2 Learning ObjectivesDiscuss the factors a retailer should consider when establishing pricing objectives and policies.Describe the differences between the various pricing strategies available to the retailer.Describe how retailers calculate the various markups.Discuss why markdown management is so important in retailing and describe some of the errors that cause markdowns.
4 Exhibit 10.1 - Interaction Between a Retailer’s Pricing Objectives and Other Decisions LO 1
5 Pricing Objectives Profit oriented objectives Achieve either a certain rate of return or maximizing profits.Target return objectiveStates a specific level of profit, such as percentage of sales or return on capital invested.Profit maximizationSeeks to obtain as much profit as possible.SkimmingPrice is initially set high on merchandise to skim the cream of demand before selling at more competitive prices.PenetrationPrice is set at a low level in order to penetrate the market and establish a loyal customer base.Sales-oriented objectivesSeek some level of unit sales, dollar sales, or market share but do not mention profit.Status quo objectivesAdopted by retailers who are happy with their market share and level of profits.LO 1
6 Pricing PoliciesRules of action, or guidelines, that ensure uniformity of pricing decisions within a retail operation.Below-market pricing policy - Regularly discounts merchandise from the established market price in order to build store traffic and generate high sales and gross margin dollars per square foot of selling space.LO 1
7 Pricing Policies Pricing at market levels Price zone - Range of prices for a particular merchandise line that appeals to customers in a certain market segment.Above-market pricing policy - Retailers establish high prices because nonprice factors are more important to their target market than price.LO 1
8 Pricing PoliciesFactors that permit retailers to price above market levels:Merchandise offeringsServices providedConvenient locationsExtended hours of operationLO 1
9 Specific Pricing Strategies Customary pricingThe retailer sets prices for goods and services and seeks tomaintain those prices over an extended period of time.Variable pricingRecognizes that differences in demand and cost necessitatethat the retailer change prices in a fairly predictablemanner.Flexible pricingEncourages offering the same products and quantities todifferent customers at different prices; used for personalselling; costs can dramatically increase, and revenuesdecrease, as customers begin to bargain for everything.One-price policyEstablishes that the retailer will charge all customers thesame price for an item; speeds up transactions and reducesthe need for highly skilled salespeople.LO 2
10 Specific Pricing Strategies Price lining - Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification.Trading up - Occurs when a retailer uses price lining and a salesperson moves a customer from a lower priced line to a higher one.Trading down - Occurs when a retailer uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line.LO 2
11 Specific Pricing Strategies Retailers select price lines that have the strongest consumer demand.Price lining helps buying more efficiently, simplifying inventory control, and accelerating inventory turnover.LO 2
12 Specific Pricing Strategies Odd pricingPractice of setting retail prices that end in the digits 5, 8, 9—such as $29.95, $49.98, or $9.99.Multiple-unit pricingPrice of each unit in a multiple-unit package is less than the price of each unit if it were sold individually.Bundle PricingSelling distinct multiple items offered together at a special price.Bait-and-switchpricingAdvertising or promoting a product at an unrealistically low price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a higher-priced product.Private-label brand pricingA private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand.LO 2
13 Specific Pricing Strategies Leader pricing - High-demand item is priced low and is heavily advertised in order to attract customers into the store.Loss leader - Extreme form of leader pricing where an item is sold below a retailer’s cost.High–low pricing - Use of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads.LO 2
14 Using MarkupsMarkup - Selling price of the merchandise less its cost, which is equivalent to gross margin.The basic markup equation: SP = C + MWhere:C - dollar cost of merchandise per unitM - dollar markup per unitSP - selling price per unitLO 3
15 Exhibit 10.3 - Relationship of Markups Expressed on Selling Price and Cost LO 3
18 Initial Versus Maintained Markup Reasons for the difference between initial and maintained markups:The need to balance demand with supply.Stock shortages.Employee and customer discounts.Cost of alterations.Initial markup may be different from maintained markup is cash discounts.LO 3
21 Planning Initial Markups Rules of markup determinationAs goods are sold through more retail outlets, the markup percentage decreases and vice versa.The higher the handling and storage costs of the goods, the higher the markup.LO 3
22 Planning Initial Markups Rules of markup determinationThe greater the risk of a price reduction due to the seasonality of the goods, the greater the magnitude of the markup percentage early in the season.The higher the demand inelasticity of price for the goods, the greater the markup percentage. What will the market bearLO 3
23 Markdown ManagementMarkdown - Any reduction in the price of an item from its initially established price.Markdown percentage = Amount of reduction / original selling priceLO 4
24 Markdown ManagementRetailers do not possess perfect information about supply and demand factors; as a result, the entire merchandising process is subject to error, which makes pricing difficult.Buying errorsPricing errorsMerchandising errorsPromotion errorsLO 4
25 Markdown Policy Early markdown policy Advantages: Speeds the movement of merchandise.Enables the retailer to take less of a markdown per unit to dispose of the goods.Markdowns are offered quickly on goods that some consumers still think of as fashionable, and the store has the appearance of having fresh merchandise.Allows the retailer to replenish lower-priced lines from the higher ones that have been marked down.LO 4
26 Markdown PolicyLate-markdown policy - Allowing goods to have a long trial period before a markdown is taken.Avoids disrupting the sale of regular merchandise by too frequently marking goods down.The bargain hunters or low-end customers will be attracted only at infrequent intervals.LO 4
27 Markdown Policy Amount of markdown Rule of thumb for early markdowns is that prices should be marked down at least 20 percent in order for the consumer to notice. Just noticeable difference important.Retailers are able to have their suppliers supplement their markdown losses with markdown money or some other type of price reductions.LO 4
31 Compute the markup on selling price for an item that retails for $49 Compute the markup on selling price for an item that retails for $49.95 and costs $31.20What is the necessary formula?(SP-C)/SPWork it out
32 Compute the markup on selling price for an item that retails for $49 Compute the markup on selling price for an item that retails for $49.95 and costs $31.20What is the necessary formula?(SP-C)/SPWork it out( )/ = 18.75/49.95 = 37.5%
33 Compute the markup on selling price for an item that retails for $49 Compute the markup on selling price for an item that retails for $49.95 and costs $31.20What is the necessary formula?(SP-C)/SPWork it out( )/ = 18.75/49.95 = 37.5%What would the markup on cost be (the cost plus)?
34 Compute the markup on selling price for an item that retails for $49 Compute the markup on selling price for an item that retails for $49.95 and costs $31.20What is the necessary formula?(SP-C)/SPWork it out( )/ = 18.75/49.95 = 37.5%What would the markup on cost be (the cost plus)?18.75/31.2 = 60%So, cost of plus 60% of = (some rounding error might exist)
35 Complete the following (11): Dress Shirt Sport Shirt Belt Selling Price ($)Cost ($)Markup in Dollars ($)Markup Percentageon Cost (%)Markup Percentage onSelling Price (%)
36 42.5 49.3 56.7 Complete the following (11): Dress Shirt Sport Shirt BeltSelling Price ($)Cost ($)Markup in Dollars ($) =Markup Percentage / / /6.5on Cost (%) = = = 1.31Markup Percentage onSelling Price (%) / / /15
37 A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost herWhat formula do we need?
39 What formula do we need? (I’m great on manipulation) A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost herWhat formula do we need? (I’m great on manipulation)R-C= /R = R= /.25 = 200R = Cost = = 150
40 The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point?SP = 45 MU on SP = .45It doesn’t say MU on SP – in which case I would assume SP (should I not say – tell me which you assume)
41 SP = 45 MU on SP = .45 (45-C)/45= .45 45-C = .45*45 45-C = 20.25 The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point?SP = 45 MU on SP = .45(45-C)/45= C = .45* C = 20.25= 24.75( )/45 = .45
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