CHAPTER 13

Retail Pricing
GROUP 5 EPPM3363
 Pricing Strategies
High/Low Pricing Everyday Low Pricing

Also known as “skimming” pricing method, A price management method that enables
high-low pricing is a common retail pricing companies, brands, and retailers to offer
strategy. their customers consistently low-priced
products.
A product or service is introduced at a higher
price point, and then gradually discounted Instead of offering discounts, coupons, and
and marked down as demand decreases. promotions, companies focus on providing
consumers with low-price products.
Pricing Strategies Examples

H&M, Adidas & Nike: High/Low Pricing

Walmart, Tesco & Amazon: Everyday Low Pricing
Advantages of the Pricing Strategies

High/Low Pricing Everyday Low Pricing

Increases profits. Assures customers of low prices.
Creates excitement. Reduces advertising/operating
Sells slow-moving merchandise. expenses.
Increased store traffic. Reduces stockouts and improves
inventory management.
Saves consumers' time.
Disadvantages of the Pricing Strategies

High/Low Pricing Everyday Low Pricing

Marketing expenses. Less profit margin.
Consumer expectations. Perception of quality.
Risk of losing profit. Customer service.
Perception of quality. Price wars.
 Setting Retail Price
Customer Price Sensitivity

The price sensitivity of customers determine how many units will be

sold at different price levels.
If customers in the target market are very price-sensitive, sales will
decrease significantly when prices increase.
If customers are not very price sensitive, sales will not decrease
significantly if the prices are increased.
One approach that can be used to measure the price sensitivity of
customers is a price experiment.
Price Experiment Data
 If customers are very
price sensitive, sales
decrease significantly with
price increases.
 If customers are very
price sensitive, sales
decrease significantly with
price increases.
 Percentage change in quantity sold
divided by percentage change in price

Price Elasticity

Price-insensitive / inelastic (the price is Price-sensitive / elastic (the price is more

more positive than -1), that is when 1% negative than -1), that is when 1% decrease
decrease in price = 1/2% increase in in price = 2% increase in quantity sold
quantity sold

inelastic elastic
 For product with price elasticity less
than 1, the price that maximizes profit
can be determined by a formula

Price Elasticity
 Setting price on elasticity doesn’t
account for effects of competitors
prices

Competition

Chosen policy must be consistent

with overall strategy and relative
market position
 Matching Supply & Demand

Capacity constraints can limit

sales

Pricing of Services
Determining Service Quality

Price is a cue for customers

Setting Retail Price

USING ANALYTICAL TOOLS TO SET PRICES

Setting prices based on costs

Many retailers set the prices by marking up the item's cost
to yield a profitable gross margin.
This initial price is adjusted on the basis of insights about
customer price sensitivity and competitive pricing
Setting Retail Price

Retail Price & Mark Up

When setting the price based on merchandise costs:

Note: Mark up is the increase in the retail price of an item after the initial markup percentage has been applied
but before the item is placed on the selling floor.
Setting Retail Price
Initial and Maintained Mark Up

The difference between the initial and maintained

markups is illustrated in Exhibit 13-2. The item
illustrated costs $0.60, and the initial price for the
item is $1.00, so the initial markup is $0.40 and the
initial markup percentage is 40 percent. However, the
average actual sale price for the item is $0.90. The
reductions are $0.10, so the maintained markup is
$0.30 and the maintained markup percentage is 33
percent (0.30/0.90).
 Setting Prices Using
Break-even Analysis

Break even analysis can be used by Break-even analysis is a technique that evaluates the
retailer to know: relationship between total revenue and total cost to
Break-even sales to generate a determine profitability at various sales levels.
target profit Break-even point is the quantity at which total revenue
Break-even volume and price to equals total cost
Formula:
justify new product lines
Break-even sales change needed to
cover a price change
Fixed cost are costs that are stable and don’t change with
the quantity of product produced and sold
Variable cost are costs that vary with the level of sales
and can be applied directly to the decision in question.
 MARKDOWN
Markdown is term that refers to a reduction of the original retail sales
price in order to increase sales

Clearance Markdown Promotional Markdown

To increase sales and promote
To get rid of slowmoving, obsolete
merchandise
merchandise
To Increase traffic flow and sale of
complementary products generate
excitement through a sale •
To generate cash to buy
 Liquidate Markdown Merchandise
1.Sell to another retailer 2. Consolidate 3. Sell on the internet
unsold merchandise Partners with some of the
Off-price retailers purchases
end-of-season merchandise Consolidated to another retail largest brands, ecommerce
and sell it at lower price branch under the same retailers and manufacturers
But only recoup a small ownership Prices offered are either fixed,
percentage of merchandise's Ship to distribution center (e.g negotiable or set by auction
cost Convention center) Eg: BULQ, Liquidation.com and
This strategy can be complex BoxFox
and expensive

Ross Stores, example of off-price retailers

BoxFox, example of liquidation websites
 Liquidate Markdown Merchandise
5.Donate to charity
6. Carry over the
4. Return to vendor Way of giving back to the
merchandise to next season
community and have strong
Negotiate an agreement that public relation benefit Usually for high priced non
unsold merchandise can be Reducing the firm's tax fashion merchandise
returned to vendors liability E.g Traditional clothing and
But only recoup a small E.g : Amazon, Starbucks, furniture
percentage of merchandise's Giant However, it is not profitable to
cost carry over merchandise

Starbucks food donation, through FoodShare Programme B

 PRICING TECHNIQUES IN RETAIL
Promotional
Dynamic Pricing Markdowns Coupon
Process of charging Retails take markdowns Coupon offer a discount
different prices for goods for holiday, special events on the price of specific
based on the type of and as part of their items when they are
customer, time of the day, overall promotional purchased
week and level of demand. program.
 Price bundling Quantity discounts Zone pricing
Offering two or more Offering two or more Charging different prices
different products or smilar products or services in different stores,
services for sale at one for sale at one lower total markets, regions or
price. price. zones.

Leader pricing Price lining Odd pricing

Offering prices of certain Offers a limited number of Offres prices that ends in
items lower than normal to predetermined price points odd number, typically a 9
increase customer's traffic within a merchandise
flow or boost sales of category
complementary products
 Legal & Ethical Pricing Issues
Baits and Switch Tactics Predatory Pricing Resale Price Maintenance
Deceptive pratice that lures Dominant retailer sets price below Vendors often encourage retailers to
customers into a store by its cost to drive competition retailer sell products at a spesific price (MSRP)
advetising a product at a lower- out of business
than-normal price (bait) then
MSRP: to reduce retail price
induces them to purchase a higher- Hopes to raises price when the competition among retailersand
priced model (switch) once they competition is eliminated and ear stimulate retailers to provide
are in the store.
enough profits to compesate its lost complimentary servies.
inadequate inventory

disparage the quality of

advertised model & emphasize
the superior performance of Horizontal Price Fixing Deceptive Reference

Prices
higher price model
Reference price : buyers compare the actual
Agreements between retailers selling price of the product thus it facilitates
Retailers should have sufficient that are in direct competition buyers evaluation process.
inventory of advertised items or with each other to set the same
offer rain checks is stockouts. Unethical practice where retailers use
prices.
deception to affect consumers' perception.
Rain checks: promise to sell
Reduces competition & illegal
outstock merchandise at advertised e.g- mark prices higher than reference prices
price when it restocks. and claimed the product as "on sale".
Thank You
See You Next Time