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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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing Objectives and Policies
Interactive pricing decisions
Pricing objectives
Pricing policies
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 1
Exhibit 10.1 - Interaction Between a Retailer’s
Pricing Objectives and Other Decisions
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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.
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.
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LO 1
Pricing Policies
Rules of action, or guidelines, that ensure
uniformity of pricing decisions within a retail
operation.
Below-market pricing policy - Regularly
discounts merchandise from the established
market price in order to build store traffic and
generate high sales and gross margin dollars per
square foot of selling space.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 1
Pricing Policies
Pricing at market levels
Price zone - Range of prices for a particular
merchandise line that appeals to customers in a certain
market segment.
Above-market pricing policy - Retailers
establish high prices because nonprice factors are
more important to their target market than price.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 1
Pricing Policies
Factors that permit retailers to price above market
levels:
Merchandise offerings
Services provided
Convenient locations
Extended hours of operation
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
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LO 2
Specific Pricing Strategies
Price lining - Established to help customers make
merchandise comparisons and involves
establishing a specified number of price points for
each merchandise classification.
Trading up - Occurs when a retailer uses price lining
and a salesperson moves a customer from a lower
priced line to a higher one.
Trading down - Occurs when a retailer uses price
lining, and a customer initially exposed to higherpriced lines expresses the desire to purchase a lowerpriced line.
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LO 2
Specific Pricing Strategies
Retailers select price lines that have the strongest
consumer demand.
Price lining helps buying more efficiently,
simplifying inventory control, and accelerating
inventory turnover.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Specific Pricing Strategies
Leader pricing - High-demand item is priced low
and is heavily advertised in order to attract
customers into the store.
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 typically featured in
weekly ads.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 2
Using Markups
Markup - Selling price of the merchandise less
its cost, which is equivalent to gross margin.
The basic markup equation: SP = C + M
Where:
C - dollar cost of merchandise per unit
M - dollar markup per unit
SP - selling price per unit
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Exhibit 10.3 - Relationship of Markups
Expressed on Selling Price and Cost
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LO 3
Exhibit 10.4 - Basic Markup Formulas
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LO 3
Initial Versus Maintained Markup
Initial markup = (original retail price –
cost)/original retail price
Maintained markup = (actual retail price –
cost)/actual retail price
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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) OR
Initial markup percentage = (gross margin +
alterations costs - cash discounts + reductions)/
(net sales + reductions) OR
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LO 3
Planning Initial Markups
Initial markup percentage = (gross margin +
alterations costs + reductions)/ (net sales +
reductions)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Planning Initial Markups
Rules of markup determination
As goods are sold through more retail outlets, the
markup percentage decreases and vice versa.
The higher the handling and storage costs of the
goods, the higher the markup.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 3
Planning Initial Markups
Rules of markup determination
The greater the risk of a price reduction due to the
seasonality of the goods, the greater the magnitude of
the markup percentage early in the season.
The higher the demand inelasticity of price for the
goods, the greater the markup percentage.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Markdown Management
Retailers do not possess perfect information about
supply and demand factors; as a result, the entire
merchandising process is subject to error, which
makes pricing difficult.
Buying errors
Pricing errors
Merchandising errors
Promotion errors
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Markdowns are offered quickly on goods that some
consumers still think of as fashionable, and 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.
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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.
The bargain hunters or low-end customers will be
attracted only at infrequent intervals.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4
Markdown Policy
Amount of markdown
Rule of thumb for early markdowns is that prices
should be marked down at least 20 percent in order for
the consumer to notice.
Retailers are able to have their suppliers supplement
their markdown losses with markdown money or some
other type of price reductions.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 4