Retailing in India

McGraw-Hill/IrwinLevy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to the Introduction to the World of RetailingWorld of Retailing

Chapter 1Chapter 1

• Retailing – a set of business activities that adds value to the products and services sold to consumers for their personal or family use.

• A retailer is a business that sells products and/or services to consumers for personal or family use.

What is Retailing?

DEFINITIONS

• RETAILING is the business activity of selling goods and services to the final consumer

• RETAILER is any business which directs its marketing effort towards the final consumer for the purpose of selling goods or services -

-greater than 50% of the total sales must be retail sales to be a retailer

-many types of retailers

CONTRASTING RETAIL AND WHOLESALE OPERATION

• RETAILERS• Sell smaller product quantities on a more

frequent basis• Store facilities open to the general public• Higher per unit price due to individual unit

sales• Almost exclusive reliance on one price policy• Ultimate consumers makes initial sales

contact• Considerable emphasis placed on store

atmosphere

CONTRASTING RETAIL AND

WHOLESALES OPERATION

WHOLESALERS• sell larger product quantities on a less

frequent basis• over-the-counter sales seldom made to

general public• lower per unit price due to bulk package

sales• more extensive use of variable price structure• sales representatives make initial sales

contract• little or no emphasis on facility atmospherics

RETAILING IS:

educational, excitingdynamic, demandingsmall town, big citylocal, regional, national, internationalthe management of changethe most imp link in the distribution channela major economic forcea significant area for career opportunities

Examples of Retailers

• Retailers:-Sears, Holiday Inn, McDonalds, Amazon.com, Jiffy Lube, AMC Theaters, American Eagle Outfitter, FAO Schwartz, Kroger

• Firms that are retailers and wholesalers that sell to other business as well as consumers:-Office Depot, The Home Depot, United Airlines, Bank of America, Sams Clubs

How Retailers Add Value• Breaking Bulk

-Buy it in quantities customers want

• Holding Inventory

-Buy it at a convenient place when you want it

• Providing Assortment

-Buy other products at the same time

• Offering Services

-See it before you buy, get credit, layaway

Doll can be bought on credit or put on

layaway

Doll is featured on floor display

Doll is offered in convenient locations in quantities of oneDoll is developed in

several styles

How Retailers Add Value

Doll is developed at manufacturer

The value of the product and service increases as the retailer performs functions.

Manufacturer’s PerspectiveThe Four P’s of Marketing

Distribution

Retailers are part of the

distribution channel

Retailers are part of the

distribution channelProduct

Price

Promotion

Distribution ChannelDistribution Channel

PPT 1-4

Accounting Finance

MISOperations

Marketing

Human Resources

Retailers are a Business Like Manufacturers

Decision Variables for Retailers

Customer Service

Store Design and Display

MerchandiseAssortment

Communication Mix

LocationPricing

Retail

Strategy

Nature of Retail Industry is Changing

Mom and Pop Store

To Today’s Retailer

Retailing is a High Tech Industry

- Selling Merchandise over the Internet

- Using Internet to manage supply chains

- Analyze POS data to tailor assortments to stores

- Computer systems for merchandise planning

Career Opportunities in RetailingStart Your Own Business

• Walton Family (Wal-Mart)• Fisher (The Gap)• Wexner (Limited)• Menard (Menard’s)• Marcus, Blank (The Home Depot)• Kellogg (Kohl’s)• Schulze (Best Buy)• Levine (Family Dollar)• Gold (99Cent Only)

List of Retail Entrepreneurs on Forbes 400 Richest Americans

Misconceptions About Careers in Retailing

• Don’t need college• Low pay• Long hours• Boring• Dead-end job

• No benefits• Everyone is part-

time• Unstable

environment

Why You Should Consider Retailing

• Entry level management positions

-Department manager or assistant buyer/planner

-Manage and have P&L responsibility on your first job

• Starting pay average with great benefits

- Some retailers pay graduate school

• No two days are alike

• Buying for financially oriented people

• Management for people people

Types of Jobs in Retailing Most entry level jobs are in

store management or buying, but…

retailers also have staff specialists:

--accounting and finance

--real estate

--human resource management

--supply chain management

--advertising

--public affairs

CHARACTERISTICS OF RETAIL CAREERS

• Many job opportunities in smallest towns or largest urban center

• High job security, even in times of economic stagnation

• Many opportunities for advancement• Many opportunities for women• Salaries vary significantly; often low pay at

start• Skills gained in retailing are transferable to

other job opportunities• The downsides of retail careers are:

image problemsconstant evaluation

JOB SKILLS NEEDED IN RETAIL

1. Merchandising buying supplier management selling relationship building advertising & promotion display building

2. Operationswarehousing receivingdeliverysecuritycustomer servicestore management

JOB SKILLS NEEDED IN RETAIL

3.Sales Promotionadvertisingdisplaypublicitysales promo

activities

4.Controlasset management creditA/P, A/R, auditingdata processing

5.Personnel recruitingselecting trainingcompensationunion issues

RETAIL CHALLENGE

You are given the job to head a committee to select a new president for a retail chain.

Rank the following criteria on a scale of 1-10(where 10 is high) on the importance of each criteria in evaluating candidates.

1. hard work 6. initiative 2. analytical skills 7. leadership 3. creativity 8. organization 4. decisiveness 9. risk taking 5. flexibility 10. stress tolerance

RETAILERS ARE AN IMPORTANT LINK IN THE CHANNEL OF DISTRIBUTION

Retailer provide services for manufacturersbuyingselling assortment creatingstockingdeliveringcredit extendinginformingconsultingtransferring ownership

RETAILERS ARE AN IMPORTANT LINK IN THE CHANNEL OF DISTRIBUTION

Retailers provide services for consumersbuyingsellingbulk breakingassortment creatingstockingdeliveringcredit extendinginformingconsultingtransferring ownership

RETAILER AS A PRODUCER/CONSUMER LINK

• Assortment Gap• Quantity gap• Space Gap• Time gap

Retailers create utility!!

Retailers are intermediaries who are very interested in channel relationships.

Improved channel relationships often involve forming vertical marketing systems.

RETAIL IMAGES ARE IMPORTANT BECAUSE

1. Simplify the consumer’s decision making and shopping process.

2. Attract shoppers who have a self image close to the retailer’s image.

3. Help segment consumer markets and improve targeting.

4. Differentiate the retailer from competing retailers and other businesses.

THE PROBLEM OF RETAILING

Must balance ability of the firm’s merchandising programs

to meet the needs of targeted consumers

With ability of the firm’s administrative plans to

meet the retailer’s need to operate effectively and efficiently

*See Key Performance Measures for Retail Businesses

THE RETAIL CHALLENGE IS TO OFFER THE RIGHT

MERCHANDISING BLEND the right product in the right quantities in the right place at the right time at the right price by the right appeal with the right service

QUOTE FROM SAM WALTON FOUNDER OF WALMART

“For my whole retail career, I have stuck to one guiding principle…give your customers what they want, and customers want everything: a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience.

You love it when you visit a store that somehow exceeds your expectations, and you hate it when a store inconveniences you, or gives you a hard time, or just pretends you’re invisible.”

Classification of Retail Operations

ClassificationClassificationof of

Retail Retail EstablishmentsEstablishments

ClassificationClassificationof of

Retail Retail EstablishmentsEstablishments

OwnershipOwnership

Level of ServiceLevel of Service

Product AssortmentProduct Assortment

PricePrice

22

Classification of Ownership

IndependentRetailers

IndependentRetailers

Chain StoresChain Stores

FranchisesFranchises

22

Level of Service

Full Service Self Service

Discount stores Exclusive storesFactory outlets Warehouse clubs

22

Types of Stores and Their Characteristics

Type of RetailerType of RetailerType of RetailerType of Retailer

Department StoreDepartment Store

Specialty StoreSpecialty Store

SupermarketSupermarket

Convenience StoreConvenience Store

DrugstoreDrugstore

Full-line DiscounterFull-line Discounter

Specialty DiscounterSpecialty Discounter

Warehouse ClubsWarehouse Clubs

Off-price RetailerOff-price Retailer

RestaurantRestaurant

Service Service LevelLevel

Service Service LevelLevel

Mod Hi-HighMod Hi-High

HighHigh

LowLow

LowLow

Low-ModLow-Mod

Mod-LowMod-Low

Mod-LowMod-Low

LowLow

LowLow

Low-HighLow-High

Assort-Assort-mentment

Assort-Assort-mentment PricePricePricePrice GrossGross

MarginMarginGrossGrossMarginMargin

BroadBroad

NarrowNarrow

BroadBroad

Med-NarrowMed-Narrow

MediumMedium

Med-BroadMed-Broad

Med-BroadMed-Broad

BroadBroad

Med-NarrowMed-Narrow

Med-NarrowMed-Narrow

Mod-HighMod-High

Mod-HighMod-High

ModerateModerate

Mod HighMod High

ModerateModerate

Mod LowMod Low

Mod Lo-lowMod Lo-low

Low-lowerLow-lower

LowLow

Low-HighLow-High

Mod HighMod High

HighHigh

LowLow

Mod HighMod High

LowLow

Mod LowMod Low

Mod LowMod Low

LowLow

LowLow

Low-HighLow-High

22

Major Types of Retail Operations

Department StoresDepartment Stores

Specialty StoresSpecialty Stores

SupermarketsSupermarkets

DrugstoresDrugstores

Convenience StoresConvenience Stores

Discount StoresDiscount Stores

RestaurantsRestaurants

Blockbuster

33

Categories of Discount Stores

Categories Categories of Discount of Discount

StoresStores

Full-LineDiscounters

Discount Specialty Stores

WarehouseClubs

Off-PriceDiscount Retailers

33

Mass Merchandising

Retailing strategy using

moderate to low prices on

large quantities of

merchandise and lower

service to stimulate high

turnover of products.

33

Hypermarket and Supercenter

HypermarketHypermarket A large retail store combining

a supermarket and a full-line discount store.

A large retail store combining a supermarket and

a full-line discount store.

SupercenterSupercenter Retail store combining groceriesand general merchandise goods

with a wide range of services.

Retail store combining groceriesand general merchandise goods

with a wide range of services.

33

Non store Retailing

Major FormsMajor Formsofof

NonstoreNonstoreRetailingRetailing

Major FormsMajor Formsofof

NonstoreNonstoreRetailingRetailing

Automatic VendingAutomatic Vending

Direct RetailingDirect Retailing

Direct MarketingDirect Marketing

Electronic RetailingElectronic Retailing

44

Direct Retailing

Door-to-DoorDoor-to-Door

Office-to-Office

Office-to-Office

Home SalesParties

Home SalesParties

Direct RetailersDirect Retailerssell products:sell products:

Direct RetailersDirect Retailerssell products:sell products:

NFL.COM44

Direct Marketing

TelemarketingTelemarketing

Catalogs & Mail OrderCatalogs & Mail Order

Direct MailDirect Mail

Types Types of of

DirectDirectMarketingMarketing

Types Types of of

DirectDirectMarketingMarketing

Electronic RetailingElectronic Retailing

44

Electronic Retailing

On-Line RetailingOn-Line Retailing

Shop-at-Home NetworksShop-at-Home NetworksTypes Types

ofofElectronicElectronicRetailingRetailing

Types Types ofof

ElectronicElectronicRetailingRetailing

44

Basic Forms of Franchising

Business FormatFranchising

Business FormatFranchising

Product and Trade Name Franchising

Product and Trade Name Franchising

Basic FormsBasic Formsof of

FranchisingFranchising

Basic FormsBasic Formsof of

FranchisingFranchising

55

Retail Marketing Strategy

Develop the “Six Ps”Develop the “Six Ps”

Define & Select a Target Market

Define & Select a Target MarketKey Tasks Key Tasks

in in StrategicStrategicRetailingRetailing

Key Tasks Key Tasks in in

StrategicStrategicRetailingRetailing

66

Defining a Target Market

STEP 1:Segment the Market

STEP 1:Segment the Market

DemographicsDemographics

GeographicsGeographics

PsychographicsPsychographics

66

Choosing the Retailing Mix

STEP 2:Choose the Retailing Mix

STEP 2:Choose the Retailing Mix

ProductProduct

PricePrice

PromotionPromotion

PlacePlace

PersonnelPersonnel

PresentationPresentation

66

The Retailing Mix

TargetTargetMarketMarket

ProductProduct

PricePrice

PromotionPromotion

PlacePlace

PersonnelPersonnel

PresentationPresentation

66

Product Offering

The mix of products offered to

the consumer by the retailer;

also called the product

assortment or merchandise

mix.

66

Retail Promotion Strategy

RetailRetailPromotion Promotion

StrategyStrategy

RetailRetailPromotion Promotion

StrategyStrategy

AdvertisingAdvertising

Public RelationsPublic Relations

PublicityPublicity

Sales PromotionSales Promotion

66

Factors to Consider in Site Selection

Economic growth potential

Economic growth potential

Area competitionArea competition

GeographyGeography

66

Location Decisions

Freestanding StoreFreestanding Store

Shopping Center Tenant

Shopping Center Tenant

Mall TenantMall Tenant

On Linehttp://www.mallofamerica.com

On Linehttp://www.mallofamerica.com

66

Shopping Center and Mall Locations

AdvantagesAdvantages

• Design attracts shoppers

• Activities and anchor stores draw customers

• Ample parking

• Unified image

DisadvantagesDisadvantages

• Expensive leases• Failure of common

promotion efforts• Lease restrictions• Anchor store

domination• Direct competitors

66

Price

QualityImage

High Price Low Price

Good Value

66

Presentation of the Retail Store

Employee Type & DensityEmployee Type & Density

Merchandise Type & DensityMerchandise Type & Density

Fixture Type & DensityFixture Type & Density

SoundSound

OdorsOdors

Visual FactorsVisual Factors

Factors Factors inin

CreatingCreatingStore’sStore’s

Atmosphere Atmosphere

Factors Factors inin

CreatingCreatingStore’sStore’s

Atmosphere Atmosphere

66

Personnel and Customer Service

Suggestive SellingSuggestive Selling

Trading UpTrading Up

Two Common Two Common SellingSelling

TechniquesTechniques

Two Common Two Common SellingSelling

TechniquesTechniques

66

Trends in Retailing

Trends in Trends in RetailingRetailing

EntertainmentEntertainment

Convenience and EfficiencyConvenience and Efficiency

Customer ManagementCustomer Management

88

Customer Management Strategies

Customer Relationship Marketing

Customer Relationship Marketing

LoyaltyProgramsLoyalty

Programs

ClientelingClienteling

88

Creating Value Through Customer and Supplier Relationships

Traditional vs. Marketing

• With the cost of customer attraction escalating, companies are paying more attention to holding on to their existing customers

• Long-standing customers are less expensive to reach and less expensive to serve

• Customer relationships are assets that should be evaluated and managed as rigorously as any financial or physical assets

• Relationship marketing not only focuses on customer retention, but also takes a long-term perspective

Fig. 11.1 Traditional Versus Relationship Marketing

Relationship Marketing

Traditional Marketing

Interactive Marketing -Value-added Product/ Service Emphasized

Value Created/ Customer Retention

Customer Acquisition/Satisfaction

Marketing Mix - Core Product Emphasized

Adapted from Jag Sheth, AMA Faculty Consortium/Evolution of Global Marketing and the Relationship Imperative, 1996

Short-term Focus Long-term Focus

Relationship Marketing Defined

“To establish, maintain, and enhance (usually but not necessarily long-term) relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises.”

___Grönroos (Service Management and Marketing, 1990)

What is Relationship Marketing?

• The cornerstone of marketing is getting close to customers in order to better identify and satisfy their needs

• Realize that marketing is responsible for more than “just the sale”

• The focus is shifting from the transaction to the

relationship

• It is difficult to separate service operations and delivery from relationship building

• Managing customer relationships continues to be paramount, so is the growing importance of managing relationships with suppliers and resellers

Continuum of Relationships

Industry Relationship Bandwidth

Pu

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Tra

nsa

ctio

nal

Exc

han

ge

Pur

eC

olla

bor

ativ

e E

xch

ange

Flaring - OutUnbundling

StrategyAdded AugmentationStrategy

Core Core ProductProduct

Augmented Augmented ProductProduct

Relationship Marketing -

Goals and Outcomes

• Whereas the goal of traditional marketing is customer acquisition, under relationship marketing the focus shifts to creating value

• The objective is to create more value through interdependent, collaborative relationships with customers, the outcome is customer retention

• Relationship marketing is ongoing, constantly looking for opportunities to generate new value

• Retaining customers requires marketers to exhibit care and concern after they have made a purchase

• The sale often represents only the beginning of the relationship between the buyer and seller

Building Lasting Customer Relationships

• Sellers can resist the natural tendency toward decline and complacency by developing what we refer to as “relationship enablers”

• It is the seller’s responsibility to nurture the relationship beyond its simple dollar value

• Using the relationship enablers sellers can minimize relationship decay and strengthen the bonds that lead to long-term, perhaps even lifetime associations

Figure 11.2 Key Relationship Variables

RelationshipEnablers

TrustTrust CommitmentCommitment

DependenceDependence CooperationCooperation

InformationExchange

InformationExchange

Marshall Field’sLayout

• Over 800,000 square feet

• Lower level & 9 floors– Men’s only on Second Floor– Women’s on Third, Fourth & Fifth Floor– Both have accessories on First Floor

Marshall Field’s Layout

• 2 Juice Bars in 2003– Bally Total Fitness– Crunch Fitness

• 3 restaurants– 7 on State– Café– Walnut Room

• 2 food courts• Australian Homemade Ice Cream• 2 Starbucks coffee bars

Marshall Field’s Layout

• Lighting, music & decor determined by department

• Shoes Department– 16,000 square feet

• Cosmetic Departments – 26,000 square feet

Marshall Field’s Layout & Displays

• Crowded• Stocked like a

department store• Primary displays,

few secondary displays

• Lots of racks• Hectic, congested

transportation between floors

Lord & TaylorLayout

• 7 Floors – First Floor

• Accessories• Cosmetics

– All were very small

• Felt like a cheap, crowded department store

• Light music in background• Store signs looked cheap• Plain mannequins

– No makeup– No faces

• Racks overflowing

NordstromLayout

• Easy to read map

• Very Spacious

• Customer Friendly Shopping Environment– Comfy Chairs

• Main Level– Cosmetics – Women’s Shoes

• Second Level– Men’s Merchandise

• Third Level– Women’s Apparel

– High-end designer lines

• Classic or Conservative Collections– Wood trim

• Modern Collections– Vibrant colors– Lighting displays

• Clean displays to accent special items

• Add home décor to give display style

• Racks are not stuffed full

NordstormLayout & Display

NordstromLayout & Displays

• Displays include everything including accessories

• Every displays has a certain look to it

• Each display pulled products together

Planning Merchandise Assortments

Merchandise Planning Is Done at the Category Level

• Why?

• Category: group of products likely to have similar demand patterns. They are substitutes

• How does a category differ from a SKU?

Two Basic Considerations

• Must stock what the customer wants to buy.

• Merchandise in stock must meet the profit goal.

Buyer’s Dilemma

• Need to balance customer preferences/ shopping behaviors vs. profit goals

Retail Market Strategy

1. Retail Market Strategy Identifies:

1. Target Market

2. Format

3. Bases of SUSTAINABLE competitive advantage

Store Positioning

Bases of Sustainable Competitive Advantage

1. Customer Relationship

2. Location

3. Vendor Relationships

4. Information Systems and Logistics

Toys “R” Us

Times Square

New York City

Facts about the Store

• Opened: November 2001

• Cost: $35 Million

• “largest toy store in the world”

• 110,000 square feet

Times Square Location??

Advantages:

High Pedestrian Traffic

Prime tourist attraction area

No longer a “seedy” arear

Drawbacks:

Only a few retailers in the area

Warner Bros. Studio Store 1 block away closed one month before Toys’ opening

So Why Times Square

• Wants to change “store image”Old Image: unimaginative, crowded, an

“ordeal for parents”

New Image: fun, interesting

• Is Times Square location good for this purpose?

Times Square Toys

• Serve as “flagship” for the chain

• Place to showcase company in a new way

• Place for new product introductions (example, Microsoft’s Xbox)

• Sales in store really secondary

Special Features

• 60 foot Ferris wheel

• 5 ton dinosaur that roars

• 25 foot replica of Empire State Building complete with King Kong

Bases of Sustainable Competitive Advantage

5. Effective Employees

6. Low Cost Operations

Multiple Sources of AdvantageWal-Mart

Neiman Marcus

Retail marketing mix

• Retail marketing mix is the term used to describe the various elements and methods required to formulate and execute retail marketing strategy.

• Retail managers must determine the optimum mix of retailing activities and co-ordinate the elements of the mix.

• The aim of such coordination is for each store to have a distinct retail image in consumers’ mind.

• The mix may vary greatly according to the type of market the retailer is in, and the type of product/services.

92.

Retail Marketing Mix

While many elements may make up a firm’s retail marketing mix, the essential elements may include:

• Store location, • merchandise assortments• Store ambience, • customer service, • price, • Communication with customers

10

Mix …

• Personal selling• Store image• Store design• Sales incentives• People• Process• Physical evidence

11

The mix planning

The retail marketing mix is the vehicle through which a retailer’s marketing strategy is implemented and, in planning the mix, retailers should be guided by three basic principles:

1. The mix must be consistent with the expectation of target customers;

2. Elements must be consistent with each other to create synergy; and

3. The mix must be responsive to competitive strategy.95.

Key Element

Place (store location)• Target market• Channel structure• Channel management• Retailer image

• Retail logistics• Retail distribution

14

Key element

Product (merchandise)• Product development• Product management• Product features and benefits• Branding

• Packaging• After-sales services

15

Key element

Price• Costs• Profitability• Value for money

• Competitiveness

• Incentives• Quality• Status

16

Key element

Promotion• Developing promotional mixes• Advertising management• Sales promotion• Sales management

• Public relations• Direct marketing

17

Key element

People element• Staff capability• Efficiency• Availability• Effectiveness• Customer interaction• Internal marketing

18

Key element

Process element

• Order processing

• Database management

• Service delivery

• Queuing system

• Standardisation

19

Retail Marketing Planning

• Retail marketing plan consists of:

• Setting objectives

• Systematic way of identifying a range of options.

• Formulation of plans for achieving goals

• Logical sequence of retailing activities.

102

Importance of retail marketing planning

• Hostile and complex retail marketing environment• External and internal retail organisation factors interact

– Maximising revenue– Maximising profit– Maximising return on investment– Minimising costs

• Each element has conflicting needs• All these variables interact• All these variables result in optimum compromise.

103.

Approaches to planning

Top down approach

• Retail management sets goals and plans for all levels of management.

Bottom up approach

• Various units prepare own goals and plans sent up for approval.

Types of planning

• Annual plan – short term and tactical.

• Long range – three to five years relating to strategic retail management.

• Strategic plans – five to ten years long term plans relating to the adaptation of the retailing approach.

105

Short-term Retail Planning

Short-termTactical planning relating to:• Current retail marketing position• Strategy for the year• Objectives for the year• Action , budgets and controls.• Coordinating retail activities within departments.

25

Long-term plan

Long-term

Medium range planning relating to:• Major factors and forces affecting the retailer.• Long-term objectives.• Resources required.

• Reviewed and updated regularly.• Deals with current business

26

Strategic retail planning

• This is the process of developing and maintaining a strategic fit between the retail organisation’s capabilities and its changing marketing opportunities.

• It relies on developing a clear corporate mission, supporting objectives, creating a sound business portfolio, and coordinating functional strategies.

108.

Corporate level planning

• Retail management should plan which business the retailer should stay in and which new areas to pursue.

• Design the retail organisation to withstand shocks.

• Adapt the organisation to take advantage of market opportunities.

• Define the corporate mission.

109.

Mission statement

• A strategic plan should begin with a mission statement.

• A mission statement is a statement of the retail organization’s purpose, what it wants to achieve in the large environment.

• It guides people in the retail organization so that they can work independently and yet collectively towards overall organizational goals.

Pricing

What is Price?

• Basis for exchange. What the retailer is willing to sell product/service for; what the consumer is willing to pay to obtain product/service

• No intrinsic value to ANYTHING. If the customer is willing to pay the price, that’s what the product is “worth.”

Pricing Challenges for Retailers

1. All the sales in past decade have conditioned consumers to never pay full price

2. Economic recession – and actually time since 1990s --makes price more important – raises the “value” issue

3. Stores with “everyday low prices” are increasingly important

Two Price Strategies

1. Every day low price – not necessarily lowest price

Advantages: fewer price wars, limited advertising, improved customer service, reduced stock outs, improved inventory management, better profit margins

2. High/low pricing – price sometimes above EDLP, and sometimes below; frequent sales

Advantages: same stuff is sold to different markets, excitement, moves merchandise, signals quality, hard to maintain EDLP

Methods of setting price

1. Cost oriented – take merchandise cost and add fixed percent markup

2. Demand oriented – price is what customer will pay

Which is preferred by marketers? Why?

Retailers actually use both

Initial MU Calculations

• Initial Markup=Maintained Markup + Reductions

Net sales + Reductions

OR in percent terms

• Initial Markup%=Maintained Markup% + Reductions%

100% + Reductions%

Example

• Assume reductions = $14,400

Initial MU = 62,000 + 14,400 = 56.85% 120,000 + 14,400OR in % terms = 51.67% + 12% = 56.85% 100% + 12% ** Initial MU is always greater than maintained MU

if there are reductions

RSP, Cost and Mark Up

Retail Selling Price = Cost = Mark Up

So if RSP is $100 and MU is 56.85%, what is cost?

$100 = cost + (56.85% x RSP)

$100 = cost + (56.85% x $100)

$100 = cost + 56.85

$43.15 = cost

Only trick to keep in mind here is that you always take % MU of RSP NOT of Cost

Adjustments to Price

• Markdowns

• Markdown cancellations

• Additional markups

• Additional markdown cancellations

Markdowns

• Reductions in initial retail selling price• Reasons for taking markdowns

Clearance (get rid of stuff)Promotional (build store traffic)

• Always calculate markdowns as a % of the the last RSP

• Selling price = $25; markdown = $5 Markdown % = 5/25 = 20%

Markdown Cancellation

• Amount by which price is raised after a sale used only for promotional markdowns only in effect up to initial retail price

• IMPORTANT – If an item is marked down 20% and then a 20% Markdown cancellation is applied, the new selling price will NOT be the price before the 20% markdown. WHY NOT?

Additional Markup

• Increase in the initial selling price

• Rare, but does happen

• Why?

Demand-oriented pricing

• What the traffic will bear• This relates to price sensitivity• Factors that affect price sensitivity

Substitute awareness effectTotal expenditure effectDifficult comparison effectBenefits/price effectSituation effect