Chapter Eleven: Pricing in Retailing• Various products/services are priced to match competitor’s offerings • Goal is to maximize profits for the whole line instead of focusing

Chapter Eleven:

Pricing in Retailing

People want economy and they'll pay almost any price to get it.

Lee Iacocca Chairman,

Chrysler Corporation

11-2

Integrated Retail Management Flowchart

11-3

Objectives

• Explain and create pricing objectives for retailers.

• Outline the main types of pricing policies.

• Develop retail prices for products and services.

• Explain why and how prices are adjusted.

11-4

Pricing

• Variables that influence price

– Pricing objectives

– Price flexibility

– Pricing policies

– Competition

– Demand

– Price adjustments

11-5

Types of Pricing Objectives

• Product quality

• Skimming

• Market penetration

• Market share

• Survival

• Return on Investment

• Profit

• Status quo

• Cash flow

• Increasing traffic

• Moving older products

• Enhancing image

11-6

Figure 11.2: Pricing Ranges Based on Demand and Cost

• Pricing Flexibility-

11-7

Determining Price Flexibility

1. Determine the costs of running the business

2. Estimate the demand for products

3. Estimate the elasticity of price for products and product lines

11-8

Price Elasticity

• Price inelasticity (Ep<1)

• Price elasticity (Ep>1)

• Unitary Elasticity

11-9

price Old / price in change Absolute

price old at Demand / pricenew at demand in change Absolute• Ep =

Factors Affecting Elasticity

• Availability of substitute products

• Time period under consideration

• Price points

• Permanent vs. temporary price changes

• Proportion of consumer’s budget to purchase item

• Whether it is a necessity or luxury

11-10

Determining Pricing Strategy and Policies

• Pricing policies help create an overall strategy

• Policies and strategy must be consistent with other areas of the Integrated Retail Management Flowchart

11-11

Pricing Policies

• Price Variability

• Promotional Pricing

• Price Leveling

• Life Cycle Pricing

• Price Lining

• Price Stability

• Psychological Pricing

11-12

Price Variability

• Different prices are charged to different customers

• Must follow laws that impose limitation on price variability

• Laws discourage retailers from varying prices for “classes” of buyers

11-13

Promotional Pricing

• Pricing becomes integrated with IMC and tied to promotions

• Leader pricing

• Special event pricing

11-14

Price Leveling

• Also called customary pricing

• Difficult to change price strategy once customers are used to it

• Typically set at market, below market or above market

11-15

Life Cycle Pricing

• Pricing set to coincide with movement through the product life cycle stages

• Prices typically higher during introduction and growth

• Prices start to decline at maturity

• Prices discounted at decline

11-16

Price Lining

• Various products/services are priced to match competitor’s offerings

• Goal is to maximize profits for the whole line instead of focusing on only 1 product

11-17

Price Stability

• One price policy

• No need to run sales

• Must adhere to price-fixing laws

11-18

Psychological Pricing

• Types of Psychological Pricing

• Odd/even pricing-

• Reference pricing-

• Prestige pricing-

11-19

Methods for Establishing Price

• Cost-oriented pricing

• Competition-oriented pricing

• Demand-oriented pricing

11-20

Cost-oriented Pricing

• Two approaches

– Markup pricing

– Breakeven pricing

11-21

Markup Pricing

• Markup based on retail or selling price

– Markup = Selling price (retail price) – Cost

– Markup % = Amount of markup/Selling price

• Markup based on cost

– Retail price = Cost + Markup

11-22

Breakeven Pricing

• The level of sales required to cover costs of selling the product is determined

• BEP (in quantity)= Fixed cost/Unit price - Unit variable cost

• BEP (in dollars) = BEP (in quantity) x Selling Price

11-23

Competition-Oriented Pricing

• Retailer identifies the industry leader and copies

• Assumes that costs, demand, and competition remain fairly constant

• Must “shop” the competition

11-24

Demand-Oriented Pricing

• Prices set based on consumer demand

• Unusual environmental changes can result in price changes

• Must avoid price gouging

11-25

Types of Demand-Oriented Pricing

• Modified breakeven

• Consumer market approach

• Industrial market approach

11-26

Initial Markup Percentage

11-27

Reductions sales Net

Reductions profit Planned expenses Planned

• Initial markup percentage

=

sales net Actual

profit Actual (actual) expenses operations Retail

• Maintained markup percentage

=

• Gross margin in dollars = Net sales – COGS

Initial Markup Percentage (cont’d)

• Variables that affect initial markup percentage

– Influence of other channel members

– Quantity discounts and shipping arrangements

– Pricing for Internet activities vs. brick and mortar

11-28

Price Adjustments

• Additional Markups (markons) often placed on

– Trendy or fad items

– Items with demand

– Holiday season item

• Markdowns help to

– Move older products

– Clear inventory for a move to a new location

– Markdown (in $) = Retail selling price – New selling price

11-29