Retail Pricing Considerations in Setting Retail Price

The importance of pricing decisions is growing because 1. Price Sensitivity of Consumers and Cost
today’s customers have more alternatives to choose
• Generally, as the price of a product increases, the
from and are better informed about the alternatives
sales for the product will decrease because fewer and
available in the marketplace.
fewer customers feel the product is a good value.
Thus, they are in a better position to seek a good value
• The price sensitivity of customers determines how
when they buy merchandise and services.
many units will be sold at different price levels.
Value is the ratio of what customers receive (the
• If customers in the target market are very price-
perceived benefit of the products and services offered
sensitive, sales will decrease significantly when prices
by the retailer) to what they have to pay for it.
increase and vice – versa.
Value = Perceived benefits ÷ Price
Price Elasticity - A commonly used measure of price
Thus, retailers can increase value and stimulate more sensitivity, or the percentage change in quantity sold
sales (exchanges) by either increasing the perceived divided by the percentage change in price.
benefits offered or reducing the price.
How do retailers set retail prices?
Retail pricing is a core aspect of any business that sells
Price elasticity of demand is an economic measure of
products to customers. ... However, generally speaking,
the change in the quantity demanded or purchased of a
the retail price you set for any given item must include
product in relation to its price change.
the cost of that item plus any markups you make in
order to gain a profit from selling that item. In economics, price elasticity is a measure of how
reactive the marketplace is to a change in price for a
What is the difference between list price and retail
given product.
price?

Listing Price: This is the amount you have to pay the

supplier for the product. There are various factors affect the price sensitivity for a
product:
Retail Price: This is the suggested price at which you can
sell the product. • The more substitutes a product or service has, the
more likely it is to be price-elastic (sensitive).

• Products and services that are necessities are price-

To some customers, a good value means simply paying
inelastic. Thus, medical care is price-inelastic, whereas
the lowest price because other benefits offered by
airline tickets for a vacation are price-elastic.
retailers are not important to them.
• Products that are expensive relative to a consumer’s
Others are willing to pay extra for additional benefits as
income are price elastic.
long as they believe they are getting their money’s
worth in terms of product quality or service. Thus, cars are price elastic, and books and movie tickets
tend to be price-inelastic.
If retailers set prices higher than the benefits they
provide, sales and profits will decrease. Inelastic is an economic term referring to the static
quantity of a good or service when its price changes.
In contrast, if retailers set prices too low, their sales
Inelastic means that when the price goes up, consumers'
might increase but profits might decrease because of
buying habits stay about the same, and when the price
the lower profit margin.
goes down, consumers' buying habits also remain
In addition to offering an attractive value to customers, unchanged.
retailers need to consider the value proposition offered
by their competitors and legal restrictions related to
pricing. 2. Competition
Thus, setting the right price can be challenging. Consumers have lots of choices for goods and services,
and they search for the best value.
Profit margin conveys the relative profitability of a firm
or business activity by accounting for the costs involved Retailers therefore need to consider competitors’ prices
in producing and selling goods. when setting their own.

Setting price on the basis of customer price sensitivity

(elasticity) ignores the effects of competitors’ prices.
Retailers can price above, below, or at parity with the Markups
competition.
• Initial Markup: Retail selling price is initially set for the
The chosen pricing policy must be consistent with the merchandise minus the cost of the merchandise.
retailer’s overall strategy and its relative market
• Maintained Markup: The actual sales realized for the
position.
merchandise minus its costs.
Retailers can reduce price competition by: Developing
Reductions:
lines of private label merchandise, negotiating with
national brands manufacturers for exclusive distribution - Markdowns (Sales)
rights, having vendors make unique products for the
retailer. - Discounts to employees

- Inventory shrinkage due to shoplifting and employee

theft
3. Economic Constraints

Some products are more sensitive to changes in

unemployment and workers’ wages than others. Break-Even Analysis

Makers of luxury products will need to drop prices Retailers want to know the break-even sales to generate
especially when the economy is in a downturn. In other a target profit.
words, during economic slowdown, prices are lowered Break-even volume and dollars justify introducing a new
to generate demand. product, product line, or department.

Break-even analysis determines, on the basis of a

4. Other elements of the marketing mix consideration of fixed and variable costs, how much
merchandise needs to be sold to achieve a breakeven
It is important to understand that prices cannot be set (zero) profit.
without reference to other parts of the marketing mix.
• Fixed costs: do not change with the quantity of
The distribution channels used will affect price – product produced and sold.
different prices might be charged for the same product
sold direct to consumers or via intermediaries. • Variable costs: vary directly with the quantity of
product produced and sold (e.g., direct labor and
The price of a product in the decline stage of its product materials used in producing a product)
life-cycle will need to be lower than when it was first
launched.
Price Adjustments

Setting Retail Price • Retailers adjust prices over time (markdowns) and for
different customer segments (variable pricing).
Theoretically, retailers maximize their profits by setting
prices on the basis of the price sensitivity of customers • Clearance Markdowns - To get rid of slow-moving,
and the cost of merchandise. obsolete merchandise

In reality, retailers need to set price for over 50,000 • Promotional Markdowns – To increase sales and
SKUs many times during year. promote merchandise, to increase traffic flow and sale
of complementary products, generate excitement
They set prices based on pre-determined markup and through a sale.
merchandise cost.
• Markdown Optimization – Software is used to
They make adjustments to markup price based on determine when and how much markdowns should be
customer price sensitivity and competition. taken to produce the best results by continually
updating pricing forecasts on the basis of actual sales
Retail Price (RP) = Cost of merchandise (COM) + Markup
and factoring in differences in price sensitivities.
(MKP)
How do retailers make adjustments to prices over time
Thus Markup = Retail price - cost of merchandise
and for different market segments?
Markup covers the retailers operating expenses needed
Markdown optimization is the application of optimizing
to sell the merchandise.
of reduction in the selling price by recommending best
timing and depth of markdowns taking into account
each product's shelf-life, stock levels, current pricing,
lifecycle and seasonality trends for the purpose of
decreasing the excess inventory
Variable Pricing and Price Discrimination • Clearance Markdowns for Fashion Merchandise:
when retailers want to get rid of unwanted
• Retailers use a variety of techniques to maximize
merchandise, this merchandise can also be used to
profits by charging different prices to different
attract different market segments based on their degree
customers.
of price sensitivity.
Individualized Variable Pricing (First Degree of Price
Fashion conscious customers who have a high
Discrimination)
willingness to pay because they want to be the first to
– Set unique price for each customer equal to wear the latest fashions self-select to pay higher prices.
customer’s willingness to pay More price-sensitive customers wait to buy the
merchandise at the end of the season when prices are
– Examples: Auctions, Personalized Internet Prices lower.
(Retailers can assess each customer’s willingness to pay
by analyzing past purchase behavior and then serve up
Web pages with unique pricing based on the customer’s
• Coupons: induce customers to try products for the
willingness to pay)
first time, convert first-time users to regular users,
Variable pricing is a system for altering the price of a encourage large purchases, increase usage, and protect
product or service based on the current levels of supply market share against the competition.
and demand. ... For example, the price of an item that is
Coupons: a voucher entitling the holder to a discount for
being sold through an auction will change depending
a particular product.
upon the amount of demand for it, as evidenced by bid
prices.

Price discrimination is a microeconomic pricing strategy • Price Bundling: practice of offering two or more
where identical or largely similar goods or services are different products or services for sale at one price. E.g.
sold at different prices by the same provider in different McDonald’s offers a bundle of a sandwich, French fries,
markets. and a soft drink in a Value Meal at a discount compared
with buying the items individually.

Price bundling is combining several products or services

Self-Selected Variable Pricing (Second Degree of Price
into a single comprehensive package for an all-inclusive
Discrimination)
reduced price. Despite the fact that the items are sold
An alternative approach for variable pricing is to offer for discounted prices, it can increase profits because it
the same multiple-price schedule to all customers but promotes the purchase of more than one item.
require that customers do something to get the lower
• Multiple-Unit Pricing/ Quantity Discount: refers to
price. Example, sports teams alter ticket prices on the
the practice of offering two or more similar products or
basis of the opponent, the day of the week, and the
services for sale at one lower total price.
time of the year; but these prices are set before the
season. For example, a pack of 3 tee shirts sold at Rs. 800, when
an individual is priced at Rs. 300/-.
Self-Selected Variable Price For sellers, variable pricing is
so powerful for two reasons. First, it allows customers to Multiple Unit pricing is a pricing strategy which is used
naturally self-select based on how much they value the as a marketing strategy in order to push the sales of the
product or service and their willingness-to-pay for it. product.
Self-Selected Variable Pricing. An alternative approach
A quantity discount is an incentive offered to a buyer
for variable pricing ... Setting different prices for same
that results in a decreased cost per unit of goods or
products seem unfair to customers
materials when purchased in greater numbers. A
quantity discount is often offered by sellers to entice
customers to purchase in larger quantities.
• Promotional Markdowns: to promote merchandise,
increase sales and increase customer traffic flow.
Retailers plan promotions in which they take
Variable Pricing by Market Segments (Third Degree of
markdowns for holidays, for special events, and as part
Price Discrimination)
of their overall promotional program.
Retailers may charge different prices to different
The most common method for stimulating customer
demographic market segments.
interest using price is the promotional markdown
method, which offers the product at a price that is Example: - Movie theaters have lower ticket prices for
lower. seniors and college students, presumably because these
segments are more price-sensitive than other
customers.
Zone Pricing: practice of charging different prices in Although EDLP retailers embrace their consistent pricing
different stores, markets, regions or zones. Retailers strategy, they occasionally have sales, just not as
generally use zone pricing to address different frequently as their high/low competitors.
competitive situations in their various markets. Some
To reinforce their EDLP strategy, some retailers have
multichannel retailers implement zone pricing by asking
adopted a low-price guarantee policy that guarantees
customers to enter their zip code before they are
customers the retailer will have the lowest price in a
quoted a price.
market for products it sells.
Geographical pricing, in marketing, is the practice of
The guarantee usually promises to match or better any
modifying a basic list price based on the geographical
lower price found in the market and might include a
location of the buyer. It is intended to reflect the costs of
provision to refund the difference between the seller’s
shipping to different locations.
offer price and the lower price.
Zone Pricing is a pricing method in which all customers
Everyday low price (EDLP) is a pricing strategy promising
within a defined zone or region are charged the same
consumer a low price without the need to wait for sale
price. And more distant customers pay a higher price
price events or comparison shopping. EDLP saves retail
than those closer to the company's dispatch point. It is
stores the effort and expense needed to mark down
also called multiple zone pricing. Prices increase as
prices in the store during sale events, as well as to
shipping distances increase.
market these events.

Pricing Strategies
Pricing Techniques to Increase Sales and Profits:
Retailers use two basic retail pricing strategies:

Leader Pricing
1.) High/Low Pricing
Certain items are priced lower than normal to increase
Retailers using a high/low pricing strategy frequently - customers' traffic flow or to boost sales of
often weekly – discount the initial prices for complementary products.
merchandise through sales promotions.
The best items for leader pricing are frequently
However, some customers learn to expect frequent purchased products (loss leaders)
sales and simply wait until the merchandise they want
The retailer hopes consumers will also purchase other
goes on sale and then stock up at the low prices
products while buying loss leaders. E.g. frequently
• Advantages: Increases profits through price purchased products like bread, milk, eggs etc.
discrimination, Sales create excitement by drawing lot of
One problem with leader pricing is that it might attract
customers, Helps sell merchandise faster (especially the
shoppers referred to as cherry pickers, who go from one
slow-selling merchandise)
store to another, buying only items that are on special.
• Limitations: People become accustomed to buy on These shoppers are clearly unprofitable for retailers.
deal and wait, may have an adverse effect on profits.
What pricing tactics do retailers use to influence
Why do some retailers have frequent sales while others consumer purchases?
attempt to maintain an everyday-low-price strategy?
Leader pricing is a common pricing strategy used by
High–low pricing (or hi–low pricing) is a type of pricing retailers to attract customers. It involves setting lower
strategy adopted by companies, usually small and price points and reducing typical profit margins to
medium-sized retail firms, where a firm initially charges introduce brands or stimulate interest in the business as
a high price for a product and later, when it has become a whole or a particular product line. Products sold in this
less desirable, sells it at a discount or through clearance strategy are often sold at a loss.
sales.

Price Lining
2.) Everyday Low Pricing (EDLP)
Retailers offer a limited number of predetermined price
Mostly adopted by discount stores, D-Mart, this strategy points within a classification.
emphasizes the continuity of retail prices at a level
Customers and retailers can benefit from such a
somewhere between the regular non-sale price and the
strategy:
deep-discount sale price of high/low retailers.
- Confusion that often arises from multiple price choices Vendors set MSRPs to reduce retail price competition
is eliminated. among retailers, eliminate free riding, and stimulate
retailers to provide complementary services.
- Merchandising task is simplified for the retailer.
Vendors enforce MSRPs by withholding benefits such as
- Price lining can also give buyers greater flexibility.
cooperative advertising or even refusing to deliver
- Customers may “trade up” to more expensive merchandise to noncomplying retailers.
offerings.
Resale price maintenance (RPM) or, occasionally, retail
Price Lining, is used to describe a marketing/ pricing price maintenance is the practice whereby a
strategy, whereby a business prices its products manufacturer and its distributors agree that the
according to quality, features and attributes in order to distributors will sell the manufacturer's product at
differentiate them from similar products. ... The certain prices (resale price maintenance), at or above a
disadvantage of price lining is that it also puts cost as price floor (minimum resale price maintenance) or at or
the key driver of purchasing decisions. below.

Odd Pricing • Horizontal Price Fixing

The practice of using a price that ends in an odd It involves agreements between retailers that are in
number, typically a 9. direct competition with each other to set the same
prices.
The theory behind odd pricing is the assumption that
shoppers do not notice the last digit or digits of a price, This practice clearly reduces competition and is illegal.
so that a price of $2.99 is perceived as $2.
As a general rule of thumb, retailers should refrain from
An alternative theory is that “9” endings signal low discussing prices or terms and conditions of sale with
prices. Thus, for products that are believed to be competitors.
sensitive to price, many retailers will round the price
If buyers or store managers want to know competitors’
down to the nearest 9 to create a positive price image.
prices, they can look at a competitor’s advertisements,
If, for example, the price would normally be $3.09, many
its Web sites, or its stores.
retailers will lower the price to $2.99.
Horizontal price fixing involves agreements between or
Odd pricing is a pricing method aimed at maximizing
among competitors. In other words, these are
profit by making micro-adjustments in pricing structure.
businesses that operate at the same level of the supply
It relies on the assumption that consumers are
chain (e.g., between manufacturers or between
calculation-averse and will therefore only read the first
distributors). ... This means that regardless of any
digits of a price when making their purchasing decision.
justification for fixing the price, it is always illegal.
This pricing method is widely spread.

• Deceptive Reference Prices

Legal and Ethical Pricing Issues
A reference price is the price against which buyers
• Predatory Pricing
compare the actual selling price of the product, and
Predatory pricing arises when a dominant retailer sets thus it facilitates their evaluation process.
prices below its costs to drive competitive retailers out
The retailer labels the reference price as the “regular
of business.
price” or “original price.”
The predator hopes to raise prices when the
When consumers view the “sale price” and compare it
competition is eliminated and earn back enough profits
with the provided reference price, their perceptions of
to compensate for its losses.
the value of the product or service will likely increase.
Predatory pricing is the illegal act of setting prices low in
Deceptive giving an appearance or impression different
an attempt to eliminate the competition.
from the true one; misleading, the act of causing
Predatory pricing violates antitrust law, as it makes someone to accept as true or valid what is false or
markets more vulnerable to a monopoly. invalid.

• Resale Price Maintenance

Vendors often encourage retailers to sell their

merchandise at a specific price, known as the
manufacturer’s suggested retail price (MSRP).