Pricing

What is Price?
‡ Basis for exchange. What the retailer is willing to sell product/service for; what the consumer is willing to pay to obtain product/service ‡ No intrinsic value to ANYTHING. If the customer is willing to pay the price, that¶s what the product is ³worth.´

Pricing Challenges for Retailers

1. All the sales in past decade have conditioned consumers to never pay full price 2. Economic recession ± and actually time since 1990s --makes price more important ± raises the ³value´ issue 3. Stores with ³everyday low prices´ are increasingly important

Two Price Strategies

1. Every day low price ± not necessarily lowest price
Advantages: fewer price wars, limited advertising, improved customer service, reduced stock outs, improved inventory management, better profit margins

2. High/low pricing ± price sometimes above EDLP, and sometimes below; frequent sales
Advantages: same stuff is sold to different markets, excitement, moves merchandise, signals quality, hard to maintain EDLP

Methods of setting price

1. Cost oriented ± take merchandise cost and add fixed percent markup 2. Demand oriented ± price is what customer will pay Which is preferred by marketers? Why? Retailers actually use both

Use of Cost Method

‡ Relates to goal setting ± GMROI ‡ Problem: in retailing, the final selling price may not b original price. So how do you set original price, so that final price meets the profit objective? ‡ In other words, how do you give consumers their ³deal´ and still earn the profit you need?

Some new and some old stuff

Net sales - COGS Maintained markup - Alteration costs + cash discounts Gross Margin $120,000 58,000 62,000 3,000 59,000

Some important definitions

‡ Initial markup ± amount product is initially marked up ‡ Original selling price = cost + initial markup ‡ Maintained markup ± amount the retailer expects to make on the sale of a particular item ‡ Maintained markup=Net sales ± COGS ‡ Maintained markup% = Maintained MU/Net Sales ‡ Ex: $62,000/120,000 = 51.67% ‡ Maintained Selling Price = Initial Selling PriceReductions (you build reductions into original selling price)

Initial MU Calculations
‡ Initial Markup=Maintained Markup + Reductions Net sales + Reductions OR in percent terms
‡ Initial Markup%=Maintained Markup% + Reductions% 100% + Reductions%

Example
‡ Assume reductions = $14,400 Initial MU = 62,000 + 14,400 = 56.85% 120,000 + 14,400 OR in % terms = 51.67% + 12% = 56.85% 100% + 12% ** Initial MU is always greater than maintained MU if there are reductions

RSP, Cost and Mark Up

Retail Selling Price = Cost = Mark Up So if RSP is $100 and MU is 56.85%, what is cost? $100 = cost + (56.85% x RSP) $100 = cost + (56.85% x $100) $100 = cost + 56.85 $43.15 = cost Only trick to keep in mind here is that you always take % MU of RSP NOT of Cost

Adjustments to Price
‡ ‡ ‡ ‡ Markdowns Markdown cancellations Additional markups Additional markdown cancellations

Markdowns
‡ Reductions in initial retail selling price ‡ Reasons for taking markdowns
Clearance (get rid of stuff) Promotional (build store traffic)

‡ Always calculate markdowns as a % of the the last RSP ‡ Selling price = $25; markdown = $5
Markdown % = 5/25 = 20%

Markdown Cancellation
‡ Amount by which price is raised after a sale used only for promotional markdowns only in effect up to initial retail price ‡ IMPORTANT ± If an item is marked down 20% and then a 20% Markdown cancellation is applied, the new selling price will NOT be the price before the 20% markdown. WHY NOT?

Additional Markup
‡ Increase in the initial selling price ‡ Rare, but does happen ‡ Why?

Demand-oriented pricing
‡ What the traffic will bear ‡ This relates to price sensitivity ‡ Factors that affect price sensitivity
Substitute awareness effect Total expenditure effect Difficult comparison effect Benefits/price effect Situation effect