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Name Roll No. Learning Centre Subject Assignment No.
: : : : :
RAKESH KUMAR SINGH
510910259 Systems Domain (2779)
Set – II (MK0003) 2010
Date of Submission :
510910259 2 Rakesh Kumar Singh
MBA Semester 3 MK0003 – Retail Marketing Assignment Set- 2 Q.1 Briefly explain the different price setting methods adopted in retailing. Give examples wherever applicable. (10 marks) Ans: Following are the various pricing strategies followed by the retailer to meet his short- and longterm objectives. The adoption of these strategies is guided by the basic pricing approach of the retailer. Every Day Low Pricing (EDLP): Here, goods are either sold below their normal prices, or some sales promotion scheme is available. For EDLP to work, volumes are necessary so that the store can negotiate with the manufacturers for bargain prices. Some retailers have adopted a low-price guarantee policy where they guarantee that they will have the lowest possible price for a product. The guarantee usually promises to match or better any lower price found in the local market. If somebody is selling at a lower price, the retailer would refund the difference. High-Low Pricing: In high-low pricing, retailers offer prices that are sometimes above their competitor’s ELDP, but they use advertisements to promote frequent sales. In the past, retailers would mark down merchandise at the end of a season to clear the stock. Grocery stores would only have sales when they were overstocked. Sale is very common in garment retailing. Loss Leader Pricing: Retailers sometimes price particular fast moving products at a lower price to attract customers to the store. Once the customers are in the store, they can be persuaded to buy more profitable products. For example, a retailer can sell eggs cheaper than other competing stores so that customers consider him while purchasing groceries. Since the customer is also likely to buy milk, bread, flour, etc. along with eggs, these products are priced slightly higher. So, the profit foregone on eggs is less than that recovered on other items of groceries, Skimming Pricing: Price skimming is a pricing strategy in which a retailer sets a relatively high price for a product or service at first, and then lowers the price over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. Penetration Pricing: Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with the marketing objective of increasing market share or sales volume, rather than short term profit maximization. Cost-plus pricing: Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.
510910259 3 Rakesh Kumar Singh Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit. Value-based pricing: Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for performance" pricing for services, in which you charge on a variable scale according to the results you achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. However, there is one more major factor that must be considered. Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your price, figuring things like:
Positioning: If you want to be the "low-cost leader", you must be priced lower than your
competition. If you want to signal high quality, you should probably be priced higher than most of your competition.
Popular price points: There are certain "price points" (specific prices) at which people
become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fastfood places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.
Fair pricing: Sometimes it simply doesn't matter what the value of the product is, even if
you don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging two or three thousand dollars for it -people would just feel like they were being gouged. A little market testing will help you determine the maximum price consumers will perceive as fair.
Q.2 a. Discuss the scope of business intelligence in retail. (6 marks) Ans: Traditionally, the retail industry has lagged behind other industries in adopting new technologies, and this holds true in its acceptance of BI technology. Some industries, such as financial services, have become very sophisticated in using BI software for financial reporting and consolidation, customer intelligence, Regulatory compliance and risk management. However, retailers are quickly catching up and beginning to recognize the many areas of BI that can be applied specifically to their businesses. As the industry continues to consolidate, retailers have begun to realize that using technology to better understand customer buying behaviour, to drive sales and profitability, and to reduce operational costs is a necessity for long-term survival. Retailers are now paying significant attention to BI software, specifically in the areas of merchandise intelligence, customer intelligence and operational intelligence. There are many factors that have led to adopt BI software: Increased competition, The need to squeeze more profitability out of less space, Prevalent credit card usage,
510910259 4 Rakesh Kumar Singh The internet’s role as an alternative sales channel, The popularity of loyalty cards and soon, RFID (radio frequency distribution). These milestones have created a wealth of data that retailers are now beginning to appreciate and use. Within individual companies, we view the history of BI in retail through the lens of the Information Evolution Model, a framework that we devised to describe the status of any company’s evolution toward becoming an intelligent enterprise. In this model, we determined that organisations pass through five fundamental stages as they advance in their use of BI as a competitive differentiator: Operate: At this most basic level are the companies rife with information mavericks: the people in basement offices hammering away on desktop spreadsheets. If they go, the knowledge goes with them. There are no processes, and each request becomes an adhoc data rebuild, resulting in multiple versions of the truth, with the likelihood of a different answer to any one question every time it is asked. Consolidate: At this stage, a company has pulled together its data at the departmental level. Here, a question gets the same answer every time, at least within the department. However, departmental interests and interdepartmental competition can skew the integrity of the output and result in multiple versions of the truth. Integrate: At this point in the evolution, a company has adopted enterprise-wide data and bases its decisions on this more complete information. This company is beginning to have a true awareness of additional opportunities for the use of BI to improve processes and profits. Optimise: At this stage, the company’s knowledge workers are much focussed on incremental process improvements and refining the value-creation process. Everyone understands and uses analysis, trending, pattern analysis, and predictive results to increase efficiency and effectiveness. The extended value chain becomes increasingly critical to the organisation, including the customers, suppliers, and partners who constitute intercompany communities. Innovate: This level represents a major, quantum break with the past. It exploits the understanding of the value-creation process acquired in the optimize stage and replicates that efficiency with new products in new markets. Companies operating at this level understand what they do well and apply this expertise to new areas of opportunity, thus multiplying the number of revenue streams flowing into the enterprise. b. What are the career or employment opportunities for MBA graduates in the retail sector? (4 marks) Ans: MBA graduates are generally hired to work in brand management at the headquarters of large corporations such as Procter & Gamble or Johnson & Johnson. Their starting salaries averaged $40,000- $44,000. In some cases, starting salaries went as high as $60,000 for MBAs with full-time work experience. These MBAs are often expected to fit in the product management teams immediately. Most of the training is on – the – job. For example, at Johnson & Johnson a newly hired MBA may be given an 18 month assignment followed by 6 weeks of sales training. After the training, a higher level 18 month assignment is offered. Successful completion of these assignments places the MBA squarely on the road toward product director and brand manager. Target, the upscale discount store owned by Dayton Hudson Corporation, has a relatively more structured program for training MBAs. Each recruit spends approximately three months gaining an overview of advertising, distribution, inventory management and merchandising positions at target. In less than two years, the employee has an opportunity to manage a $30 million to $100 million business as a buyer and, later, as a senior buyer. In these positions, national and international shopping is required to identify retail trends and to develop merchandising and advertising strategies. The successful manager is also involved in product development, financial planning and vendor management.
510910259 5 Rakesh Kumar Singh
Q.3 Assume you have a capital of five lakhs and that with this amount you are planning to expand your small mobile accessories outlet. How will you decide about the various expenses involved and other requirements? (10 marks)
Earmarking of merchandising budgets is considered to be a vital component of the planning phase. Usually, a budget states amount allocated for each product, based on the pre-set profitability or other performance measures. In other words, merchandise budgeting is a financial tool of planning and controlling the retailer’s merchandise inventories investment. While planning and control of merchandise mix is direct at meeting the customer-oriented objectives, equally important is that merchandising process is the firm’s financial objective of profitability. To ensure profitable operations, the retailer must use a merchandising budget in which sales volumes, stock levels, retail reductions, purchase orders, and profit margins are planned and controlled. The important components of the merchandise budget plan are as follows: Projected Sales / Sales Forecast At times, retailers choose to specialize in a single kind of merchandise and choose to carry a very deep assortment. For example, in the Chandni Chowk market in Delhi a particular lane is referred to as the Parathe Wali gali. Paratha is an Indian bread savory. All the retail food outlets only sell different variants of parathas with a vegetable curry and pickle. Sometimes they may also serve a simple dessert. The customers are attracted to the lane primarily because of its specialization. This is also the reason for its popularity. Similar examples are seen in many parts of India – shops selling Chikan embroidered material and garments in the Chowk and Aminabad markets of Lucknow, shops selling bandhni material and garments in Jaipur, etc. Specialization is their best advertisement. Budget planning starts with the development of a sales plan, this shows the expected or projected rupees volume of sales for each merchandise or department. Sales forecasting helps the management in a forecast of expected sales. Without having information on how much is to be sold, the retailer cannot determine how much to buy. Mistakes made at this stage will be reflected in the entire budgeting plan and may incur huge losses to the management in the future. Usually, product categories experience an expected sales pattern. Sales start at low, then increase gradually, stabilize, and finally decline. It is important to understand that the pattern experienced varies from one product category to another product category. While making the sales forecast, a retailer or planner should be aware of the consumer segment for the offer, expected drivers of variety, nature of competition, promotion, and price range. One needs to classify the merchandise as a fashion, a fad, a staple, or seasonal merchandise before developing a sales forecast. The product category life cycle describes the primary form of sales pattern over time. It assists in examining the sales pattern variations among fad, fashion, staple, and seasonal merchandise. The product category life cycle is divided into four stages: introduction, growth, maturity, and decline. The understanding of the life cycle stage of a particular product helps in developing sales forecast and merchandising strategy. It is a well-known fact that the product category life cycle stage affects the retail marketing mix such as target market, variety, place, price, and advertising. The target market for a newly introduced product is usually the high-income innovator. For example, cellular phones, introduced in India in 1996, targeted the high-income professionals or the business class. It was no doubt, very expensive in comparison to the other modes of communication. With time, as the category reached the
510910259 6 Rakesh Kumar Singh early and late stages, they became more appealing to the middle-income, mass-market customers who were the target market for discount stores. This clearly shows how a new entry in the market enlarges its market as it moves along its life cycle. The variety available in cellular phone was small at its introductory stage. However, today the Indian retail market is experiencing a huge expansion with a wide range of choices based on colour, product features, and price levels. Distribution intensity refers to the number of retailers carrying a particular category. In the introductory stage, a product is distributed from a limited number of outlets. For example, in India, colour television was initially acquired by people in the metros. Even after 20 years of introduction of CTV in Indian markets, most of the semi-urban areas acquired it from the adjoining cities. In the same manner, cell phone was earlier available in major cities only but today even the smaller cities have a good number of unorganized retailers along with company-owned outlets in this sector. It is often observed that as the new offer gains popularity in the growth and maturity stages, retail penetration increases. At the same time, when certain products like pagers experience decline in sales, fewer or no retailer intends to stock the product. Inventory Plan: Inventory management plan provides information regarding sales velocity, inventory availability, ordered quantity, inventory turnover, sales forecast, and quantity to order for specific SKU. Inventory plan assists retailers in scheduling orders to vendors after considering tradeoffs between carrying cost versus the cost of ordering and handling the inventory. The more they purchase at one time, the higher the carrying costs, but the lower the buying and handling costs. The inventory plan helps to devise the stock support levels for a specific sales period. Most widely used methods to determine the stock support levels are: beginning-of-the-month ratios, weeks’ supply method, the percentage variation method, and the basic stock method. Estimated Reductions: Retailers are required to provide for retail reductions along with sales forecast and inventory support levels. Retail reduction is anticipated sales below the list price. Retail reductions are classified into three types of sales below price: markdowns, discounts, and shortages. Markdown is defined as reduction in the original list price to encourage sales of the product. Discounts are reduction in the original retail price given to special customer groups, such as loyal customers. Shortages are reductions in the total value of inventory that results from damages to merchandise, shoplifting, or pilferage. The retailers on the bases of their past experience on retail reductions make adequate arrangements while evolving merchandise budgets. Estimated Purchase Levels: At this stage a retailer is supposed to devise an actual budget for planned purchase. In other words, planned purchases refer to planned purchases that must be made at the beginning of each month. Here a retailer or planner uses information compiled at the initial stages of merchandise budget planning. The planned monthly purchases figure informs buyers how much they need to spend to support anticipated sales levels considering existing inventories.
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