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Chapter 10
Retail Pricing
Learning Objectives
• Discuss the factors a retailer should consider
when establishing pricing objectives and
policies
• Describe the differences between the various
pricing strategies available to the retailer
• Describe how retailers calculate the various
markups
• Discuss why markdown management is so
important in retailing and describe some of
the errors that cause markdowns
Pricing Objectives and Policies
• Pricing - Is an interactive decision made in
conjunction with the firm’s:
•
•
•
•
Mission statement
Goals and objectives
Strategy
Operational and administrative management
• Yield management
• Focuses on optimizing the total sales revenue or
yield from its capacity to provide services (hotels)
LO 1
Exhibit 10.1 - Interaction Between a Retailer’s
Pricing Objectives and Other Decisions
LO 1
Pricing Objectives
Profit oriented
objectives
Achieve either a certain rate of return or maximizing
profits.
Target return
objective
States a specific level of profit, such as percentage of
sales or return on capital invested.
Profit
maximization
Seeks to obtain as much profit as possible.
Skimming
Price is initially set high on merchandise to skim the
cream of demand before selling at more competitive
prices.
LO 1
Pricing Objectives
Penetration
Price is set at a low level in order to penetrate the
market and establish a loyal customer base.
Sales-oriented
objectives
Seek some level of unit sales, dollar sales, or market
share but do not mention profit.
Status quo
objectives
Adopted by retailers who are happy with their market
share and level of profits.
Pricing Policies
• Guidelines, that ensure uniformity of pricing
decisions within a retail operation
• Types of policies
• Below-market pricing: Discounts merchandise
from the established market price to:
• Build store traffic
• Generate high sales and gross margin dollars per square
foot of selling space
• Discourage competitors from entering a given trading
area
LO 1
Pricing Policies
• Pricing at market levels
• Price zone: Range of prices for a particular merchandise
line that appeals to customers in a market segment
• Size of a retail store affects its ability to compete on
price
• Above-market pricing policy
• Retailers establish high prices because nonprice factors
are more important to their target market than price
• Factors that permit retailers to price above market
levels
•
•
•
•
Merchandise offerings
Services provided
Convenient locations
Extended hours of operation
LO 1
Specific Pricing Strategies
Customary pricing
The retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
Variable pricing
Recognizes that differences in demand and cost necessitate
that the retailer change prices in a fairly predictable
manner.
Flexible pricing
Encourages offering the same products and quantities to
different customers at different prices; used for personal
selling; costs can dramatically increase, and revenues
decrease, as customers begin to bargain for everything.
One-price policy
Establishes that the retailer will charge all customers the
same price for an item; speeds up transactions and reduces
the need for highly skilled salespeople.
LO 2
Specific Pricing Strategies
• Price lining
• Helps customers make merchandise
comparisons and
• Specifies number of price points for
each merchandise classification
• Trading up
• Retailer uses price lining and a
salesperson moves a customer from a
lower priced line to a higher one
• Trading down
• Retailer uses price lining, and a customer
exposed to higher-priced lines purchases
a lower-priced line
LO 2
Specific Pricing Strategies
• Retailers select price lines that have the strongest
consumer demand
• Advantages
• Helps buying more efficiently
• Simplifies inventory control
• Accelerates inventory turnover
LO 2
Specific Pricing Strategies
Odd pricing
Practice of setting retail prices that end in the digits 5, 8, 9—
such as $29.95, $49.98, or $9.99.
Multiple-unit
pricing
Price of each unit in a multiple-unit package is less than the
price of each unit if it were sold individually.
Bundle Pricing
Selling distinct multiple items offered together at a special
price.
Bait-and-switch
pricing
Advertising or promoting a product at an unrealistically low
price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the
customer to a higher-priced product.
Private-label
brand pricing
A private-label brand can be purchased by a retailer at a
cheaper price, have a higher markup percentage, and still be
priced lower than a comparable national brand.
LO 2
Specific Pricing Strategies
• Leader pricing
• High-demand item is priced low and is heavily
advertised in order to attract customers
• Requires careful evaluation
• Strategy ineffective if consumers are limiting their
purchases to only leader items
• Loss leader: Extreme form of leader pricing where
an item is sold below a retailer’s cost
• High-low pricing
• Use of high every day prices and low leader ‘‘specials’’
on items featured in weekly ads
LO 2
Specific Pricing Strategies
• Bait-and-switch pricing
• Advertising or promoting a product at an
unrealistically low price to:
• Serve as bait and then trying to switch the customer to
a higher-priced product
• Is considered illegal by the Federal Trade
Commission when:
• The low-priced model used as bait is unavailable to
shoppers
LO 2
Specific Pricing Strategies
• Private-label brand pricing
• Permit the retailer a large degree of pricing
freedom because:
• Consumers find it difficult to make exact comparisons
between the private and national brands
LO 2
Using Markups
• Markup: Selling price of the merchandise less
its cost, which is equivalent to gross margin
• Basic markup equation - SP = C + M
• Where:
C - Dollar cost of merchandise per unit
M - Dollar markup per unit
SP - Selling price per unit
LO 3
Exhibit 10.3 - Relationship of Markups
Expressed on Selling Price and Cost
LO 3
Exhibit 10.4 - Basic Markup Formulas
LO 3
Initial Versus Maintained Markup
• Initial markup = (original retail price –
cost)/original retail price
• Maintained markup = (actual retail price –
cost)/actual retail price
LO 3
Initial Versus Maintained Markup
• Reasons for the difference between initial and
maintained markups:
•
•
•
•
•
The need to balance demand with supply
Stock shortages
Employee and customer discounts
Cost of alterations
Initial markup may be different from maintained
markup is cash discounts
LO 3
Planning Initial Markups
• Initial markup percentage = (operating
expenses + net profit + markdowns + stock
shortages + employee and customer discounts
+ alterations costs - cash discounts)/ (net sales
+ markdowns + stock shortages + employee
and customer discounts)
• Initial markup percentage = (gross margin +
alterations costs - cash discounts +
reductions)/ (net sales + reductions)
LO 3
Planning Initial Markups
• Initial markup percentage = (gross margin +
alterations costs + reductions)/ (net sales +
reductions)
LO 3
Planning Initial Markups
• Rules of markup determination:
• As goods are sold through more retail outlets, the
markup percentage decreases and vice versa
• Higher the handling and storage costs of the
goods, higher should be the markup
• Greater the risk of a price reduction due to the
seasonality of the goods:
• Greater is the magnitude of the markup percentage
early in the season
• Higher the demand inelasticity of price, greater
the markup percentage
LO 3
Markdown Management
• Markdown: Any reduction in the price of an
item from its initially established price
• Markdown percentage = Amount of reduction
/ original selling price
LO 4
Markdown Management
• Retailers do not possess perfect information
about supply and demand factors
• Merchandising process is prone to:
• Buying errors - Retailer buys:
• The wrong merchandise or buys the right merchandise
in too large a quantity
• Pricing errors - Price of the item is too high to
move the product at desired speed and quantity
LO 4
Markdown Management
• Merchandising errors
• Failure by the buyer to inform the sales staff of how the
new merchandise:
• Relates to the current stock
• Ties in with the store’s image
• Satisfies the needs of the store’s target market
• Improper handling of the merchandise by the sales staff
• Ineffective visual presentation
• Promotion errors
• Promotion activities are too weak or sporadic to elicit a
strong response from potential customers
LO 4
Markdown Policy
• Early markdown policy
• Advantages
• Speeds the movement of merchandise
• Enables the retailer to take less of a markdown per unit
to dispose of the goods
• The store has the appearance of having fresh
merchandise
• Allows the retailer to replenish lower-priced lines from
the higher ones that have been marked down
LO 4
Markdown Policy
• Late-markdown policy - Allowing goods to
have a long trial period before a markdown is
taken
• Avoids disrupting the sale of regular merchandise
by too frequently marking goods down
• Bargain hunters or low-end customers will be
attracted only at infrequent intervals
LO 4
Markdown Policy
• Amount of markdown
• Prices should be marked down at least 20 percent
in order for the consumer to notice
• Suppliers supplement retailers markdown losses
with:
• Markdown money or some other type of price
reductions
LO 4
Markdown Policy
• Amount of markdown
• Maintained markup = (actual selling price – cost) /
actual selling price
• Maintained markup percentage = initial markup
percentage – [(reduction percentage) (100% initial markup percentage)]
Where:
Reduction percentage = Amount of reductions/net
sales
LO 4