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
Pricing - Is an interactive decision made in conjunction with the firm’s:
Mission statement
Goals and objectives
Strategy
Operational and administrative management
Yield management
Focuses on optimizing the total sales revenue or yield from its capacity to provide services (hotels)
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.
LO 1

6. Pricing Objectives 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.

7. Pricing Policies
Guidelines, that ensure uniformity of pricing decisions within a retail operation
Types of policies
Below-market pricing: Discounts merchandise from the established market price to:
Build store traffic
Generate high sales and gross margin dollars per square foot of selling space
Discourage competitors from entering a given trading area
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 Pricing at market levels Above-market pricing policy
Price zone: Range of prices for a particular merchandise line that appeals to customers in a market segment
Size of a retail store affects its ability to compete on price
Above-market pricing policy
Retailers establish high prices because nonprice factors are more important to their target market than price
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
Helps customers make merchandise comparisons and
Specifies number of price points for each merchandise classification
Trading up
Retailer uses price lining and a salesperson moves a customer from a lower priced line to a higher one
Trading down
Retailer uses price lining, and a customer exposed to higher-priced lines purchases a lower-priced line
LO 2

11. Specific Pricing Strategies
Retailers select price lines that have the strongest consumer demand
Advantages
Helps buying more efficiently
Simplifies inventory control
Accelerates 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

14. Specific Pricing Strategies
Leader pricing
High-demand item is priced low and is heavily advertised in order to attract customers
Requires careful evaluation
Strategy ineffective if consumers are limiting their purchases to only leader items
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 featured in weekly ads
LO 2

15. Specific Pricing Strategies
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
Is considered illegal by the Federal Trade Commission when:
The low-priced model used as bait is unavailable to shoppers
LO 2

16. Specific Pricing Strategies
Private-label brand pricing
Permit the retailer a large degree of pricing freedom because:
Consumers find it difficult to make exact comparisons between the private and national brands
LO 2

17. Using Markups
Markup: Selling price of the merchandise less its cost, which is equivalent to gross margin
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

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

19. Exhibit 10.4 - Basic Markup Formulas
LO 3

20. Initial Versus Maintained Markup
Initial markup = (original retail price – cost)/original retail price
Maintained markup = (actual retail price – cost)/actual retail price
LO 3

21. 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

22. Planning Initial Markups
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)
Initial markup percentage = (gross margin + alterations costs - cash discounts + reductions)/ (net sales + reductions)
LO 3

23. Planning Initial Markups
Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions)
LO 3

24. Planning Initial Markups
Rules of markup determination:
As goods are sold through more retail outlets, the markup percentage decreases and vice versa
Higher the handling and storage costs of the goods, higher should be the markup
Greater the risk of a price reduction due to the seasonality of the goods:
Greater is the magnitude of the markup percentage early in the season
Higher the demand inelasticity of price, greater the markup percentage
LO 3

25. 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

26. Markdown Management
Retailers do not possess perfect information about supply and demand factors
Merchandising process is prone to:
Buying errors - Retailer buys:
The wrong merchandise or buys the right merchandise in too large a quantity
Pricing errors - Price of the item is too high to move the product at desired speed and quantity
LO 4

27. Markdown Management Merchandising errors Promotion errors
Failure by the buyer to inform the sales staff of how the new merchandise:
Relates to the current stock
Ties in with the store’s image
Satisfies the needs of the store’s target market
Improper handling of the merchandise by the sales staff
Ineffective visual presentation
Promotion errors
Promotion activities are too weak or sporadic to elicit a strong response from potential customers
LO 4

28. 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
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

29. 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
Bargain hunters or low-end customers will be attracted only at infrequent intervals
LO 4

30. Markdown Policy Amount of markdown
Prices should be marked down at least 20 percent in order for the consumer to notice
Suppliers supplement retailers markdown losses with:
Markdown money or some other type of price reductions
LO 4

31. 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