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Pricing Options for Retailers

Discount orientation
Retailer uses low prices as competitive advantage. Low-price image targets price-oriented customers. Fewer shopping frills and low per-unit profit margins mean low operating costs and high inventory turnover.

At-the-market orientation
Retailer has average prices.

Offers good service and a nice atmosphere to middle-class shoppers, average to above-average quality products are stocked.
Margins are moderate to good, squeezed by retailers positioned as discounters or prestige stores, finds it hard to expand its price range.

Upscale orientation
A prestigious image is the retailers competitive advantage. A smaller target market, higher expenses and lower turnover mean customer loyalty, distinctive services & products and high per-unit profit margins.

Factors Affecting Retail Price Strategy

1. Price Elasticity of Demand

The sensitivity of customers to price changes in terms of the quantities they will buy:

Elastic Small percentage changes in price lead to substantial percentage changes in the number of units bought.
Inelastic Large percentage changes in price lead to small percentage changes in the number of units bought. Unitary elasticity Percentage changes in price are directly offset by percentage changes in quantity.

A Movie Theaters Elasticity of Demand

Market Segments by Price Sensitivity

Economic consumers perceive competing retailers as similar; shop around for the lowest possible prices.

Status-oriented consumers perceive competing retailers as quite different; prefer upscale retailers with prestige brands and strong customer service; less interested in prices.
Assortment-oriented consumers seek retailers with a strong selection in the product categories being considered; want fair prices. Personalizing consumers shop where they are known and feel a bond with employees and the firm; will pay slightly aboveaverage prices. Convenience-oriented consumers shop because they must; want nearby stores with long hours; may use catalogs or the Web; will pay higher prices for convenience.

2. Government and Retail pricing

Predatory pricing large retailers seek to reduce competition by selling goods and services at very low prices, causing small retailers to go out of business. Loss leaders retailers price selected items below cost to lure more customer traffic. Supermarkets and other retailers use loss leaders to increase overall sales and profits because people buy more than one item once in a store. Bait-and-switch advertising retailer does not intend to sell the advertised item; customers lured by advertisements of goods and services at exceptionally low prices; at time of contact, customer is told the item is out of stock or of inferior quality. A salesperson tries to convince the person to buy a more costly substitute.

4. Competition and Retail Pricing

Market pricing
Retailers often price similarly to each other and have less control over price because consumers can easily shop around.

Occurs when shoppers have a large choice of retailers.

Supermarkets, fast-food restaurants.

Administered pricing
Firms seek to attract consumers on the basis of distinctive retailing mixes. Occurs when people consider image, assortment, service, to be important; willing to pay above-average prices to unique retailers. Upscale department stores, fashion apparel stores, and expensive restaurants

If competition becomes too intense, a price war may eruptfirms continually lower prices below regular amounts and sometimes below their cost to lure consumers from competitors. Price wars are difficult to end and can lead to low profits, losses or even bankruptcy.

Framework for Developing a Retail Price Strategy

1. Retail Objectives and Pricing

Market skimming pricing a firm sets premium prices; attracts customers less concerned with price than service, assortment, prestige. Does not maximize sales but achieves high profit per unit.

Market Skimming
Market Penetration

Appropriate if targeted segment is price insensitive, new competitors are unlikely to enter the market, added sales will greatly increase retail costs. Market penetration pricing an aggressive strategy; retailer seeks large revenues by setting low prices and selling many units. Profit per unit is low, but total profit is high if sales projections are reached. Appropriate if customers are price sensitive, low prices discourage actual and potential competition, and retail costs do not rise much with volume.

2. Broad Price Policy

Through a broad price policy, a retailer generates an integrated price plan with short and longrun perspectives (balancing immediate and future goals) and a consistent image (vital for chains and franchises).

Price Policy Choices

No competitors will have lower prices; no competitors will have higher prices; or prices will be consistent with competitors. All items will be priced independently or the prices for all items will be interrelated to maintain image and ensure proper markups. Price leadership will be exerted; competitors will be price leaders and set prices first; or prices will be set independent of competitors. Prices will be constant over a year or season; or prices will change if costs change.

3. Price Strategy
Demand-oriented pricing
retailer sets prices based on consumer desires. it determines the range of prices acceptable to the target market. The top of this range is the demand ceiling, the most that people will pay for a good or service. studies customer interests and the psychological implications of pricing. Two aspects: pricequality association and prestige pricing.

Price Strategy

Demand-oriented pricing

Pricequality association concept many consumers feel high prices connote high quality and low prices connote low quality.

Important if:
competing products are hard to judge on bases other than price, consumers have little experience in judging quality (as with a new retailer), shoppers perceive large differences in quality among retailers or products, brand names are insignificant in product choice.

Not important if:

other quality cues such as retailer atmospherics, customer service are involved, they may be more important than price in a persons judgment of overall retailer or product quality.

Prestige pricing assumes that consumers will not buy goods and services at prices deemed too low; too low a price means poor quality and status. Does not apply to all shoppers. Some people may be economizers and always shop for bargains.

Price Strategy
Cost-oriented pricing Retailer sets a price floor, the minimum price acceptable to the firm so it can reach a specified profit goal.
Markup pricing a retailer sets prices by adding per-unit merchandise costs, retail operating expenses and desired profit. The difference between merchandise costs and selling price is the markup.
Markups can be computed on the basis of retail selling price or cost but are typically calculated using the retail price. Why? (1) Retail expenses, markdowns and profit are always stated as a percentage of sales. Thus, markups expressed as a percentage of sales are more meaningful. (2) Manufacturers quote selling prices and discounts to retailers as percentage reductions from retail list prices (MRP).

(3) Retail price data are more readily available than cost data.
This is how a markup percentage is calculated. The difference is in the denominator:

Cost-oriented pricing - Variable markup policy

Direct product profitability (DPP)

Technique that enables a retailer to find the profitability of each category of merchandise by computing adjusted per-unit

gross margin and assigning direct product costs for such

expense categories as warehousing, transportation, handling, and selling. The proper markup for each category or item is then set. DPP is used by some supermarkets, discounters, and other retailers.

How to Determine Direct Product Profitability

Price Strategy
Competition-oriented pricing
retailer sets its prices in accordance with competitors. The price levels of key competitors are studied and applied.

Integration of Approaches to Price Strategy

To properly integrate the three approaches, questions should be addressed: If prices are reduced, will revenues increase greatly? (Demand orientation) Should different prices be charged for a product based on negotiations with customers, seasonality, and so on? (Demand orientation)

Will a given price level allow a traditional markup to be attained? (Cost orientation)
What price level is necessary for a product requiring special costs? (Cost orientation) What price levels are competitors setting? (Competitive orientation) Can above-market prices be set due to a superior image? (Competitive orientation)

4. Implementation of Price Strategy

Implementing a price strategy involves a variety of separate but interrelated specific decisions, in addition to those broad concepts already discussed.

Price Strategy Concepts

Customary Pricing retailer sets prices for goods and services and seeks to maintain them for an extended period. E.g. newspapers, candy, arcade games, vending machine items, and foods on restaurant menus. Everyday Low Pricing retailer strives to sell its goods at consistently low prices throughout the selling season. Firm reduces its advertising and product re-pricing costs; this increases the credibility of its prices in the consumers mind.
o o A firm cannot maintain constant prices if its costs are rising. A firm should not hold prices constant if customer demand varies.

Price Strategy Concepts

Variable Pricing a retailer alters prices to coincide with fluctuations in costs or consumer demand. It provides excitement due to special sales opportunities for customers. Cost fluctuations can be seasonal or trend-related. Demand fluctuations can be place or time-based. Yield Management Pricing a computerized, demand-based, variable pricing technique, whereby a retailer (typically a service firm) determines the combination of prices that yield the greatest total revenues for a given period. It is widely used by airlines and hotels.

Price Strategy Concepts

One-Price Policy retailer charges the same price to all customers buying an item under similar conditions. Flexible Pricing Flexible pricing lets consumers bargain over prices; those who are good at it obtain lower prices. E.g. jewelry stores, car dealers. Contingency Pricing a service retailer does not get paid until after the service is performed and payment is contingent on the services being satisfactory. E.g. A realestate broker may show a house 25 times, not sell it, and therefore not be paid.

Price Strategy Concepts

Odd Pricing a form of psychological pricing. Assumption is that people feel these prices represent discounts or, the amounts are beneath consumer price ceilings. E.g. Rs.99.99 Leader Pricing a retailer advertises and sells selected items in its goods/service assortment at less than the usual profit margins. Goal is to increase customer traffic so that it can sell regularly priced goods in addition to the specially priced items. This is different from bait-and-switch, in which sale items are not sold.

Price Strategy Concepts

Multiple-Unit Pricing a retailer offers discounts to customers who buy in quantity or who buy a product bundle. Reasons to use multiple-unit pricing:
(1) A firm could seek to have shoppers increase their total purchases of an item. (If people buy multiple units to stockpile instead of consuming more, the firms overall sales do not increase) (2) (3) This approach can help sell slow-moving and end-of-season merchandise. Price bundling may increase sales of related items.

Price Lining Rather than stock merchandise at all price levels, retailers sell merchandise at a limited range of price points, with each point representing a distinct level of quality.

Retailers first determine their price floors and ceilings in each product category. They then set a limited number of price points within the range.

5. Price Adjustments
Markdowns and additional markups are needed due to competition, seasonality, demand patterns, merchandise costs and pilferage.
Markdown a markdown from an items original price is used to meet the lower price of another retailer, adapt to inventory overstocking, clear out shop-worn merchandise, reduce assortments and increase customer traffic. Additional markup increases an items original price because demand is unexpectedly high or costs are rising. Employee discount Some firms give employee discounts on all items and also let workers buy sale items before they are made available to the general public.

Timing Markdowns
Early markdown policy merchandise is offered at reduced prices while demand is still fairly active. Early markdowns free selling space for new merchandise. The retailers cash flow position can be improved. Late markdown policy a retailer gives itself every opportunity to sell merchandise at original prices. Staggered markdown policy discounts prices throughout a selling period.

Automatic markdown plan the amount and timing of markdowns are

controlled by the length of time merchandise remains in stock

Storewide clearance goal is to clean out merchandise before taking a physical inventory and beginning the next season; longer period is provided for selling merchandise at original prices; frequent markdowns can destroy a consumers confidence in regular prices