RETAIL PRICING

CONCEPT OF RETAIL PRICING

Integral part of retail marketing mix

Source of revenue for the retailer
Communicate the image of the retail store

FACTORS THAT NEED TO BE TAKEN INTO CONSIDERATION

Demand

for the product and the target market

Store policies and the image to be created
Competition for the product and the competitors price
Economic conditions prevailing at that time
PRICING OBJECTIVE
In

agreement with the mission statement

In agreement with the merchandising policies

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ELEMENTS OF RETAIL PRICE

1.

Cost of goods

: Cost of Merchandise
Expenses incurred towards transportation
Taxes, duties levies etc.

2.

Expenses Incurred

3.

Fixed Expenses

: Expenses that do not vary with quantum of

business
eg. Shop rent, Head Office costs etc

4.

Variable expenses

: Level of sales directly effects variable expenses.

eg. Merchandise margins, product mix costs
Their Management either enhances or destroy
profitability

Fixed expenses
Variable expenses

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FIXING THE RETAIL PRICE
Consideration : Profit to be earned
Profit from Merchandise planed before price fixation
Profit to be arrived at is expressed as a mark up percentage

Retail Price = Cost + Mark Up

Or Cost = Retail Price - Mark Up
Or Mark Up = Retail Price - Cost

Components of the formula can be expressed in

Rupee Term or as a percentage

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THE FOLLOWING FORMULA WOULD APPLY
Mark Up percentage can be expressed as
Percentage of retail price or as a percentage of cost price

Mark Up percent (based on Retail Price) = Mark Up in Rupees / Retail Price

Mark Up percent (based on Cost) = Mark Up in Rupees / Cost

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ILLUSTRATION
Assume the cost of merchandise = Rs.200.00
The Mark Up is
= Rs.150.00
Retail Price = 200 + 150 = 350
Mark Up % on Retail
= 150 / 350 = 42.86%
Mark Up % on Cost
= 150 / 200 = 75 %
Mark Up fixed is termed as Initial Mark Up
Rarely are all products sold completely at fixed prices

Reduction in price are often made and could be due to Markdowns, Employee
discounts, Customer Discounts or Shrinkage

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ILLUSTRATION OF COST PLUS PRICING
Cost of fabric = Rs.150.00 per meter
Fabric consumption = 1.30 meters
Total Fabric Cost
Manufacturing Cost
Basic Cost
Packaging Cost

=
=
=
=

Rs.195.00
Rs.100.00
Rs.295.00
Rs. 50.00

Cost Price
Mark Up @ 60%

= Rs.345.00
= Rs.207.00

Retail Price

= Rs. 552.00 Rounded Off Rs.550.00

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DEVELOPING A PRICING STRATEGY
1.
2.
3.

Cost Oriented
Demand Oriented
Competition Oriented

COST ORIENTED PRICING

Basic mark up is added to the cost of merchandise

Retail price is considered to be a function of the cost and the mark up

Thus Retail Price = Cost + mark Up
Or
Cost = Retail Price Mark Up
Or
Mark Up = Retail Price - Cost
Difference between the selling price and cost is Mark Up
Mark up should cover for operating expenses and transportation etc

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DEMAND ORIENTED PRICING
Focuses on quantities the customers would buy at various prices
Largely depends on perceived value attached to the product by customers
Sometimes a high priced product is perceived to be of high quality
Sometimes a low priced product is perceived to be of inferior quality

Key to demand oriented pricing

Understanding of the target market

Value based proposition that they would look for

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COMPETITION ORIENTED PRICING

Competition is the criteria of fixing the price

Competitors play a key role in determining price

Retailer fixes price on par with the competitors

Retailer fixes price above the competitors price

Retailer fixes price below the competitors price

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IMPORTANT TERMS USED BY RETAILERS IN PRICING

Price Lining : When retailers sell merchandise only at a given price
Price Zone or Price Range : Range of prices for a particular merchandise line
Price Point : A specific price in that price range

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APPROACHES TO PRICING STRATEGY

Market Skimming
Market Penetration
Leader Pricing
Price Bundling
Multi-Unit Pricing
Discount Pricing
Everyday Low Pricing
Odd Pricing

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MARKET SKIMMING
Strategy to charge a high price initially
Gradually reduce it if necessary
Policy is a form of price discrimination over time
To be effective several conditions are to be considered

MARKET PENETRATION

Opposite of Market Skimming

Aim to capture a large market share by charging low price
Low prices stimulate purchases
Low prices discourages competitors from entering the market
Economies of scale is required in manufacturing or retail to be effective

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LEADER PRICING

Retailer sells few items at deep discounts

This increases traffic and sales on complementary items.
The product must appeal to a large number of people
The concept should appear as a bargain
Items best suited for this type of pricing are those that are bought frequently
Example : bread, eggs, biscuit, milk etc.

PRICE BUNDLING
Retailer bundles a few products and offers them at a particular price
Price bundling helps sale of related items
Example: A PC at a fixed price including a printer and a web camera
Value Meal offered by McDonalds

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MULTI UNIT PRICING
Retailer offers discounts to customers who buy in large quantities or who buy a
product in bundle
This involves value pricing for more than one of the same item
Multi unit pricing helps move products that are slow moving
Example: Offer price of one T-shirt for Rs.255.99 and two T-shirts for Rs.355.99

DISCOUNT PRICING

Used as a strategy by outlet stores who offer merchandise at the lowest market
prices

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EVERY DAY LOW PRICING
Popularly known as EDLP
Strategy adopted by retailers who continually price their products lower than
the other retailers in the area
Example: Food Bazaar, Wal-Mart and Toys R Us regularly use this strategy

ODD PRICING
Strategy is to set retail prices in such a manner that the price ends in odd
numbers
Example: Rs.99.99, Rs.199.99 or Rs.299.99
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