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Presentation on theme: "RETAILING MANAGEMENT RETAILING MANAGEMENT 5th Edition."— Presentation transcript:


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)

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


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