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PPT 15-1 5 th Edition. PPT 15-2 Chapter 15Pricing McGraw-Hill/Irwin Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies,

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Presentation on theme: "PPT 15-1 5 th Edition. PPT 15-2 Chapter 15Pricing McGraw-Hill/Irwin Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies,"— Presentation transcript:

1 PPT th Edition

2 PPT 15-2 Chapter 15Pricing McGraw-Hill/Irwin Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3 PPT 15-3 Merchandise Management Buying Systems Planning Merchandise Assortments Buying Merchandise Pricing Retail Communication Mix

4 PPT 15-4 Pricing Issues Pricing Strategies –Everyday Low Pricing (EDLP) Vs Hi-Lo Pricing How Should Prices Be Set? –Demand Oriented Pricing How Do Retailers Set Price? –Cost Oriented Pricing Legal Issues in Pricing

5 PPT 15-5 Pricing Strategies Everyday Low Prices (EDLP) –Charge the same price all the time –Set prices between regular non-sale price and deep discount sale prices of a high/low pricing competitor. –EDLP retailers typically still have some sales. High/Low Pricing –Regular prices are higher than EDLP competitors, but merchandise frequently on sale at lower prices.

6 PPT 15-6 Everyday Low Pricing Wal-Mart, Category Specialists, Dillards, Food Lion Benefits to Consumers –Assured of Low Price on Every Visit –Less Stockouts Benefits to Retailer –Lower Advertising Expense –Lower Labor Costs

7 PPT 15-7 Hi-Lo Pricing Most Department Stores, Publix, Kmart Benefits to Consumer –Spend Time to Find Lowest Price Benefits to Retailer –Maximize Profits -- Price Discrimination Problem: Trains People to Buy on Deal

8 PPT 15-8 Pricing Strategies EDLP Builds loyalty – guarantees low prices to customers Lower advertising costs Better supply chain management –Fewer stockouts –Higher inventory turns Hi-Lo Higher profits – price discrimination More excitement Build short-term sales and generates traffic

9 PPT 15-9 Considerations in Setting Retail Price Price of Merchandise Cost of Merchandise Demand: What will the customer will pay for merchandise? Competitors How are they pricing merchandise?

10 PPT Methods for Setting Price Demand-Oriented – Charge as much a customers are willing to pay Cost-Oriented – Set price at a fixed percent over cost of merchandise Competitor-Oriented – Set price in relation to competitors prices

11 PPT Sample Income Statement Showing Gross Margin Net Sales $ 120,000 -Cost of goods sold 58,000 =Maintained markup 62,000 -Alteration costs + cash discounts 3,000 =Gross margin $ 59,000

12 PPT Initial and Maintained Markups Initial markup = retail selling price initially placed on the merchandise - cost of goods sold Maintained markup = Actual sales that you get for the merchandise - cost of goods sold

13 PPT Maintained Markup % and Gross Margin Maintained = Net Sales – Cost of Goods Sold Margin Net Sales Gross Margin = Maintained Markup – Workroom Costs + Discounts Percent Net Sales

14 PPT Setting Retail Price Based on Costs Retail Price $1.00 Cost of Merchandise $.60 Margin $.40 Markup as a Percent of Retail Price 40% = $.40/$1.00

15 PPT Initial and Maintained Markup Initial Retail Price $1.00 Cost of Merchandise $.60 Maintained Markup $.30 Maintained Markup as a Percent of Retail Price 30% = $.30/$1.00 Reductions $.10

16 PPT Reductions Markdowns (Sales) Discounts to employees Inventory shrinkage due to shoplifting and employee theft

17 PPT Setting Retail Price Based on Cost Determine –Cost of Goods Sold –Planned and Forecasted Reductions –Desired Maintained Markup Calculate Initial Markup % Based on Cost of Goods Sold, Planned and Forecasted Reductions, and Desired Maintained Markup Calculate Initial Retail Price Based on Cost of Merchandise and Initial Markup Percent

18 PPT Determining Initial Markup from Maintained Markup Maintained Markup = net sales - invoice costs + cash discounts Gross Margin = maintained markup - alterations + cash discounts Initial Markup = ($maintained markup + $ reductions) ($ net sales + $ reductions) or Initial Markup = (maintained markup (%) + reductions (%)) 100% + reductions (%)

19 PPT Example of Markups Retail = Cost + Markup 100% = 70% + 30% Retail = $10.00 and markup = 30% Retail = Cost + Markup $ = $ $ 3.00

20 PPT Example of Setting the Initial Retail Price Cost = $100 Planned Initial Markup = 56.85% Retail Price = $100 + (56.85% x Retail Price) Solve for Retail Price.4315 x retail price = 100 Retail Price = $100/.4315 = Initial Retail Price = Cost of Merchandise (1-markup percentage)

21 PPT Pricing Example A buyer has purchased 200 wallets at $30 each. Some of the handbags will be sold at $50 retail and others will be sold at $70 retail. How many handbags should be put at each price point to realize a maintained markup of 40% assuming no reductions? Z = percent sold at $50 $50 x + 70 x (1-Z) = 30 x Z /(1-.4)

22 PPT Pricing Example A buyer for women hosiery is planning to buy for merchandise to be sold during the summer season that will generate retail sales of $300,000. The buyer wants to have a maintained markup of 50% on retail for summer swim suits sales. Reductions will be very small and can be ignored. The buyer has already spent $75,000 for merchandise that will generate $175,000 at retail. What markup does the buyer need to have on the remainder of the planned purchases to realize the overall markup of 50%?

23 PPT Pricing Example Planned Sales $300,000 Planned Cost = 150, ,000 (1-.50) Sales Achieved 175,000 Money Spent = 75,000 Remaining Sales 125,000 Remaining Cost 75,000 Markup% Needed on Remaining Sales

24 PPT Setting Prices Based on Demand – Price Customer Is Willing to Pay Estimate Sales Made at Different Price Levels Calculate Profit at Each Price Level Set Prices to Maximize Profits

25 PPT Demand Curve Sales at Different Price Levels Quantity Sold Cost = $1 unit 1000 Price $2

26 PPT Methods for Estimating Sales at Different Price Levels Analyze Historical Sales and Prices Using Statistical Methods Conduct Price Experiments Use Judgment

27 PPT A Pricing Experiment BeforeAfter Store 110 $10021 $80 Gross margin = $500Gross margin = $630 Store 212 $10013 $100 Gross margin = $600Gross margin = $650

28 PPT Results of Pricing Test (1)(2)(3)(4)(5) Total Cost of MarketUnits SoldTotal DemandTotal($300,000 fixedProfits Unitat PriceRevenuecost + $5 variable(col 3 x MarketPrice(in units)(col 1 x col 2)cost)col 4) 1 $8 200,000$1,600,000 $1,300,000$300, ,000 1,500,000 1,050, , ,000 1,200, , , , ,000550, ,000

29 PPT Factors That Affect Customers Sensitivity to Price Customer Income (-) Need for the Product (-) Availability of Product from Competitors (+) Frequency and Amount Spent on Product (+)

30 PPT Considering Competitor Pricing

31 PPT Breakeven Analysis Understanding the Implication of Fixed and Variable Cost BEP quantity Fixed cost = Unit price - Unit variable cost Calculating Breakeven Quantity Unit Sales Fixed Costs Contribution/Unit Breakeven point

32 PPT Illustration of Breakeven Analysis American Eagle Outfitter is interested in developing private label cargo pants that will sell for $ The cost of developing the pants is $400,000. This includes the cost of salaries, benefits, space for the members of the design team. The variable cost of manufacturing the pants is $ How many cargo pants does American Eagle Outfitter have to sell to breakeven on its $400,000 investment?

33 PPT Cargo Pants Illustration of Breakeven Analysis Breakeven Quantity = Fixed Cost Unit Price – Variable Cost 40,040 units = $400,000 $ $15.00

34 PPT Making a Profit on Cargo Pants Illustration of Breakeven Analysis What if American Eagle Outfitter does want to just break even. It wants to make a profit of $100,000 on the cargo pants. How many units does American Eagle Outfitter need to sell then?

35 PPT Making a Profit on Cargo Pants Illustration of Breakeven Analysis Breakeven Quantity = Fixed Cost Unit Price – Variable Cost 50,050 units = $500,000 $ $15.00

36 PPT Percent Sales Increase Needed to Breakeven on a Price Decrease The Gap has bought 60,000 womens tee shirts at $5 a unit. It was originally going to price the tee shirts at $12.00, but is considering reducing the retail price to $10.00 – a 16.67% price reduction. How much does sales have to increase for The Gap to make the same profit at the lower price?

37 PPT The Gap Considers a Price Cut of 16.67% Breakeven % = 100 x (-%price change) Sales Change % initial margin -% price change 39.78% = 100 x – (-16.67) (7/12) + (-16.6)

38 PPT Using Breakeven Analysis for Other Retail Investment Decisions An independent retailers with one store is using breakeven analysis to consider several options. The retailer wants to know what the breakeven sales she will needs if she: Move to a new location with higher rent Reduces prices by 5% Wants to make a $50,000 profit

39 PPT Retailers Income Statement Net Sales $1,000,000 COGS 800,000 80% Gross Margin 200,000 20% Operating Expenses Variable 100,000 10% Fixed 80,000 8% Profit 20,000 2%

40 PPT Retailers Variable and Fixed Operating Expenses Variable Fixed Wages & Salaries Manager20,00020,000 Sales60,000 Clerical20,00010,000 Rent20,000 Maintenance 10,000 Total 100,00080,000

41 PPT Retailers Assets Current Assets Inventory$300,000 Accounts Receivable 75,000 Cash 25,000 Fixed Assets 100,000 Total $500,000

42 PPT Sales $ Retailer Needs to Break Even Profit = Sales - COGS-Var Cost - Fixed Cost 0 = Sales - COGs% * Sales - VC%*Sales - FC Break-even Sales * (1-COGS% -VC%) = FC Break-even Sales = FC/(1-COGS% -VC%) Break-even Sales = FC/(GM%-VC%) = $80,000/(.2-.1) = $888,888

43 PPT What Is the Breakeven Sales To Move To New Location? Rent Increases to $50,000 Break-even Sales = FC/(GM%-VC%)

44 PPT What Is the Breakeven Sales To If the Retailer Wants to Reduce Prices? Reduce Prices By 5% Break-even Sales = FC/(GM%-VC%)

45 PPT What Is the Breakeven Sales If the Retailer Wants to Make a Specific Income? Make $50,000/Year Break-even Sales = FC/(GM%-VC%)

46 PPT Price Adjustments Markdowns Coupons Rebates Price Bundling Multiple-Unit Pricing Variable Pricing

47 PPT Reasons for Taking Markdowns Get Rid of Slow-Moving, Obsolete, Uncompetitively Priced Merchandise Increase Sales and Profits through Price Discrimination Generate Cash to Buy Better Selling Merchandise Increase Traffic Flow and Sale of Complementary Products Generate Excitement through a Sale

48 PPT Markdowns Are a Form of Price Discrimination Occurs when a firm sells the same product to two or more customers at different prices. Generally illegal with a vendors sells to retailers except: costs are different quantity and functional discounts changing market conditions Generally legal when retailer sells to consumers.

49 PPT Maximize Profits through Price Discrimination Want Charge Every Customer the Maximum They Are Willing to Pay Problem –Dont know willingness to pay –With list prices, cant prevent high willingness to pay customers from buying at low price

50 PPT Solution to Problems in Implementing Price Discrimination Set prices based on customer characteristics related to willingness to pay Fashion sensitive customers will pay more so charge higher prices when fashion first introduced – reduce price later in season Price sensitive customers will expend effort to get lower prices – coupons Elderly customers eat earlier and are more price sensitive so offer early bird specials

51 PPT Types of Price Discrimination First Degree – Set unique price for each customer equal to customers willingness to pay –Auctions Second Degree – Offer the same price schedule to all customers –Quantity discounts Third Degree – Charge different groups different prices –Markdowns Late in Season –Early Bird Special –Seniors Discounts –Over Weekend Travel Discount –Coupons

52 PPT How To Reduce Markdowns Use Markdown Optimization Models Improve Sales Forecasts and Merchandise Budget Plan Work with Vendors to Plan Deliveries

53 PPT Liquidating Markdown Merchandise Auction merchandise on Internet (eBay or liquidation exchange) Have special clearance location on own website Job out the remaining merchandise to another retailer Consolidate the marked-down merchandise Give merchandise to charity Carry the merchandise over to the next season

54 PPT Clearance Center Liquidates Markdowns

55 PPT Coupons Documents that entitle the holder to a reduced price or X cents off a product or service. Purpose –Reduce price to price sensitive customers who will spend the effort to clip coupons –Induce customer to try products for first time –Convert first time users to regulars –Encourage large purchases –Increase usage –Protect market share

56 PPT Rebates Money returned to the customer based on a portion of the purchase price. Retailers perspective: more advantageous than coupons since they increase demand, but retailer has no handling costs. Manufacturers like rebates because: –Many customers dont redeem. –They can offer price cuts to customers directly.

57 PPT Price Bundling and Multiple-unit Pricing Price Bundling: practice of offering two or more different products or services at one price. Multiple-unit pricing: similar to price bundling except products or services are similar rather than different.

58 PPT Variable Pricing Application of price discrimination –By location – zone pricing –Early Bird Special –Seniors Discounts –Over Weekend Travel Discount –Quantity Discount Electronic channel has potential for charging a different price to each customer

59 PPT Pricing and the Internet Auction pricing more feasible – easier to form a market of buyers and sellers (eBay)

60 PPT Using Price to Stimulate Sales Leader Pricing Price Lining Odd Pricing

61 PPT Leader Pricing Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products. Best items: purchased frequently, primarily by price-sensitive shoppers. Examples: bread, eggs, milk, disposable diapers.

62 PPT Price Lining A limited number of predetermined price points. Ex: $59.99 (good), $89.99 (better), and (best) Benefits: –Eliminates confusion of many prices. –Merchandising task is simplified. –Gives buyers flexibility. –Can get customers to trade up.

63 PPT Odd Pricing A price that ends in an odd number ($.57)or just under a round number ($98). Retailers believe practices increases sales, but probably doesnt. Does delineate: –Type of store (downscale store might use it.) –Sale

64 PPT Legal Issues in Retail Pricing Price Discrimination Vertical Price Fixing –Resale Price Maintenance Horizontal Price Fixing Comparative Price Advertising Bait and Switch Tactics Scanned Versus Posted Prices

65 PPT Vertical Price Fixing Vertical Price Fixing -- Agreements to fix prices between parties at different levels of the same marketing channel. Vendors cant force retailers to sell at manufacturer suggested retail price (MSRP). Retailers can sell above MSRP. Often vendors tie selling products are MSRP with co-op advertising allowance

66 PPT Predatory Pricing Establishing merchandise prices to drive competition from the marketplace. Illegal! Retailers can charge different prices at different locations if costs are different.

67 PPT Comparative Price Advertising Compares price of merchandise offered for sale with a higher regular price or MSRP. Good because it gives consumers information about what merchandise should sell for. Illegal if used to deceive consumer.

68 PPT Potential Deceptions of Comparative 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.

69 PPT Guidelines for Retailers to Avoid Deception in Comparative Price Advertising Have reference price in effect about one-third of the time. Disclose how sale prices are set and how long they will be offered. Offer a satisfaction guaranteed policy. Be careful when using MSLP. Use objective terms. Use reference prices that can be easily verified.

70 PPT Bait-and-Switch Lure customers into store by advertising a product at a lower than usual price (the bait) and then induces customer to switch to higher-priced model (the switch). Can occur by –Retailer out of advertised model. –Retailer has advertised model, but disparages it.

71 PPT Bait and Switch (cont.) Retailers should: –Have sufficient quantities –Give a rain check –Dont disparage merchandise

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