Retail pricing

Retail Pricing

Challenges- Pricing decision

• Pricing decision is important:- Customers are better informed- Have better alternatives to choose from- Want to seek good value- Value is the ratio of what customers receive (the

perceived benefits) to what they have to pay for it.- Value= Perceived benefits/Price- Thus retailer can increase sale either by increasing

perceived benefits or by reducing price

Challenges- Pricing decision

• For some customers- good value- paying lowest price-other benefits are not important to them

• For some- ready to pay extra – if they are getting their moneys worth –quality

• Prices are higher than benefits- sales and profit –decrease

• Prices are low- sales increase , but profits may decrease due to low profit margin

• Need to consider the value proposition offered by competitor pricing and legal issues

Considerations in setting Retail Pricing

Retail Price

Price sensitivity

CompetitionEconomic constraints

Cost

Customer price sensitivity and cost

• Price sensitivity : how many units will be sold at different price levels. If customers are not price sensitive, sales will not decrease significantly and vice versa

• No of factors affect price sensitivity- More substitutes for a product, more likely it will be

price sensitive. Eg McDonalds meals and petrol- Necessities are inelastic (insensitive), Eg medicines- Products that are expensive relative to consumer

income are price elastic . Eg cars

Competition

• If product is unique with no competitors- premium price

• If similar products in the market, competitors price needs to be considered.

• Pricing policy must be consistent with retailers overall strategy and its relative market position

• Walmart: low cost strategy for its merchandise• Tiffany: premium pricing

Legal/Ethical pricing issues

• France- regulates pricing. Carrefour affected by German brands- AIDL, Lidl- store brands not affected by French rules- converted many Carrefour shoppers .

Ethical pricing issues

• Price discrimination: occurs when retailer charges diff prices for the identical products/services sold to different consumers. Eg Restaurant meals, women haircuts.

• Predatory pricing: arises when a dominant retailer sets prices below its costs to drive competitors out of business. Retailer hopes to raise prices in the near future and regain lost profits. Eg Walmart vs small retailers

• Horizontal price fixing: involves agreements between retailers that are in direct competition with each other to set the same prices

Ethical pricing issues

• Bait and switch tactics: deceptive practice, wherein the customers are lured into the stores by advt a product at lower than normal price (bait) and once they are into the store, induce them to purchase a higher price model (switch). Can occur by having inadequate inventory of the advt product/salesperson disparage the quality of advt model and promote the superiority of higher priced model.

Economic constraints

Economic slowdown: prices are lowered to generate demand

Retail price and markup• Retail price (RP)=Cost of merchandise (COM) + Markup (MKP)• Thus markup=Retail price-cost of merchandise• Mark up covers all retailers operating expenses needed to sell the

merchandise• Mark up % age= Retail price-cost of merchandise/Retail price• Eg Cost of item A= Rs 75,RP: Rs 125,Mark up % age: 125-75/125=

40%• RP= COM+RP*MKP %age• RP= COM/1-MKP%age • Eg if a item A is purchased at Rs14 and retailer needs 30%

markup to meet financial goals, then, RP= 14/1-0.30=20• Assumption : that all merchandise at all initially set price

• Retailers frequently reduce the price of items for special promotions or to sell excess stock at the end of season

• Also discounts are given for employees, accounting done for theft,errors etc.

• Factors that reduce the actual selling price from initial sales price are called as reductions

• Thus there is a diff between initial markup and maintained markup.• Initial markup= RP initially set – COM• Maintained markup= Actual realized sale-cost of product• Maintained markup= Gross margin for the product.• For eg Item A costs= Rs 0.60,initial RP= rs1, initial mkp=0.40,mkp

%age= 40%, actual SP= 0.90, the reductions are 0.10 rs,so maintained markup= 0.30 and maintained mkp %age: 0.30/0.90=33%

Price adjustments• Markdowns: Price reductions or discounts from initial retail price• Take markdowns either for clearance or for promotion• Clearance markdowns: when merchandise is selling at slower rate than

planned, will become obsolete at end of season. Slow selling merchandise decreases inventory turnover, prevents buyer from acquiring new/better selling merchandise and can mar a retailers image.

• Cost of doing business, and buyers plan for them. Eg order more of fashion merchandise – concerned about underordering and stockout. Stockout can have detrimental effect on image but whereas markdown just reduces mainatined markup

• Promotional markdown: to promote merchandise and increase sales. Some complemenatry products are marked down to promote the sale of other items in the store and to generate traffic

Markdowns

• Work closely with vendors to coordinate deliveries and share financial burden of taking markdowns.SCM systems reduce the lead time for receiving merchandise so that retailers can monitor change in trends and demand.

• Liquidating merchgandise: unsold goods- Sell to other retailer- Consolidate the unsold merchandise to other outlets - place on internet auction website- Charity- Carryover to next season

Variable pricing and Price discrimination

• Individualised variable pricing: charging each individual customer a different price based on their willingness to pay

• self selected variable pricing: offer the same price schedule to all customers but require that customers do something to get the lower price. Eg early bird specials.

• Coupons: offer a discount on price of items when they are purchased. Issued by mfgs and retailers in newspapers, on products, on shelf at cashregister, through internet and mail. Used to induce people to try out product for first time, convert first time users to regular users, encourage large purchases,increase usage and protect market share. Price sensitive customers spend extra effort in collecting coupons . For eg coupon on sugar,stockpile and reduce future sale

• Price bundling: practice of offering two or more different products for sale at one price:Eg Mc value meal. Increase both unit and volume sale by increasing the amount of merchandise bought on a store visit

• Multiple unit pricing: Quantity disocunts for same product to increase sales volume.

PRICING STRATEGIES

• High/low pricing: Discount the initial prices for merchandise through frequent sales promotion. Increased frequency of sales to target competition and the value conscious customer.

• Adv: Increase profits through price discrimination, sales create excitement and sell merchandise

• EDLP: Every day low pricing: Followed by supermarkets, home improvement stores. Emphasizes the continuity of retail prices at a level between the regular non sale price and the deep discount prices of high/low retailers. Term is misleading because they may not be lowest in the market. Follow a low price guarantee policy: offer lowest price for the products they sell. Eg Big bazaar

• Adv: Assures customers of low prices, reduces advt and operating expenses, reduce stock out and improves inventory management

Pricing techniques for increasing sales

• Leader pricing: involves a retailer pricing certain items lower than normal to increase customer traffic flow or to boost the sales of complementary products. These products are called as “loss leaders”. Eg frequently purchased products like whitebread,milk eggs.Retailer hopes that consumer will purchase their entire weekly grocery list while shopping for loss leaders. Eg Toys R us and disposable diapers

• Price lining: offer a limited no of pre determined price points within a merchandise category. For eg tire stores may offer tires at 69.99,89.99,129.99 that reflect good,better and best quality. This price is referred to as price lining

• Odd pricing: refers to the practice of using a price that ends in an odd number, typically a 9

• Used in early days to reduce losses due to employee theft

• Assumption that shoppers don’t notice the last digits of the price . 9 endings signifies low prices would create a positive price image

GMROI (Gross Margin Return on Investment)

• A decision making tool that assists the buyer in identifying and evaluating whether an adequate gross margin is being earned by products purchased ,compared to the investment in inventory required to generate the gross margin

• The focus is on return on investment rather than on sales• The focus is on SKU’s of each individual product• Helps in identifying product winners and core products• Product winners : products which perform well, which

boost profitability and are the best ROI product• Core products: Buyers list of existing winners that should

never be out of stock. Give high profitability and ROI