Module 5

Retail Merchandising and merchandise pricing

 Retail Merchandising refers to the various activities which contribute to the

sale of products to the consumers for their end use. Every retail store has
its own line of merchandise to offer to the customers. The display of the
merchandise plays an important role in attracting the customers into the
store and prompting them to purchase as well.
 Merchandising helps in the attractive display of the products at the store in
order to increase their sale and generate revenues for the retail store.
 Merchandising helps in the sensible presentation of the products available
for sale to entice the customers and make them a brand loyalist.

Having the following elements will provide a good basis for a merchandising plan:

 A layout plan of the instore customer journey – how traffic should move through
the store
 A department plan that’s used to change store layouts according to season and
holidays
 A budget for lighting, signage, props, and fixtures
 A merchandising planning system geared towards maximizing turn, limiting out-
of-stocks, increasing margins, and minimizing markdowns
 An ‘open-to-buy’ system with predictive analytics to determine the variety of
merchandise shoppers have available

Merchandise Pricing
A retailer must price merchandise in a way that besides satisfying the customers,
achieves profitability for the firm. Pricing is a crucial exercise due to its direct
relationship with a firm’s goals and its interaction with other retailing matters. A
pricing policy, if not appropriate, send a store out of competition.

A pricing strategy must be consistent over a period of time and consider retailer’s
overall positioning, profits, sales and appropriate rate of return on investment.
Lowest price does not necessarily be the best price, but the lowest responsible
price is the best right price. The difference between price and cost is profit which
can be very high when the sales person wants to exploit an urgent situation.
Retailers should understand the importance of pricing because it has direct
relation with consumer purchases and perceptions. During pricing decisions,
retailers should also under the price elasticity of customers to price changes in
terms of the quantities bought.

If relatively small percentage change in price results in substantial percentage

changes in the number of articles purchased, price elasticity will be high. This is
the situation where the urgency to purchase is low or substitutes are well
available. If large percentage changes in price have small percentage changes in
the number of articles purchased, demand is considered to be inelastic.

This is the situation where purchase urgency is high and substitutes are not
easily available. The formula to compute price elasticity is given below. The price
elasticity is calculated by dividing the percentage change in the quality
demanded by the percentage change in the price charged. Because in retail
market sales usually decline as prices go up, elasticity tends to be on negative
side.

Buying Function

The main process of marketing is buying. There are two aspects of exchange, i.e
buying and selling. In the absence of buying, exchange or marketing becomes
impossible. Without buying, selling cannot be done, similarly, without selling
buying cannot be.
In buying function of marketing, ownership of goods is transferred to buyer, for
which buyer pays certain price. Goods can be bought to consume, resale or use
in production.

So, producers/manufacturers, wholesalers, retailers or ultimate consumers buy

goods. So, buyers can be divided in three classes as manufacturers, middlemen
and ultimate consumers.
1. Manufacturers

Manufacturers buy goods to use in production. They may buy raw materials,
semi-finished goods and parts etc. to use in producing certain goods. They may
buy capital goods such as machines, tools, manufacturing plant, building etc.
They also may buy necessary supplies and operating materials to facilitate
production process. Such buyers are called industrial buyers.
2. Middlemen

Wholesalers and retailers also buy goods. They are called

middlemen. Wholesalers buy bulk quantity of goods directly from manufacturers
to sell to retailers or consumers. Similarly, retailers buy goods directly from
manufacturers or wholesalers to sell to ultimate consumers. In this way
wholesalers or retailers work both as buyers and sellers in marketing process.
3. Ultimate Consumers

Ultimate consumers buy goods to satisfy their need. They buy daily necessary
goods such as food, grains. clothes, medicines, education materials, etc. to meet
their needs and also buy luxury capital goods like motorcar, radio, TV,
refrigerator, washing machine and so on. Ultimate consumers buy necessary
goods in small quantity repeatedly and also may buy in bulk quantity use for
longer time.

In this way, different buyers buy goods for different purposes. The buying
function include the important activities such as taking decisions on what to buy,
when to buy, where to buy from etc.

Importance of Buying Function

1. Buying Drives Sales

Sales people are always grateful for a nice product selection that practically “sells
itself” and allows them to achieve their budgets.The fact is when the product is
right for the market and priced competitively, it needs a minimal effort from the
salesperson to push it.Even if the product is highly priced, but delivers a very
high value, for e.g by being of very high quality, it will still sell itself with a little
introduction from the sales person.

2. Buying increases margin

Maintaining an OTB process {open to buy} and ordering the right quantities at the
right time ripples quickly into the business in the form of better financial
performance. When your buyers choose the right collection in right quantities
your sell-thru will always be high, and you will not need to markdown a lot at the
end of the season. his is usually done by maintaining a feedback loop between
the stores and the buying & merchandising team, and by performing inventory
analysis at the end of the season and adjusting the buying strategy based on it.
Over time, this will improve the performance of the business, in the form of
delivering higher returns on inventory and higher margins.

3. Buying increases traffic

Apart from the above stated advantage of improving margins by buying right, it
also drives more traffic to your store.It not only means increase of the customers
but also an increase in the loyalty of the brand.

4. Buying id a competitive advantage

If you have the right buyers and the right buying process (that is not based on
taste, and also not based on historic numbers alone) you can basically crush the
competition, even if this competitor is a big established retailer.

Markups and Markdown in Merchandise Management

Markup

Markup pricing refers to a pricing strategy wherein the price of a product or

service is determined by calculating the sum of the products and a percentage of
it as a markup. In other words, it's the method of adding a percentage to a
product's cost to determine its selling price. For reference, a markup refers to a
price difference between a good or service's selling price and its cost. It's
essentially the price added to the total cost of a good or service that results in a
profit for the company. To better illustrate this concept, consider the following
equation:
Cost of good or service + markup = selling price

This means businesses can set their retail or selling prices by adding a certain
markup to the cost they incurred from creating the goods or services. If you want
the markup percentage, you can use the following formula:
Markup percentage = ( (sales price - unit cost) / (unit cost) ) x 100

The specific amount of markup a business uses depends on its needs, the type
of business and the industry it's in. While some industries mark up the price of
their goods and services by a small percentage, others can afford to mark up
their goods and services at an exceedingly large amount.

Benefits of markup pricing

Markup pricing comes with several advantages to help your business find greater
success. Here are some of the advantages that come from markup pricing:

 Increases profits: When you take markup pricing into consideration, it can
help you set strategic prices for your goods and services that can generate
a profit for your business. If you mark up your goods and services enough,
you can help offset any expenses you incurred during production.
 Recover costs: Since you have the potential to earn a profit when you
mark up the pricing of your products and services, you can put this profit
toward what you spent for the labor and materials. This can prevent you
from going into debt just for creating your goods and services.
 Simple calculation: Though creating a pricing strategy involves several
important figures, calculating the right markup price comes fairly easily
thanks to its simple equation.

Mark Down

A markdown is a reduction of the original price of goods to increase sales.

Compared to a sale or promotional event, a markdown essentially is when you
change the list price to a lowered price permanently. Retailers calculate
markdown percentage with the following calculation:
Markdown percentage = Amount of reduction / Original selling price

Shrinkage in Retail Merchandising

Shrinkage in retail sales is when the number of products a business has in stock
is less than those appearing on the inventory list. This usually means an
accounting error, or it can indicate the presence of theft or inventory destruction.
Shrinkage in retail can pose a significant challenge because the products lost to
shrink cost the company money, and cannot be sold. This can result in lost
revenue and, ultimately, less profit. When shrink occurs it is important to identify
its cause and implement strategies to minimize or eliminate product loss or
accounting errors.

Types of Retail Shrinkage

1. Shoplifting :Shoplifting is when external individuals people who don't

work for the company steal inventory from a retail store. Shoplifting
can take a variety of forms and can include items of varying worth.
For example, a shoplifter might operate individually to steal an item
worth a few money, or a team of shoplifters might coordinate to steal
many items worth much more.
2. Employee theft : Employee theft occurs when individuals associated
with a business steal from or defraud the company. This form of
retail shrinkage can take a variety of forms as well. Sometimes,
employees engage in outright theft by removing items or chase from
a retail store. Other times, employee theft might take the form of
fraud such as intentionally mischarging an accomplice.
3. Return fraud :Return fraud occurs when someone steals a product
and then returns it for a refund. It can also occur when a used item is
returned for a refund against store policy, or if an item was
purchased using counterfeit currency and returned for a refund.
Return fraud can be hard to track because it can happen in many
different ways, and effective employee enforcement of return
policies can help.
4. Administrative errors :Administrative errors, sometimes called
human error, are mistakes in the accounting process that cause a
discrepancy between expected and actual inventory during an
accounting period. Typos, mislabeled merchandise and erroneous
discounts can all contribute to this accidental type of retail shrink.
Although these kinds of errors aren't intentional, they can impact a
business' revenue and profitability.
5. Operational loss :Operational loss, or waste, refers to the kinds of
losses that are generally accidental and only sometimes
preventable. For example, merchandise that is broken in the store
might be considered an operational loss. Expired food products are
another form of operational loss. Many businesses account for
 operational loss as to be somewhat expected in the course of doing
business, but it can be beneficial to minimize this kind of shrink as
well to help boost revenues and profitability.

Concept of Merchandise Pricing

Pricing notes already given in this chapter

1. Pricing Options:
(i) Predatory Pricing:
It involves large retailers that normally seek to produce competition by selling
merchandise at very low prices and create the situation where it becomes difficult
for small retailers to stay.

(ii) Prestige pricing: It assumes that customers will not buy merchandise
displayed if price fixed are too low. It is based on the price-quality association.

(iii) Price lining:

A pricing practice where by retailers sell merchandise at a limited rate/limited
range of price points, where each point represents a different level of quality.

2. Pricing Objectives:
Pricing objectives are generally considered as part of the general business
strategy and give direction to the retail pricing process. While deciding on pricing
objectives, a retailer must understand that pricing strategy must reflect the
retailer’s overall goals that can be stated in terms of profit and sales.

Usually, while setting the price, the firm may aim at one or more of the
following objectives:
(i) Achieving pre-determined return on investment (ROI)
 (ii) Building company’s image, goodwill and brand’s name

(iii) Building sustainable competitive advantage

(iv) Creating curiosity and interest about goods and services

(v) Creating store traffic

(vi) Early recovery of cash

(vii) Having price leadership

(viii) Increasing company’ growth

ix) Increasing market share

(x) Increasing rupee sales

(xi) Justifying social responsibility of business

(xii) Making the newcomers’ entry in the industry difficult

Pricing Strategy

1. Value Based Pricing: With value-based pricing, you set your prices according to
what consumers think your product is worth. We're big fans of this pricing
strategy for SaaS businesses.
2. Competitive pricing
When you use a competitive pricing strategy, you're setting your prices based on
what the competition is charging. This can be a good strategy in the right
circumstances, such as a business just starting out, but it doesn't leave a lot of
room for growth.
3. Price skimming
If you set your prices as high as the market will possibly tolerate and then lower
them over time, you'll be using the price skimming strategy. The goal is to skim
 the top off the market and the lower prices to reach everyone else. With the right
product it can work, but you should be very cautious using it.

4. Cost-plus pricing
This is one of the simplest pricing strategies. You just take the product production
cost and add a certain percentage to it. While simple, it is less than ideal for
anything but physical products.

5. Penetration pricing
In highly competitive markets, it can be hard for new companies to get a foothold.
One way some companies attempt to push new products is by offering prices
that are much lower than the competition. This is penetration pricing. While it
may get you customers and decent sales volume, you'll need a lot of them and
you'll need them to be very loyal to stick around when the price increases in the
future.

6. Economy pricing
This strategy is popular in the commodity goods sector. The goal is to price a
product cheaper than the competition and make the money back with increased
volume. While it's a good method to get people to buy your generic soda, it's not
a great fit for SaaS and subscription businesses.

7. Dynamic pricing
In some industries, you can get away with constantly changing your prices to
match the current demand for the item. This doesn't work well for subscription
and SaaS business, because customers expect consistent monthly or yearly
expenses.

Types of Pricing
1.Penetrating pricing: The penetration pricing strategy consists of setting a
much lower price than competitors to earn initial sales. These low prices can
draw in new customers and take away revenue from competitors. While your
company will likely take a loss at first, you can earn new customers and turn
them into loyal customers once you start raising your prices again. Companies
like internet and smartphone providers use this strategy to gain market share.
2.Skimmimg Price: Businesses that charge maximum prices for new
products and gradually reduce the price over time follow a skimming strategy.
Prices drop as products end their life cycle and become less relevant.
Businesses that sell high-tech or novelty products typically use price skimming.

3. High –Low Pricing: High-low pricing is similar to skimming, except the price
drops at a different rate. With the high-low pricing method, the price of a
product drops significantly all at once rather than at a gradual pace. Retail
businesses that sell seasonal products typically use a high-low strategy.

4. Premium Pricing: Premium pricing occurs when prices are set higher than the
rest of the market to create perceived value, quality, or luxury. Customers are
willing to pay a premium price when they know the brand name and have
a positive brand perception. Companies that sell luxury, high-tech, or exclusive
products—like businesses within the fashion or tech industry—often use the
premium pricing technique.

5.Phychological Pricing: Psychological pricing strategies play on the psychology

of consumers. In a way, you are luring in customers by slightly altering price,
product placement, or product packaging. Some psychological pricing techniques
include setting the price to $9.99 rather than $10, or offering a “buy one, get one
free” deal. For example, 90% of retail prices end with either “9” or “5.” Nearly any
type of business can use this strategy, but retail and restaurant businesses most
commonly employ this method.

6.Bundle Pricing: Bundle pricing is selling two or more similar products or

services together for one price. Bundling is an effective way to upsell additional
products to customers or add value to their purchase. Restaurants, beauty
salons, and retail stores are among the many businesses that apply this strategy.

7.Competitive Pricing: The competitive pricing strategy sets the price of your
products or services at the current market rate. Your pricing is determined by all
other products in your industry, which helps you stay competitive if your business
is in a saturated industry. You can also decide to price your products above or
below the market rate, as long as it’s still within the range of prices set by all
competitors in your industry.
8.Cost-Plus Pricing: Cost-plus pricing involves taking the amount it cost you to
make the product and increasing that amount by a set percentage to determine
the final price. You can work backwards to determine your markup percentage by
first figuring out how much you want to profit from each product sold.
9.Dynamic Pricing: Dynamic pricing matches the current market demand for a
product. This pricing strategy most often occurs when the product at hand
fluctuates on a daily or even hourly basis. Industries like hotels, airlines, and
event venues set different prices daily and apply this strategy to maximize profits.