{Reductions} + ext{Alterations} - ext{Cash} ext{Net Sales} + ext{Reductions}
  • Maintained Markup is calculated as the net sales minus gross cost of goods sold. It is reported as a percentage:
    extMaintainedMarkup=extNetSales−extGrossCostofGoodsSoldext{Maintained Markup} = ext{Net Sales} - ext{Gross Cost of Goods Sold}
    ext{Maintained Markup Percentage} = rac{ ext{Maintained Markup}}{ ext{Net Sales}}
Demand-Oriented Method of Setting Prices

This pricing strategy should work alongside cost-oriented methods to optimize retail prices. The demand-oriented method evaluates how price changes affect sales volume, particularly:

  • If customers are price-sensitive, a reduction in price may significantly increase demand.
  • Conversely, for customers less sensitive to price changes, increasing prices may not adversely affect sales and could enhance profit margins.

Results of Pricing Tests

  • Market Demand Analysis Example: Standardized pricing tests illustrating the relationship between unit price, market demand, total revenue, total costs, and subsequently, profits.
  • For varied price points, analyze demand at different price levels to optimize profit margins.

Competition-Oriented Method of Setting Retail Prices

  • Competitive Pricing: Gathering data on competitors' pricing allows retailers to strategically adjust their own prices.
  • Dominant Strategies for Price Competition:
    • EDLP (Everyday Low Pricing): Focuses on consistent low prices.
    • Branding Strategies: Positioning premium private-label brands can mitigate price competition.
Break-Even Analysis

This analysis examines the relationship between total revenue and total costs to identify necessary sales volumes for break-even profit levels. Key considerations include calculating:

  • Break-even volume and sales dollars for new products or lines.
  • Sales increases required to offset price changes.
  • Sales alterations needed to achieve target profit levels.

Price Adjustments

Types of Price Adjustments
  1. Markdowns: Price reductions from the original retail price intended to boost sales.
    • Reasons: Clear slow-moving merchandise, increase sales, generate cash for better selling items, and attract more customers.
  2. Coupons: Discounts provided to customers that encourage initial product trials or larger purchases.
    • Research indicates that a significant 80% of coupon redemptions occur through mobile devices.
  3. Rebates: A portion of the purchase price refunded to the buyer, viewed favorably by retailers for increasing demand.
  4. Price Bundling: Offering multiple products or services at one price to enhance sales.
  5. Variable Pricing: Prices that vary in different locations/demographics to optimize sales (third-degree price discrimination).

Pricing Strategies

Everyday Low Pricing vs. High/Low Pricing
  • EDLP: Focused on maintaining low prices across all goods, resulting in reduced advertising and better inventory management.
    • Some Canadian retailers promise to undercut competitors' prices by 10%.
  • High/Low Pricing: Retailers purposefully set higher prices but offer promotional sales. This strategy has intensified, allowing for customer excitement and better merchandise movement.
    • Differences in approach between stores can be noticeable, employing varied discount and sales intervals.
Unethical Pricing Tactics
  1. Bait and Switch: Advertising a bargain item with limited availability.
  2. Sales Above Advertised Price: Selling items at higher prices than advertised, barring rare exceptions with swift corrections.
  3. Price-Fixing: Agreements among retailers to manipulate market competition.

Pricing Services

Retailers in the service sector utilize yield management to adjust prices dynamically based on demand since services cannot be inventoried. Key aspects entail:

  • Understanding that unused service capacity (like empty seats on flights) represents lost revenue.
  • Complexity in assessing service quality due to its intangible nature, making consumer evaluations challenging.

Conclusion

Customers increasingly prioritize price sensitivity, compelling retailers to adopt agile pricing strategies. Retailers must balance pricing decisions with strategic objectives while continuously accommodating changes in the market driven by technology.