1. RETAILING
MANAGEMENT
RETAILING
MANAGEMENT
5th Edition

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

3. Merchandise Management
Planning Merchandise Assortments
Retail Communication Mix
Pricing
Buying Merchandise
Buying Systems

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 2

5. Everyday Low Prices (EDLP)
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. 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 3

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 4

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

10. 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 competitor’s prices

11. Sample 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

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

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

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

17. 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. 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 (%)) % + reductions (%)

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

20. Example 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 = 100
Retail Price = $100/.4315 =
Initial Retail Price = Cost of Merchandise (1-markup percentage)

21. 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 x (1-Z) = 30 x Z /(1-.4)

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

24. 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. Demand Curve Sales at Different Price Levels
Quantity Sold
Cost = $1 unit
1000
Price $2 5

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

27. A Pricing Experiment Store 1 10 units @ $100 21 units @ $80
Before After
Store $ $80
Gross margin = $500 Gross margin = $630
Store $ $100
Gross margin = $600 Gross margin = $650

28. Results of Pricing Test
(1) (2) (3) (4) (5)
Total Cost of
Market Units Sold Total
Demand Total ($300,000 fixed Profits
Unit at Price Revenue cost + $5 variable (col 3 x
Market Price (in units) (col 1 x col 2) cost) col 4)
1 $ ,000 $1,600, $1,300,000 $300,000
, ,500, ,050, ,000
, ,200, , ,000
, , , ,000

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

30. Considering Competitor Pricing

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

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

34. 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. 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. Percent 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?

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

38. 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. Retailer’s Income Statement
Net Sales $1,000,000
COGS , %
Gross Margin , %
Operating Expenses
Variable , %
Fixed , %
Profit , %

40. Retailer’s Variable and Fixed Operating Expenses
Variable Fixed
Wages & Salaries
Manager 20,000 20,000
Sales 60,000
Clerical 20,000 10,000
Rent ,000
Maintenance ,000
Total ,000 80,000

41. Retailer’s Assets Current Assets Inventory $300,000
Accounts Receivable ,000
Cash ,000
Fixed Assets ,000
Total $500,000

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

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

45. 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. Price Adjustments Markdowns Coupons Rebates Price Bundling
Multiple-Unit Pricing
Variable Pricing

47. 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. 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. Maximize Profits through Price Discrimination
Want Charge Every Customer the Maximum They Are Willing to Pay
Problem
Don’t know willingness to pay
With list prices, can’t prevent high willingness to pay customers from buying at low price

50. 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. Types of Price Discrimination
First Degree – Set unique price for each customer equal to customer’s 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. How To Reduce Markdowns
Use Markdown Optimization Models
Improve Sales Forecasts and Merchandise Budget Plan
Work with Vendors to Plan Deliveries

53. 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. Clearance Center Liquidates Markdowns

55. 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. 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 don’t redeem.
They can offer price cuts to customers directly.

57. 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. 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. Pricing and the Internet
Auction pricing more feasible – easier to form a market of buyers and sellers (eBay)
Priceline.com

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

61. 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. 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. 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 doesn’t.
Does delineate:
Type of store (downscale store might use it.)
Sale

64. 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. Vertical Price Fixing
Vertical 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

66. 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. 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. 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. 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. 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. Bait and Switch (cont.) Retailers should: Have sufficient quantities
Give a “rain check”
Don’t disparage merchandise