In-Depth Notes on Pricing in Retail

Pricing in Retail

Importance of Pricing

• Key Objectives:
  • Achieve profitability
  • Ensure customer satisfaction
• Consistency Required: Pricing strategy must align with:
  • Retailer’s positioning
  • Business goals
  • Sales targets
  • Profit objectives
  • Return on Investment (ROI)

Pricing Options for Retailers

• Discount Orientation:
  • Competitive advantage through low prices.
• At-the-Market Orientation:
  • Service and atmosphere aimed at attracting middle-class consumers.
• Upscale Orientation:
  • Prestige pricing targeting a small market segment, involves higher expenses and extra services.
• Consumer Perception:
  • Essential to offer perceived value for chosen pricing orientation; consumers dislike feeling ripped off.

External Factors Affecting Retail Price Strategy

• Various Factors:
  • Influence pricing strategies to varying degrees, affecting options and restrictiveness.

Price Elasticity of Demand

• Definition:
  • Sensitivity of customers to price changes, reflected in quantity purchased.
• Price Elastic:
  • Small price change leads to a significant change in quantity bought.
• Price Inelastic:
  • Large price change results in minimal change in quantity bought.

Market Segments and Price Sensitivity

1. Economic Consumers:
   • Seek lowest prices due to economic constraints.
2. Status-Oriented Consumers:
   • Willing to pay more for prestige products.
3. Assortment-Oriented Consumers:
   • Value a wide range of selections over price.
4. Personalizing Consumers:
   • Prioritize customer service above price.
5. Convenience-Oriented Consumers:
   • Favor convenience over service and price.

Government Influence on Retail Pricing

• Horizontal Price Fixing:
  • Agreement among retailers to set prices; illegal under Sherman Antitrust Act.
• Vertical Pricing Fixing:
  • Manufacturers controlling retail prices, permissible through specific practices like MSRP.
• Price Discrimination (Robinson-Patman Act):
  • Prevents unfair pricing practices among retailers to maintain competition.
• Minimum Price Laws:
  • Regulate selling prices above certain thresholds to cover costs.
• Predatory Pricing:
  • Selling items at loss to harm competitors.
• Loss Leaders:
  • Pricing items below cost to attract customers.
• Unit Pricing:
  • Displays total cost and price per unit for easy comparison.
• Price Advertising Regulations:
  • FTC enforces rules for fair price representations in advertising.

Competition Pricing

• Market Pricing:
  • Retailers price similarly due to consumer choice in a saturated market.
• Administered Pricing:
  • Distinctive pricing mix to attract customers.

Overall Pricing Objectives

• Lower prices to gain market penetration.
• Premium prices for marketing skimming to attract less price-sensitive customers.
• Other objectives include maintaining a positive image, increasing traffic, and discouraging competitors.

Demand-Oriented Pricing

• Based on consumer desires and sensitivity.
• Price-Quality Association:
  • Consumers equate high prices with higher quality.
• Prestige Pricing:
  • High prices set to attract status-conscious consumers.

Cost-Oriented Pricing

• Markup Pricing:
  • Prices determined by adding costs plus desired profit.
• Variable Markup Policy:
  • Adjustments in markups based on merchandise category.

Customary and Variable Pricing

• Customary Pricing:
  • Prices set and maintained for extensive periods.
• Variable Pricing:
  • Prices adjusted with fluctuating costs or demand.
• Yield Management:
  • Dynamic pricing techniques to maximize revenues during high demand periods.

Additional Types of Pricing

• One-Price Policy: Same price for all customers.
• Flexible Pricing: Bargaining allowed (e.g., cars).
• Odd Pricing: Prices set below whole numbers to create a psychological effect.
• Leader Pricing: Advertised items sold at lower margins to drive traffic.

Multiple-Unit and Price Lining Pricing

• Multiple-Unit Pricing: Discounts on bulk purchases.
• Price Lining: Limited price range for merchandise with phased pricing strategies to reduce confusion and aid inventory management.

Reasons to Take Markdowns

• Meet competition, adjust to overstock, and increase traffic.

Timing Markdowns

• Policies can involve early, late, staggered, or automatic markdowns depending on demand dynamics.

Sources for Further Reading

• Various online links on pricing strategies and market dynamics, especially in retail contexts.
  • For example, trade practices and consumer behavior surveys, insights into markdown strategies, etc.