3Merchandise Management Planning Merchandise AssortmentsRetail Communication MixPricingBuying MerchandiseBuying Systems
4Pricing Issues Pricing Strategies Everyday Low Pricing (EDLP) Vs Hi-Lo PricingHow Should Prices Be Set?Demand Oriented PricingHow Do Retailers Set Price?Cost Oriented PricingLegal Issues in Pricing2
5Everyday Low Prices (EDLP) Pricing StrategiesEveryday Low Prices (EDLP)Charge the same price all the timeSet 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 PricingRegular prices are higher than EDLP competitors, but merchandise frequently on sale at lower prices.
6Everyday Low PricingWal-Mart, Category Specialists, Dillards, Food LionBenefits to ConsumersAssured of Low Price on Every VisitLess StockoutsBenefits to RetailerLower Advertising ExpenseLower Labor Costs3
7Hi-Lo Pricing Most Department Stores, Publix, Kmart Benefits to ConsumerSpend Time to Find Lowest PriceBenefits to RetailerMaximize Profits -- Price DiscriminationProblem: Trains People to Buy on Deal4
9Considerations in Setting Retail Price Price of MerchandiseDemand: What will the customer will pay for merchandise?Competitors How are they pricing merchandise?Cost of Merchandise
10Methods for Setting Price Demand-Oriented – Charge as much a customers are willing to payCost-Oriented – Set price at a fixed percent over cost of merchandiseCompetitor-Oriented – Set price in relation to competitor’s prices
11Sample Income Statement Showing Gross Margin Net Sales $ 120,000- Cost of goods sold ,000= Maintained markup ,000- Alteration costs + cash discounts ,000= Gross margin $ 59,000
12Initial and Maintained Markups Initial markup = retail selling price initially placed on the merchandise - cost of goods soldMaintained markup = Actual sales that you get for the merchandise - cost of goods sold
13Maintained Markup % and Gross Margin Maintained = Net Sales – Cost of Goods Sold Margin Net SalesGross Margin = Maintained Markup – Workroom Costs + Discounts Percent Net Sales
14Setting Retail Price Based on Costs Margin $.40Cost of Merchandise $.60Markup as a Percent of Retail Price % = $.40/$1.00
15Initial and Maintained Markup Initial Retail Price $1.00Reductions $.10Maintained Markup $.30Cost of Merchandise $.60Maintained Markup as a Percent of Retail Price % = $.30/$1.00
16Reductions Markdowns (Sales) Discounts to employees Inventory shrinkage due to shoplifting and employee theft
17Setting Retail Price Based on Cost DetermineCost of Goods SoldPlanned and Forecasted ReductionsDesired Maintained MarkupCalculate Initial Markup % Based on Cost of Goods Sold, Planned and Forecasted Reductions, and Desired Maintained MarkupCalculate Initial Retail Price Based on Cost of Merchandise and Initial Markup Percent
20Example of Setting the Initial Retail Price Cost = $ Planned Initial Markup = 56.85%Retail Price = $ (56.85% x Retail Price)Solve for Retail Price.4315 x retail price = 100Retail Price = $100/.4315 =Initial Retail Price = Cost of Merchandise (1-markup percentage)
21Pricing ExampleA 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 x (1-Z) = 30 x Z /(1-.4)
22Pricing ExampleA 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%?
31Breakeven AnalysisUnderstanding the Implication of Fixed and Variable CostContribution/UnitBreakeven pointFixed CostsUnit SalesCalculating Breakeven QuantityBEP quantityFixed cost=Unit price - Unit variable cost
32Illustration 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?
33Cargo Pants Illustration of Breakeven Analysis Breakeven Quantity = Fixed CostUnit Price – Variable Cost40,040 units = $400,000$ $15.00
34Making 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?
35Making a Profit on Cargo Pants Illustration of Breakeven Analysis Breakeven Quantity = Fixed CostUnit Price – Variable Cost50,050 units = $500,000$ $15.00
36Percent Sales Increase Needed to Breakeven on a Price Decrease The Gap has bought 60,000 women’s 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?
37The Gap Considers a Price Cut of 16.67% Breakeven % = x (-%price change) Sales Change % initial margin -% price change39.78% = x – (-16.67) (7/12) + (-16.6)
38Using 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 rentReduces prices by 5%Wants to make a $50,000 profit
39Retailer’s Income Statement Net Sales $1,000,000COGS , %Gross Margin , %Operating ExpensesVariable , %Fixed , %Profit , %
47Reasons for Taking Markdowns Get Rid of Slow-Moving, Obsolete, Uncompetitively Priced MerchandiseIncrease Sales and Profits through Price DiscriminationGenerate Cash to Buy Better Selling MerchandiseIncrease Traffic Flow and Sale of Complementary Products Generate Excitement through a Sale
48Markdowns 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 differentquantity and functional discountschanging market conditionsGenerally legal when retailer sells to consumers.
49Maximize Profits through Price Discrimination Want Charge Every Customer the Maximum They Are Willing to PayProblemDon’t know willingness to payWith list prices, can’t prevent high willingness to pay customers from buying at low price
50Solution to Problems in Implementing Price Discrimination Set prices based on customer characteristics related to willingness to payFashion sensitive customers will pay more so charge higher prices when fashion first introduced – reduce price later in seasonPrice sensitive customers will expend effort to get lower prices – couponsElderly customers eat earlier and are more price sensitive so offer early bird specials
51Types of Price Discrimination First Degree – Set unique price for each customer equal to customer’s willingness to payAuctionsSecond Degree – Offer the same price schedule to all customersQuantity discountsThird Degree – Charge different groups different pricesMarkdowns Late in SeasonEarly Bird SpecialSeniors DiscountsOver Weekend Travel DiscountCoupons
52How To Reduce Markdowns Use Markdown Optimization ModelsImprove Sales Forecasts and Merchandise Budget PlanWork with Vendors to Plan Deliveries
53Liquidating Markdown Merchandise Auction merchandise on Internet (eBay or liquidation exchange)Have special clearance location on own website“Job out” the remaining merchandise to another retailerConsolidate the marked-down merchandiseGive merchandise to charityCarry the merchandise over to the next season
55CouponsDocuments that entitle the holder to a reduced price or X cents off a product or service.PurposeReduce price to price sensitive customers who will spend the effort to clip couponsInduce customer to try products for first timeConvert first time users to regularsEncourage large purchasesIncrease usageProtect market share
56RebatesMoney 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 don’t redeem.They can offer price cuts to customers directly.
57Price 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.
58Variable Pricing Application of price discrimination By location – zone pricingEarly Bird SpecialSeniors DiscountsOver Weekend Travel DiscountQuantity DiscountElectronic channel has potential for charging a different price to each customer
59Pricing and the Internet Auction pricing more feasible – easier to form a market of buyers and sellers (eBay)Priceline.com
60Using Price to Stimulate Sales Leader PricingPrice LiningOdd Pricing
61Leader PricingCertain 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.
62Price Lining A limited number of predetermined price points. Ex: $59.99 (good), $89.99 (better), and (best)Benefits:Eliminates confusion of many prices.Merchandising task is simplified.Gives buyers flexibility.Can get customers to “trade up.”
63Odd PricingA price that ends in an odd number ($.57)or just under a round number ($98).Retailers believe practices increases sales, but probably doesn’t.Does delineate:Type of store (downscale store might use it.)Sale
64Legal Issues in Retail Pricing Price DiscriminationVertical Price FixingResale Price MaintenanceHorizontal Price FixingComparative Price AdvertisingBait and Switch TacticsScanned Versus Posted Prices
65Vertical Price FixingVertical Price Fixing -- Agreements to fix prices between parties at different levels of the same marketing channel.Vendors can’t 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
66Predatory PricingEstablishing merchandise prices to drive competition from the marketplace.Illegal!Retailers can charge different prices at different locations if costs are different.
67Comparative 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.
68Potential 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.
69Guidelines 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.
70Bait-and-SwitchLure 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 byRetailer out of advertised model.Retailer has advertised model, but disparages it.
71Bait and Switch (cont.) Retailers should: Have sufficient quantities Give a “rain check”Don’t disparage merchandise