Fashion Marketing and Merchandising

Knitwear Design Semester-6

Session Plan-11
Pricing strategies
Market Penetration Skimming EDLP Single Pricing

Books for ref: Retail management-text and cases: Swapna Pradhan: Edition-2

Pricing
Price is the value placed on what is exchanged . Integral part of the retail strategy. Costs and operating expenses also need to be considered while establishing the retail price Arriving at the right price for a product or service is one of the most difficult tasks for marketing.

Factors like the target market, store policies, competition and economic conditions are considered while arriving at a price.

1. Demand for the product and Target market

For whom is the product meant for ? What is the value proposition for the consumer? Price of the product is linked to the quality. Eg: Electronics.high priced product is perceived to be of good quality. Products like designer clothing, a certain section of the population may be willing to pay the price. Hence very imp. to know the tgt mkt and the value proposition he is looking for.

2. Store Policies and the image to be created

Retailers who want to create a prestige image may opt for a higher pricing policy Retailer who want to penetrate the market will offer value for money proposition.

3. Competition for the product

Competition for the product and competitors price for a similar product is considered. Common product prices of all similar products to be taken into consideration before finalizing the final price.

If unique product without any competition may demand a premium price.

4. Economic Conditions
Imp. For pricing. During economic slowdown, prices are generally lowered to generate sales. Demand and supply conditions also affects.
If the demand is more than supply, prices can be premium, however, when supply is more than demand, prices have to be economical

Elements of retail Price

Imp. Element : Cost of goods, (cost of merchandise + various other expenses (involved in the movement of the goods from the manufacturer to the actual store). These may be fixed or variable. Fixed Costs: rent, office equipments, insurance etc.. Variable costs: vary with the amount of services provided or goods produced. Salaries of labour directly involved, raw material, advertisement or promotion expenses.

 Cost of product is the total of fixed and variable expenses to the manufacturer for producing and distributing the product or service.

Price is the selling price per unit, customers pay for your product or service.

Profit Fixing
Profit to be earned must be planned before fixing the retail price. The profit figure arrived at can also be expressed as markup percentage as Retail price = cost + Markup.or Cost = Retail Price Markup and Markup = Retail Price-Cost

Example:
Cost of a product =Rs200/markup = Rs150/-

Retail price = 200 +150 = 350/Markup% on retail = 150/350=42.86% Based on the cost price, markup % Markup % on cost = 150/200=75%

Determining the price

Break-even Point (BE): is the point at which the retailer neither makes profit nor loses money.

 Breakeven analysis is the process used to uncover the break even numbers.
To reach breakeven point, it is imp. To determine the fixed and the variable costs per unit. Breakeven Revenue= Fixed Cost_________ 1-(variable cost per unit/selling price per unit

Eg: Calculating breakeven Revenue

Determine an appropriate hourly rate ( revenue that can be charged by a consultant or a service business Total fixed cost=Rs40,000/-. Variable costs= Rs25/-per hour Selling Price=Rs50/-..using the breakeven formula = 40,000 1-(25/50) = 80,000/Thus the company needs 80,000 to cover costs. Less than this amount will be loss and more means the company is making money.

Calculating breakeven Units

To determine how many units must be produced and sold to break-even Fixed costs = Number of units needed to break even Unit Contribution margin

Eg: Calculating breakeven Revenue

The unit produced is one hour of consulting. No. of hours required to cover costs= Rs 1600/40,000 = 1,600 units (hours per year) 50-25

Mark-Up Pricing
It is the difference between the cost of the product and the final selling price. Can be in terms of rupee or percentage. Can be calculated on cost or on the retail price Selling price = cost + markup

Markup% (at retail) = (retail selling price-merchandise cost) / retail selling price
Markup% (at cost) = (retail selling price- merchandise cost) / merchandise cost

1) Eg:
A buyer pays Rs 100/- for a toy to be sold in his store. He intends to sell it at a price of Rs175/-.

Markup calculated would be: markup% at retail price: 175-100 175 = 42.86% Markup% at cost : 175 -100 100

=75%

2) Eg
A women blouse costs Rs220/- and retail for Rs 460/SP-C = MU X100 = MU% SP
460-220 = 460 240 = 460 24 0.52 X100 = 52% 46

Eg:
If we need an assortment of shorts which will be sold at Rs100/- and markup needed is 55%, what should be the cost price?

MU = (SP-C)/SP 55% = (100-C ) / 100 C = 100 X .45 = 45

EG
The cost of an Item is rs15/- , the planned MU is 55%, what will we use as retail price?

SP = Rs 23.25

Cumulative Markup
It is calculated for a group of products. Eg: for a particular month the cost of inventory is rs100,000 and the selling price is Rs185,000. If and Additional inventory worth Rs 20,000/- has been ordered to retail at Rs 35,000/- then the total cost of inventory and the value of the stock at the selling price will be determined as follow:

 Cost of Inventory= Rs 100,000 +Rs20000 = 120,000 Retail value of Inventory= Rs 185,000 + 35,000=220000 Cumulative markup= Markup % at retail = Retail value cost value Retail value = 220,000-120,000 220,000 = 100,000 220,000 =45.46%

Initial markup
It is the difference between the cost price of the merchandise and the initial retail price. The initial markup takes into consideration the operating expenses, the planned profit, etc
Initial markup%= (operating expenses + net profit + markdowns + employ and consumer discounts + alteration costs-cash discounts) / (net sales + markdowns + employee and customer discounts)

Maintained Markup
It is the difference between the gross merchandise cost and actual selling price.

Retail pricing policies and strategies

Retail pricing policies and strategies

Pricing strategy adopted by a retailer can be cost-oriented, demand-oriented or competition oriented

Cost-oriented pricing
A basic markup is added to the cost of the merchandise to arrive at point.
Retail Price = Cost + markup If formula rearranged: Cost = retail price markup markup = Retail price -cost

 The difference between the selling price and cost is markup. (It should cover all operating expenses and transportation etc.. Mark up % can be calculated on retail price or cost.

 Markup% (at retail)= (retail selling price-merchandise cost)/retail selling price Markup% (at cost)= (retail selling price-merchandise cost)/merchandise cost When the buyer is aware of the markup% required and the selling price, he can also work put the price at which he actually needs to procure the product.

 Single markup does not work always for a product category, then variable markup policy is followed.

If variable markup policy followed, buyer can buy product at varying pricing but maintain the margins to be earned. Some products may earn a higher margin while others a lower.

Demand-oriented pricing
Focuses on the quantities that the customers would buy at various prices. Depends on the perceived value attached to the product by the customer. Many times High value product is perceived as high quality product and low value product is perceived as low quality product Understanding of the market and value proposition that would look for is the key to demand oriented pricing.

Competition-oriented pricing
When the price adopted by the competitors play a key role in determining the price of the product. Retailer may price the product on par with the competition, above the competitors price or lower

 Price Lining: When retailers sell the merchandise only at given prices Price zone :is a range of prices for a particular merchandise line. Price point: is a specific price in that price range. Price range: refers to the width of the price range, ie..the no. of points that a retailer chooses to offer the range of products at.

Pricing Strategies

Market Skimming
Is a form of price discrimination over time. The strategy here is to charge initial high prices and then reduce them gradually. The success largely depends on in-elasticity of the demand. Main objective is to benefit from high-short term profits (due to newness of the product). Such strategy works well for prestige goods or luxury items.

Market Penetration
Opposite of market penetration and aims to capture large market share with low prices.

Low prices stimulate purchases

Discourage competitors from entering the market as the profit margins are low. Retailers who wish to enter a new market or build on a relatively small market share. Demand of the product s/b highly elasticie..demand is price sensitive and new customers will be attracted to the product because of low prices

Expansionistic pricing:
Another form of penetration pricing.

The product enjoys the high price elasticity of demand, so that adoption of low price leads to significant increase in sales volumes.
Good strategy for companies entering new or international market .

A low cost version of a product may be offered at a very low price to gain recognition and acceptence by consumers. Once accepted more expensive versions may be offered at higher price.

Price Bundling
Variation of multiple pricing.various products are bundeled together and sold as one unit. Products are put together as package deal and sold together at a single price. Eg: Fast food resturants putting together and offering products under the happy price menu or computer hardware manufacturer selling the hardware and the printer and some softwares ata particular price as a package.

Leader pricing
One or few items are sold at a deep discount to increase traffic and sales on complementary items. Key to success: product must appeal to large no. of people and should appear as a bargain.

Multi-Unit Pricing
The retailer offers discounts to customers who buy in quantity or product bundle. This involves value pricing for one of the same item. Eg: one T-shirt may be priced for Rs/-255 while two T-shirts may be offered at rs/355. Helps in moving slow moving products.`

Every Day Low Pricing (EDLP)

Strategy adopted by retailers who continually price their products lower than the other retailers in the area. Eg: Walmart and Toys R Us follow this regularly. Objective: to assure buyers that they need not wait for sale or promotion to achieve attractive prices. They assume that consumers are attracted by their focus on low priced products.

Odd Pricing
Retail prices end in odd numbers, such as rs/-99, 199 or 299. Used to denote low prices.

Single Pricing
Same price for all products Also known as one price policy

Common eg: dollar shops, charge one price for variety of items.

Multiple Pricing
The customer is given discount for making quantity or bulk purchases. Eg: can of soft drink sold at Rs15/- but pack of 3 may be sold at Rs40/-. Eg. of psychological pricing where the customer believes that he is getting a bargain for buying more units.

Concept of MRP
Prior to 1990s packed products were marked with two separate prices.
Retail price..(local taxes extra) Maximum retail price Rs (inclusive of all taxes) Following complaints, an act was introduced in year 1990 which instructed manufacturers to print MRP on the packed product which is inclusive of al taxes.

Adjustments to retail price

Retail price are adjusted by markdowns or by way of promotions. Markdowns are permanent reduction in the price, May be done as a result of slow selling Or as a part of systematic strategy Usually done after a determined no. of weeks in order to maintain a desired rate of sales

 Timely markdowns help improve profitability, increse turnover and increse profit. Markdown gets necessary due to wrong forecasting, overbuying, faulty selling practices or if the odds and ends are left of a season

 Markdown % calucation: Total markdown / total sales.

 Promotions are temporary reduction in the price used to generate additional sales during peak selling periods. Prices reduced by % (eg 25%off) or to a sale price (Rs99) High volume items with a substantial initial markup, are usually selected for promotional vehicals Promotions may include coupons, which may reduce the retail price by an amount or percent.

Markups vs Mardown
A markup is where profit is expressed as percentage of costs :
Price-cost / cost X 100 A selling price of 30, with a cost of 20 gives a markup of 50%

 Markdown is percentage of the sale price Price - cost / price X 100 Selling price of 60 with a cost of 24, gives a markdown of 60%

Thank you!