1. Chapter 10 Retail Pricing

2. Learning Objectives
Discuss 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.

3. Pricing Objectives and Policies
Interactive pricing decisions
Pricing objectives
Pricing policies
LO 1

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 objective
States a specific level of profit, such as percentage of sales or return on capital invested.
Profit maximization
Seeks to obtain as much profit as possible.
Skimming
Price is initially set high on merchandise to skim the cream of demand before selling at more competitive prices.
Penetration
Price is set at a low level in order to penetrate the market and establish a loyal customer base.
Sales-oriented objectives
Seek some level of unit sales, dollar sales, or market share but do not mention profit.
Status quo objectives
Adopted by retailers who are happy with their market share and level of profits.
LO 1

6. Pricing Policies
Rules 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 Policies
Factors that permit retailers to price above market levels:
Merchandise offerings
Services provided
Convenient locations
Extended hours of operation
LO 1

9. Specific Pricing Strategies
Customary pricing
The retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
Variable pricing
Recognizes that differences in demand and cost necessitate
that the retailer change prices in a fairly predictable
manner.
Flexible pricing
Encourages offering the same products and quantities to
different customers at different prices; used for personal
selling; costs can dramatically increase, and revenues
decrease, as customers begin to bargain for everything.
One-price policy
Establishes that the retailer will charge all customers the
same price for an item; speeds up transactions and reduces
the 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 pricing
Practice of setting retail prices that end in the digits 5, 8, 9—such as $29.95, $49.98, or $9.99.
Multiple-unit pricing
Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually.
Bundle Pricing
Selling distinct multiple items offered together at a special price.
Bait-and-switch
pricing
Advertising 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 pricing
A 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 Markups
Markup - Selling price of the merchandise less its cost, which is equivalent to gross margin.
The basic markup equation: SP = C + M
Where:
C - dollar cost of merchandise per unit
M - dollar markup per unit
SP - selling price per unit
LO 3

15. Exhibit 10.3 - Relationship of Markups Expressed on Selling Price and Cost
LO 3

16. Exhibit 10.4 - Basic Markup Formulas
LO 3

17. Initial Versus Maintained Markup
Initial markup = (original retail price – cost)/original retail price
Maintained markup = (actual retail price – cost)/actual retail price
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

19. Planning Initial Markups start
Initial markup percentage = (operating expenses + net profit + markdowns + stock shortages + employee and customer discounts + alterations costs - cash discounts)/ (net sales + markdowns + stock shortages + employee and customer discounts) OR
Initial markup percentage = (gross margin + alterations costs - cash discounts + reductions)/ (net sales + reductions) OR
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20. Planning Initial Markups
Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions)
LO 3

21. Planning Initial Markups
Rules of markup determination
As 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 determination
The 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 bear
LO 3

23. Markdown Management
Markdown - Any reduction in the price of an item from its initially established price.
Markdown percentage = Amount of reduction / original selling price
LO 4

24. Markdown Management
Retailers 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 errors
Pricing errors
Merchandising errors
Promotion errors
LO 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 Policy
Late-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

28. Markdown Policy Amount of markdown
Maintained markup = (actual selling price – cost) / actual selling price
Maintained markup percentage = initial markup percentage – [(reduction percentage) (100% - initial markup percentage)]
Where:
Reduction percentage = Amount of reductions/net sales
LO 4

29. 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 $31.20
What is the necessary formula?

30. Exhibit 10.4 - Basic Markup Formulas
LO 3

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 $31.20
What is the necessary formula?
(SP-C)/SP
Work 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 $31.20
What is the necessary formula?
(SP-C)/SP
Work 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 $31.20
What is the necessary formula?
(SP-C)/SP
Work 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 $31.20
What is the necessary formula?
(SP-C)/SP
Work 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 Percentage
on Cost (%)
Markup Percentage on
Selling Price (%)

36. 42.5 49.3 56.7 Complete the following (11):
Dress Shirt Sport Shirt Belt
Selling Price ($)
Cost ($)
Markup in Dollars ($) =
Markup Percentage / / /6.5
on Cost (%) = = = 1.31
Markup Percentage on
Selling 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 her
What formula do we need?

38. Exhibit 10.4 - Basic Markup Formulas
LO 3

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 her
What formula do we need? (I’m great on manipulation)
R-C= /R = R= /.25 = 200
R = 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 = .45
It 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

42. Exhibit 10.4 - Basic Markup Formulas
LO 3