Retail Pricing Price is a measure of value and the only element of the marketing mix that represents revenue
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Retail Pricing
Price is a measure of value and the
only element of the marketing mix that
represents revenue
Price
Is the most flexible marketing mix element
Can be changed quickly unlike product
features, channel commitments and
promotions
Communicates the intended value positioning
to the market
Decisions are complex and difficult
Possible pricing objectives
Maintain the retail image - (Bulgari)
To be perceived as fair to all stakeholders (suppliers, staff, customers) – Waitrose
To increase customer traffic in slow periods (demand fill) – JD Wetherspoon
Clear out seasonal merchandise – most retailers especially fashion
Match competitors without starting a price war (Comet)
Promote “never undersold” philosophy (John Lewis)
To be the price leader (Asda, Morrisons)
To provide extra customer services and higher perceived value (Tesco)
Consumer psychology and
pricing
Question economists’ view of price
Consumers do not accept prices as given
Consumers interpret price according to prior
knowledge and experience and purchase
decisions are based on perception of price
Consumers have lower and upper threshold
prices – below which the price signals inferior
quality, above which it signals inferior value
Consumer psychology and
pricing
Price cues: consumers process prices left to right rather than rounding (Stiving and Winer 1997, Empirical analysis of price endings with scanner data)
Hence £299 is closer to £200 than to £300
Prices ending in odd numbers convey a deduction or discount (Anderson and Simester 2003, Effects of $19 price endings on retail sales). Firms with high price images should avoid this
Consumer psychology and
pricing
Price – Quality inference: many consumers
use price as an indicator of quality
Importance of price in retailing
Price as key competitive factor
Influences on pricing
PRICE DECISIONS
Buyer perceptions
Competition
Laws, regulations,
Directives, compliance Marketing channel,
Distribution costs
Production,
Operational costs
Marketing
objectives
Main retailer pricing strategies
Premium (superior products, service and
store interiors but at a higher price)
Discount (low prices with sacrifices in other
areas)
Every Day Low Price (reliable prices with few
or no promotions)
Hi-Lo (higher prices on most items but offset
by special promotions)
Pricing strategies for leading UK
retailers
Discount
Pricing mechanisms preferred
by shoppers
Source: IGD
Reasons for low price/promotion
preference
Retail pricing terms
Cost of goods – invoice costs, carriage inwards, depreciation on unsold goods
Gross margin – sales minus cost of goods sold
% gross margin – gross margin as % of sales
Mark up – amount added to cost of goods to give required selling price (can be expressed as % of cost)
Net profit – sales less cost of goods less operating expenses
Mark down – total reduction on normal RSP for all items sold
Margin levels – high on slow moving lines (furniture), low on fast moving lines (grocery)
Factory Gate Pricing
A supply chain initiative which aims to remove unnecessary transportation costs and improve efficiency of the supply chain
Provides efficient transportation – suppliers for whom transportation is not core can transfer cost and responsibility to retailer
Improved availability – more product available on shelf
Lower prices for consumers – through lower transport costs
Environmental benefits
Product price and transport
price Possible retailer cost saving through FGP
Strategic pricing decisions
If prices are reduced will revenues increase
(demand orientation)
Will a given price level provide the desired
retail markup? (cost orientation)
What price levels are competitors setting?
(competitor orientation)
Can above market prices be set due to
superior image? (competitor orientation)
Pricing and positioning
Price is a strong determinant of position
Competitive strategy determines pricing
strategy and pricing policy
Possible pricing strategies
Low cost
Premium
Prestige
Setting retail prices – cost
oriented pricing
Apply necessary mark-up to cost price to achieve profit objectives
Cost price to include purchase ,transport, storage, selling etc
Must not exceed ceiling above which price is expensive relative to competitors
Weaknesses lie in price/demand/marketplace/competitor considerations
Cost-oriented mark up pricing
Retail Markup % = Retail selling price – merchandise cost
Retail selling price
Example: TKMaxx can buy a shipment of jeans at £12 per pair and wants to
achieve a 30% retail mark up. What retail price should the store charge to achieve
markup.?
0.30 = RSP – 12.00 or 12 = £17
RSP 0.7
Rymans Stationers seeks a minimum 40 % retail markup. It sells manila envelopes
at £7.99 per box. What is the maximum price it should pay a supplier per box?
0.40 = 7.99 – merchandise cost or 7.99 x 0.6
7.99
Merchandise cost = £4.79
Demand oriented retail pricing
Use price tactically according to market demand (Xmas, economic downturn)
Knowledge of consumers
Respond to competitive pressure (fuel price to drive footfall)
Stimulate demand for other/related items (Jessops, offers on entry level cameras)
Achieve market presence
Discrimination, backward, skimming, leader, competitive, penetration, EDLP
Price discrimination
First degree Price varies by customer willingness or ability
to pay. Student discounts. Higher prices for
flowers on Mothers/Valentines Day
Second degree Price varies according to quantity sold: quantity
discounts or non-linear pricing eg Stella Artois @
£1 bottle of £7.99 for 12 bottles
Third degree Price varies by attributes such as location, time,
customer segment, individual customer eg Tesco
Express prices higher than Extra
Backward pricing
Determine the price the customer is willing to pay
and work backwards
Source merchandise to fit into price lines £25, £35,
£45 (also known as price lining)
Price lines must reflect clear value difference for
consumer
Wide assortment can be concentrated into narrow
price lines thus simplifying consumer choice process
and creating defined store image (see Charles
Tyrwhitt for price lined male tailoring, Specsavers
£25, £45, £69 etc ranges)
Leader pricing
Stimulate overall demand selling selected lines (widely
and frequently purchased) at or below cost
Increase store visits, build brand image and perception
of value
Can lead to consumer selectivity in lines purchased
Eg milk at Iceland £1 for 4 pints – try going to Iceland
and just buying milk
Items chosen for leader pricing must be frequently
bought where customers know going rate price
Everyday low pricing (EDLP)
A low price position which remains stable relative to
discounters and mark-down strategies
Perception of fairness
Reduced advertising: customers know prices are low
Improved customer service: as demand is less volatile
Improved inventory management: based on more even
demand
Increased profits: through higher volumes
Mark-downs: tactical price
adjustments
Reductions in price to reflect current value
(maturity/decline stage PLC)
Correctional mark-downs stimulate interest in
a line (new size, flavour, variety): establish
buying habit
Operational mark-downs: shopworn, out of
date, end of season
Promotional mark-down: stimulate demand
through lower prices
Use mark-downs in response
to
Competitor activity
Poor original price setting
Economic/seasonal change
Poor quality
New competitor product better matched to consumer needs
Free display space on slow selling lines
Improve customer goodwill through larger mark-down
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