CHAPTER 5

Motivating Customers
To Buy
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 Pricing the
merchandise
○
PRICE is the value placed
on what is exchanged

4
○
Price quantifies the value of
products / services
○
and is major determinant of the
amount of merchandise that will
be sold by the store.

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○
Price usually the element of
retail strategy that can be
changed quickly due to the
changes in economic and
market conditions.

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○
Retail price includes the cost of merchandise, and an
additional amount known as mark-up.
○
Mark-up must be large enough to cover the operating
expenses of the retail organization while providing a profit.

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 Elements of Retail Price
• Cost of goods includes the actual cost of the
merchandise plus transportation charges
involved in getting the merchandise from
the vendor to the store
• Mark-up is added to the cost of goods to
determine retail price.
• Must estimate expenses and profit.
• Expenses – fixed and variable expenses.

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○
Fixed expenses – do not vary regardless
of how much merchandise the store sells.
Ex: mortgage
○
Variable expenses – change in a direct
relationship to sales. Ex: commissions,
delivery , expenses , advertising.

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Planning Initial Mark-up Percent
○
In planning must estimates the elements of retail
price as well as any planned reductions in price,
include sales, expenses, profit, reductions & cash
discounts.
■
Initial Mark-up Percent =
(Expenses + Profit + Reductions – Cash Discounts)/
○ (Sales + Reductions)

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○
Sales – should be planned first., based on
past sales records & changes.
○
Expenses –must plan fixed & variable
expenses.
○
Profit – estimated based on store records.
○
Reductions – include markdowns,
employee discounts , consumer discounts
& shrinkage.

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○
Example : Assume that a store plans sales of
RM50,000 with a profit of RM2,500.
Markdowns are planned at RM5,000 and
shrinkage is planned at RM500. No
employee or consumer discounts. Expenses
are planned at RM15,000.
Calculate mark-up percent, using initial mark-
up formula.

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○
INITIAL MARKUP PERCENT =
(RM15,000 + RM2,500 + RM5,500) /
(RM50,000 + RM5,500)
○
Initial markup percent = RM23,000 /
RM55,500
○
Initial markup percent = .414
○
Initial markup percent = 41.4%

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 Calculating Retail Prices
○
After set mark-up, must calculated retail prices
○
Retail price is the cost of merchandise plus
desired mark-up
•
Mark-Up Based On Retail -the retail percent
will always equal 100 percent
○
Example : Percent mark-up 41.4 percent
○
Cost of an item RM50
○
What would be the retail price?

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○ Answer : Retail Price = Cost / Cost percent
○ = Retail price 100%

$ %

Cost RM50

+ markup 41.4%

= Retail price 100%

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○
Cost percent is 58.6 percent (100% -41.4%)

○
Retail price = cost / cost percent
○
Retail price = RM50.00 / 0.586
○
Retail price = RM85.32

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○
Markup Based On Cost
○
Cost percent will always be 100 percent
○
Assume : item costs - RM50. Planned 41.4
percent markup based on cost on the item.

RM %
Cost RM50 100%
+ Markup 41.4 %

= Retail Price 141.4 %

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○
From this can determine dollar markup
○
Markup = 0.414 X Cost
○
Markup = 0.414 X RM50
○
Markup = RM20.70
○
Retail = Cost + Markup
○
RM50 + RM20.70 = $70.70

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○
This concept illustrates how retail prices
are calculated using markup based on
cost.

○
This formula be used to calculate retail
price when cost & markup are known.
○
Retail Price = Cost X (100% + Markup
Percent Based On Cost)

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FACTORS AFFECTING RETAIL PRICE

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○ 1. Merchandise and prices offered
○ Costs and operating expenses must be
considered
○ Store cannot survive if do not cover this

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○ 2. Target Market
○ Must understand how your store is positioned in the
marketplace
○ How customer view price.
○ Knowing target market, establishes the price range
in the store
○ Determine if the customers will recognize the value
they will receive based on the price.

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○
3. Store policies.
○
Store policies must be used to guide
pricing decisions.
○
If want to create prestige image –use
price skimming – charge the highest
possible price that customers who most
desire the product will pay.
○
Used this when new products are
introduced.

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○ Discounters use penetration pricing policies.
○ Low prices to produce large unit sales volumes.
○ A small amount of profit is made on each item
○ But many more units are sold-result in higher overall profits
○ Use this policy when want to gain market share quickly &
discourage competitors entering the market

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○
Some use loss leaders – price specific
products at a point that will not generate
any profits
○
Purpose – to build store traffic
○
Hope that customers will make other
purchases – impression that all prices are
low.

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○
Odd-cent pricing – influence customers’ perceptions
○
Technique – price product at $9.99
○
Use by Discounters

○
Even pricing – to create a prestige/ upscale image
○
Retail price at $32.00 rather than $31.95
○
To enhance the upscale image of many products ex:
jewelry.

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○
4. Competition
○
Examine the competitor’s prices
○
Price at, below or above the competition

○
Pricing To Meet the Competition –
factors such as service & location are
stressed to customers.

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○ Pricing below the competition
○ Requires the merchandise be purchased at a lower cost /
operating expenses are less than the competitors.

○ Pricing Above The Competition

○ To create a prestige image
○ Customers must perceive extra value for higher prices –
free services, exclusive merchandise, more attention
from SA

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○
5. Economic condition
○
Such as – during economic slowdowns
prices are lowered to generate more sales.
○
Supply and demand will also impact retail
prices.
○
Prices must be lowered when supply
exceeds demand.

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PROMOTING THE MERCHANDISE
○ RETAIL PROMOTIONAL ACTIVITIES
○
All promotional activities should have the
following general objectives:
○
To produce sales & maximize profits.
○
To generate customer loyalty & continued
patronage
○
To project / enhance the store’s image

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○
Key promotional mix elements include:
○
Advertising
○
Visual merchandising
○
Personal selling
○
Publicity
○
Special events
○
Other sales promotion activities

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Advertising
A paid, non-personal promotional
message for a product, service, or
idea by an identified sponsor.
○
Purposes :
○
Increase sales volume
○
Increase store traffic
○
Attract new customers

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○
Introduce new products / services
○
Develop a demand for private brands
○
Reinforce customer satisfaction
○
Increase sales volume during slow
periods
○
Presell the merchandise

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○
Selection of media based on following
factors:
○
Product to be advertised
○
Trading area of the store
○
Media used by the competition
○
The selling season
○
Type of customer to be reached
○
Budget available

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Visual merchandising
○ Includes the layout of store facilities & the placement of
merchandise in the store to stimulate customer desire.
○ Display new merchandise prominently.
○ State prices clearly in the displays
○ Use feature displays to help customers visualize
themselves using the products.
○ Least expensive & most powerful forms of promotion.

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Personal selling
 The one-on-one communication between a customer & a
salesperson for the purpose of satisfying customer wants
& needs through products presented for sale.
 Buyer responsibility is to help salespeople make sales,

by providing products information.

 Customer services and personal selling help increases

the sales.

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Publicity

The free & voluntary mention of a company, product /
service by the media.

To obtain publicity, must have something newsworthy
& of interest to the general public.

By contacting the media by sending them a press
release.

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
Elements that differentiate advertising from publicity
are payment & sponsorship.

Publicity release should include following
information:

Who : the company / persons involved

What : the important event

When : the date and time

Where : The location

Why : the reason for the event

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Special events

○
Example : fashion shows, book signings, and
seminars on upcoming trends.
○
Create excitement & enthusiasm for the store
and its products.

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○
Other Sales Promotion Activities
○
Special sales, coupons & premiums .

○
Sales promotion activities give customers
additional reasons to buy.

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○
In deciding the right mix, need to consider:
○
The success or failure of previous year’s
promotional activities
○
The image that the store desires
○
The store’s target customer
○
Store objectives
○
The competitive environment

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DEVELOPING A PROMOTIONAL
PLAN
○
Promotional campaign – a planned &
coordinated series of promotional activities
for the purpose of reaching desired goals of
the business.
○
Campaigns require that promotions be
targeted , comprehensive & well planned.
○
Steps in plan :

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1. Establish objectives
2. Prepare the budget
3. Select merchandise for promotion
4. Establish a schedule or promotional
activities
5. Prepare the promotional message
6. Evaluate the promotional campaign

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1. Establish objectives

Deciding what the store are trying to
accomplish

Specific objectives should be establish

Ultimate goal – is to increase the store’s
sales & max profits.

Ex: To increase sales by 5 percent for the
week

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2. Prepare the budget
○
Promotional budget – plan of how much money
will be spent on promotional activities during a
specific period.
○
The amount allocated to each promotional
activity must be established
○
May use cooperative advertising (manufacturers
share the advertising costs with retailers that
promote its products

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○
Store also be able to negotiate with
suppliers for other promotional materials
○
Such as premiums, POS displays,
display fixtures.

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3. Select merchandise for promotion
○ Select fast selling, popular items/styles
○ Products that in season
○ Items that vendors also promoting
○ Merchandise that easier to write about
○ New items
○ Merchandise that has distinct price appeal-
markdowns must be advertised.

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○
Products that should not be selected for
promotion :
○
Old and obsolete merchandise
○
Merchandise that cannot be quickly
reordered
○
Products that has passed it peaks
○
Do not rely on promotional efforts to
correct buying errors.

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4. Establish a schedule or promotional activities
○
Need to decide how often promotion will be
needed
○
Develop a promotional calendar
○
- a written timetable for a long-range promotional
campaign.
○
Include : when, what merchandise, which
promotion mix, who is responsible , how much
budget.

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5. Prepare the promotional message
○
Message must appeal to target customers
○
Stressing the reasons, they have for buying
the product
○
Keep the message concise
○
Stress a few facts about merchandise
○
Mention product features
○
Make the message believable

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6. Evaluate the promotional campaign
○
Store records are vital to evaluate the
effectiveness of promotional
○
Records of what & how many of each item
sold
○
Examine unit sales
○
Count the number of customers entering the
store ( can use coupons)

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 CONCLUSION
○
Advertising, special events and other sales
promotions should create sufficient interest
& desire to bring customers into the store.
○
Visual merchandising should remind
customers why they came to the store &
informed salespeople should be able to
persuade customers to buy.

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Thank you!
End of chapter 5

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Understanding what you read
○
What should be the objectives of all promotional activities?
○
What are the basic elements that differentiate advertising
and publicity?
○
Describe the difference between fixed and variable
expenses.
○
List and explain three causes of markdowns.

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