Student_MKTG3230A (2025 Winter) - Lecture 7 PPT - Retail Pricing

Retail Pricing Overview

Course Title: MKTG2020C (2025 Winter)

Lecture: Retail Pricing

Presented by Dr. Deborah LeungReference: Chapter 11 from McGraw Hill

Learning Objectives (LO)

Upon studying Chapter 11, students should:

• Explore and analyze various factors that retailers consider when pricing merchandise, including market conditions, consumer preferences, and cost structures.

• Examine and compare various pricing strategies used by retailers to influence consumer purchases, assessing the effectiveness of each in different market scenarios.

• Understand how the Internet alters retail pricing approaches, including direct online sales strategies and the impacts of price comparison tools.

Discussion Points

• Cross-Border Shopping: Strategies for Canadian retailers to mitigate cross-border shopping are crucial for sustaining market share. Retailers need to adapt their offerings, pricing models, and customer engagement tactics to compete effectively with U.S. retail prices and selection.

• Impact of Amazon: The discussion on how Amazon has reshaped the Canadian retail landscape highlights the need for traditional retailers to innovate and adjust their business models to align with the convenience, product variety, and pricing effectiveness that Amazon offers.

Understanding Value (LO1)

Definition of Value:

Value is defined as a customer's perception of what they receive (goods/services) against what they pay for it.

• Dynamic Nature: Value can vary based on numerous factors, including:

  • Quality: The materials used and the workmanship quality directly influence consumer perception of value.

  • Price: The perceived relationship between prices (high or low) significantly affects buying decisions.

  • Service: The level of customer treatment, assistance, and after-sales support enhances perceived value.

  • Convenience: Factors such as the time and place of purchase play a critical role in enhancing customer satisfaction and perceived value.

Approaches to Setting Prices (LO1)

Factors Influencing Price Setting:

• Cost of Merchandise and Services: The base costs of goods and services significantly dictate pricing strategies.

• Consumer Demand: Understanding price sensitivity of consumers and adjusting per observed buying behaviors is essential for maximizing profitability.

• Competition: Awareness of competitors’ pricing and strategies allows for better positioning in the marketplace.

• Legal Considerations: Compliance with pricing regulations is necessary to avoid legal issues and maintain brand reputation.

Pricing Methods:

• Cost-Oriented Pricing: Setting prices based on the cost of goods plus a markup (

  • Markup Importance: Consideration of operating expenses (labor, rent, utilities) that need to be covered, and utilizing net profit margins to inform pricing strategies.

• Demand-Oriented Pricing: Adjusting prices based on real-time consumer demand sensitivities; more detailed analysis can predict optimal price points.

• Competition-Oriented Pricing: Establishing prices based on competitor prices, which may involve collecting and analyzing competitor pricing data for strategy adjustments.

Cost-Oriented Pricing (LO1)

Price Equation:

• Retail Price Formula: Retail Price = Cost of Merchandise + Markup.

Markup Importance:

• Understanding the necessity of an adequate markup to cover operating expenses and yield profit is vital for sustainable pricing strategies.

• Gross Profit Margin Percentage: A crucial metric in pricing decisions, influencing product positioning and inventory management.

• Initial Pricing Strategy: Initial prices should be set high enough to maintain profitability post markdown adaptations, taking into account seasonal and promotional considerations.

Markup Calculation:

• This crucial pricing technique enables setting prices above merchandise cost.

• Markup Percentage Formulas:

  • Markup % at Retail = (Retail Price - Cost) / Retail Price.

  • Markup % at Cost = (Retail Price - Cost) / Cost.

Practical Example:

• If a calculator costs $14 with a desired 30% markup, to determine the retail price, one would calculate: Retail Price = $14 / (1 - 0.30) = $20.

Determining Initial Markups (LO1)

• Initial Markup Calculation: Can employ either percentages or specific dollar amounts, ensuring all relevant costs (rent, salaries) are factored into desired profit margins.

• Maintained Markup: The actual sales deducted from cost represent profit percentage, informing future price adjustments.

Demand-Oriented Pricing (LO1)

Definition:

• This approach considers consumer demand sensitivities, analyzing how price changes can directly impact sales volumes and profits.

Examples:

• Price reductions can effectively increase demand among price-sensitive shoppers, while price increases may sustain profits if the target demographic is less price-sensitive.

• Pricing Experiments: Implementing systematic adjustments in pricing to compare sales responses effectively tunes retail pricing strategies.

Competition-Oriented Pricing (LO1)

• Data Collection: Gathering competitive pricing data allows for strategic price adjustments tailored to market positions.

Strategies:

• EDLP (Everyday Low Price): A strategy aimed at sustaining competitiveness without frequent promotional sales, focusing instead on consistent, attractive pricing.

• Branding Strategies: Developing premium private label brands to distinctly differentiate offerings in the market.

• Importance of understanding market position is paramount in selecting appropriate pricing strategies.

Profit Impact and Break-Even Analysis (LO1)

Break-Even Analysis:

• A critical tool determining the necessary sales volume required to cover costs accurately.

• Break-Even Point (BEP): Defined as the point where total revenue equals total costs.

• Calculation: BEP quantity can be calculated via the formula: BEP quantity = Fixed Costs / (Unit Price - Unit Variable Cost). Incorporation of desired profit margins into calculations can help set realistic sales targets.

Price Adjustments (LO2)

Types of Price Adjustments:

• Markdowns: Strategic price reductions from initial prices designed to stimulate sales and clear inventory.

• Coupons and Rebates: Tactical pricing incentives aimed at increasing consumer demand through attractive discounts.

• Price Bundling and Multiple-Unit Pricing: Offering complementary products together at a reduced price to encourage larger transactions.

Pricing Strategies Overview (LO2)

• Everyday Low Prices (EDLP): Emphasize stable pricing to mitigate price competition and build customer loyalty.

• High/Low Pricing: Typically involves pricing products higher than EDLP but leveraging promotional tactics to generate urgency.

• Psychological Pricing: Utilizing odd pricing techniques (e.g., $9.99 instead of $10.00) to shape customer perceptions of value positively.

Challenges in Pricing Services (LO2)

• Demand Matching: Services are intangible and time-sensitive, complicating the inventory management of service-based businesses.

• Quality Assessment: Customers may fall back on pricing as an informal indicator of the quality of unfamiliar services.

Leveraging Price to Drive Sales (LO2)

Strategies to Increase Sales:

• Leader Pricing: Implementing discounts on high-demand items to drive overall store traffic and enhance sales volumes across categories.

• Price Lining: Establishing fixed price points to streamline choices for customers and reduce confusion.

• Odd Pricing/Psychological Pricing: Employing pricing techniques ending in odd numbers aimed at creating greater perceived value among consumers.

Internet's Role in Pricing Strategies (LO3)

• The growth of online retail has significantly expanded consumers' abilities to compare prices globally, resulting in intensified competition among retailers.

• Influence of Shopping Bots: The emergence of price comparison tools has facilitated the effortless comparison of merchandise across multiple retail platforms, fundamentally altering consumer behavior and retail strategies.

Summary of Key Takeaways

• Rising price sensitivity among consumers necessitates careful consideration and implementation of strategic pricing approaches tailored to market dynamics.

• Aligning pricing strategies impeccably with overall retail objectives is vital for sustained competitive advantage.

• Continuous adaptation in pricing based on evolving market competition and customer demand trends is essential for retail survival and growth.