CHAPTER 6 :

RETAILPRICING
STRATEGIES
 SYLLABUS
6.1 Explain the pricing
6.1.1 Identify factors affecting a retail
price strategies
a. Customer price
b. Cost
c. Competition
d. Government
e. Manufacturer, wholesaler and
other suppliers
 SYLLABUS
6.1.2 Identify pricing objectives
6.1.3 Discuss pricing strategies
a. Customary pricing
b. Variable pricing
c. One-price policy
d. Flexible pricing
e. Odd pricing
f. Leader pricing
g. Multiple unit pricing
h. Price lining
6.1.4 Discuss price adjustment
At the end of this chapter, student will
be able to:

1. Explain the pricing

2. Determine the factors affecting retail
price strategy
3. Identify price objectives
4. Determine price strategy
5. Discuss price adjustment
INTRODUCTION :
Price is of fundamental importance as it is the
only mix element that actually generates
income.
We need to set price when we have a new
product, or when we enter a new market with
an existing product
PRICE :

‘The amount of money charged for a product or

service, or the sum of the values that consumers
exchange for the benefits of having or using the
product or service’
PRICING OBJECTIVES:
1. To maintain a proper image
2. To encourage shoppers not to be overly price-
conscious
3. To be perceived as fair by all parties (including
suppliers, employees and customers)
4. To be consistent in setting prices
5. To increase customer traffic during slow
periods
7. To clear out seasonal merchandise to match
competitors’ prices without starting a price
war
8. To promote a ‘we-will-not-be-undersold’
philosophy
OBJECTIVES OF PRICING :
9. To be regarded as the price leader in the
market area by consumers
10. To provide ample customer service
11. To minimize the chance of government actions
relating to price advertising and antitrust
matters
12. To discourage potential competitors from
entering the marketplace
13. To create and maintain customer interest
14. To encourage repeat business
TTING RETAIL PRICES:
CTORS AFFECTING RETAIL PRICE STRATEG

a) Customer price
b) Cost
c) Competition
d) Government
e) Manufacturer, wholesaler and
other suppliers
CTORS AFFECTING RETAIL PRICE STRATEGY
Before any pricing decisions can be undertaken it is
important that the factors influencing price are
understood. These factors can be categorized as
internal and external.

a) Customer Price Sensitivity

 The marketer should consider
various consumer factors while
fixing the prices such as the
price sensitivity of the buyer,
purchasing power, and so on.
 A commonly used measure of
price sensitivity is price
elasticity.
 Retailers should understand the price elasticity of
demand : the sensitivity of customers to price
changes in terms of the quantities they will buy.
 Price elasticity, or people’s sensitivity to price
changes, affects the demand for products.
 If small percentage changes in price lead to
substantial percentage changes in the number of
units bought, demand is price elastic
 When consumers are very
sensitive to the price change of a
product -that is, they buy more
of it at low prices and less of it at
high prices -the demand for it is
price elastic.
a) Customer Price Sensitivity (continue)
 Durable goods such as TVs, stereos, and freezers are
more price elastic than necessities. People are more
likely to buy them when their prices drop and less
likely to buy them when their prices rise.
 By contrast, when the demand for a product stays
relatively the same and buyers are not sensitive to
changes in its price, the demand is price inelastic.
 Demand for essential
products such as many
basic food and first-aid
products is not as
affected by price
changes as demand for
many nonessential
goods.
a) Customer Price Sensitivity (continue)

 One approach that can be used to

measure the price sensitivity of
customers is a price experiment.
 Situation : The restaurant chain
wants to determine the best price
for a new item, a riblet basket.
 It selects restaurants in the chain with very
similar trade areas and sets prices at different
levels in each of the restaurants for a week.
 Assume that the variable cost of the riblet is $5
per plate and the fixed cost of operating the
restaurant for a week (rent, labor & energy) is
$8,000.
 The result of this experiment are shown in
Exhibit 13-1
a) Customer Price Sensitivity (continue)
 One approach that can be used to measure the
price sensitivity of customers is a price
experiment.

EXHIBIT 13-1A Data from Price Experiment

 a) Customer Price Sensitivity (continue)
EXHIBIT 13-1B Quantity EXHIBIT 13-1C Profit at
Sold At Different Prices Different Prices

In Exhibit 13-1A that a prices increase, the fixed costs remain the same, sales and variable
costs both decrease but sales decrease at a faster rate than variable costs (Exhibit 13-1B) So
the highest profit level occurs at a $7 price (Exhibit 13-1C).
If the restaurants considers only customer’s price sensitivity and cost in setting prices, it would
set the price for the riblet basket with these demand characteristics at $7 to maximize profits.
b) Cost
 In order to arrive at the retail price, we need to first
consider the elements that go into the making of the
price.
 The first element to be considered is the Cost of
Goods, which is the cost of the merchandise and
their various expenses, which are involved in the
movement of the goods from the manufacturer to
the actual store.
 These expenses may be Fixed or variable.
Fixed costs:
 Fixed costs sometimes
referred to as overhead
 are expenses that don’t vary
according to production
amounts
 Eg: rent or office space (and
storage space if you store
inventory), office equipment
(telephones, faxes,
computers etc) insurance,
utilities etc
Variable costs:
 Variable costs are
expenses that do vary with
the amount of service
provided or goods
produced.
 They include cost such as
hourly pay for an
assistant on a specific
project, raw material etc.
 Some available costs don’t
depend specifically on the
number of product but are
still variable such as
advertising or promotion
expenses.
 The cost of a product is the total of the fixed and
variable expenses .
 The profit to be earned from the merchandise must
be planned before fixing the retail price. The profit
figure arrived at can also be expressed as the markup
percentage as:
Retail Price = Cost + Mark Up or
Cost = Retail Price – Mark up and
Mark up = Retail Price — Cost

 The components of this formula can be expressed in

RM terms or as a percentage.
 The markup percentage can be expressed as a
percentage of the retail price or as a percentage of the
cost price.
Thus, the following formula would apply :

Mark up Percent
(Based on Retail Price)
= Markup in RM
Retail Price
And,

Mark Up Percent
(Based on Cost)
= Mark Up in RM
Cost
Let us understand these concepts with the help of the
following illustration.
Assume that the cost of merchandise of an item is RM
200 and the markup is RM 150. The markup
percentage based on the retail price would work out
to 37.5%.

The retail price has been calculated as 200+150 = 350

Markup percentage on retail = 150 / 350 = 42.86%
Based on cost price, the markup percentage can be
calculated as under:

Markup percentage on cost = 150 / 200 = 75%

The markup thus fixed is termed as the Initial Markup.

c) Competitors Pricing
 How competitors price and sell their products will
have a tremendous effect on a firm’s pricing decisions.
 Because companies want to establish and maintain
loyal customers, they will often match their
competitors’ prices.
 The retailer can use
competitor’s prices as a guide.
The firm might not alter prices
in reaction to changes in
demand or costs unless
competitors alter theirs.
 With so many products sold online, consumers can
compare the prices of many merchants before making
a purchase decision.
 Similarly, it might change prices when competitors
do, even if demand or costs remain the same.
 A competition-oriented, retailer can price above,
below or at parity with the competition.
 A firm with a strong location, superior service,
good assortments, favorable image and exclusive
brands can set prices above competitors
 However, above-market pricing is not suitable for a
retailer that has inconvenient location, relies on self-
service, is not innovative and offer no real product
distinctiveness

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c) Government rules and regulations
 Government rules and regulation must be considered
while fixing the prices.
 In certain products, government may
announce administered prices, and
therefore the mar­keter has to
consider such regulation while fixing
the prices.
 Three levels of government may affect
retail pricing decisions : Federal,
state and local
c) Government rules and regulations (cont)

 Regulations are designed to protect

consumers, promote competition,
and encourage ethical and fair
behavior by businesses.
 For example, the Direct Sales Act
1993 of Malaysia as government
engineered mechanism to protect
customers from unscrupulous multi-
level marketing and Direct Marketing
companies.
c) Government rules and regulations (cont)

 Major government rules relates to :

 horizontal price fixing,

 vertical price fixing,
 price discrimination,
 minimum price levels,
 unit pricing,
 item price removal and
 price advertising

 For retailers operating outside their home countries,

a fourth level of government comes into play :
international jurisdictions.
d) Government
• Price fixing, which occurs when firms
get together and agree to charge the
same prices, is illegal.
• Usually, price fixing involves setting
high prices so consumers must pay a
high price regardless of where they
purchase a good or service.
• Video systems, LCD (liquid crystal
display) manufacturers, auction houses,
and airlines are examples of offerings in
which price fixing existed.
d) Government
• By requiring sellers to keep a minimum
price level for similar products, unfair
trade laws protect smaller businesses.
• Unfair trade laws are state laws
preventing large businesses from selling
products below cost (as loss leaders) to
attract customers to the store.
• When companies act in a predatory
manner by setting low prices to drive
competitors out of business, it is a
predatory pricing strategy
d) Government
• Bait and switch, or bait advertising,
occurs when a business tries to “bait,”
or lure in, customers with an incredibly
low-priced product.
• Once customers take the bait, sales
personnel attempt to sell them more
expensive products.
• Sometimes the customers are told the
cheaper product is no longer available.
e) Manufacturer, wholesaler and other suppliers

• Pricing decisions occur on two levels in the

organisation.
• Over-all price strategy is dealt with by top
executives.
• They determine the basic ranges that the
product falls into in terms of market segments.
• The actual mechanics of pricing are dealt with at
lower levels in the firm and focus on individual
product strategies.
• Usually, some combination of
production and marketing
specialists are involved in
choosing the price.
e) Manufacturer, wholesaler and other suppliers

• When products are sold through intermediaries

like wholesaler & retailers, the list price to
customers must reflect the margins required
by them
• Sometimes list prices will be high because
middlemen want higher margins.
• But some retailers can afford to sell below the
list price to customers.
• They run low-cost operations and can manage
with lower margins.
• They pass on some part of
their own margins to
customers.
e) Manufacturer, wholesaler and other suppliers

• Suppliers of raw materials and other goods can

have a significant effect on the price of a product.
• Eg: If the price of cotton goes up, the increase is
passed on by suppliers to manufacturers.
Manufacturers, in turn, pass it on to consumers.
• Sometimes, however, when a manufacturer
appears to be making large profits on a particular
product, suppliers will attempt to make profits by
charging more for their supplies.
• In other words, the price of a finished
product is intimately linked up with
the price of the raw materials. Scarcity or
abundance of the raw materials also determines
pricing.
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
a. Customary Pricing
b. Variable Pricing
c. One Price Policy
d. Flexible Pricing
e. Odd Pricing
f. Leader Pricing
g. Multiple Unit Pricing
h. Price Lining
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
a) Customary Pricing
 A retailer sets prices for goods
& services and seeks to
maintain them for an
extended period
 Eg. Of items : Newspaper,
candy, vending machine items
& foods on restaurant
 Everyday Low Pricing is a
customary version
 Retailers strive to sell its
goods & services at
consistently low prices
throughout the selling season
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
b) Variable Pricing

 A retailer alters its prices to coincide with fluctuations

in costs or consumer demand
 Provide excitement due to special sales opportunities
for customers
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
c) One Price Policy
 retailer charges the same
price to all customers buying
an item under similar
conditions
 May be used together with
customary pricing (CP) or
variable pricing (VP)
 Eg: With VP, all customers
interested in a particular
section of concert seats would
pay the same price
 Advantage : easy to manage,
does not require skilled
salespeople
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
d) Flexible Pricing
 Lets consumers bargain over prices
 Eg: Jewelry stores, auto dealers
 They do not clearly post bottom-line prices,
shopper need prior knowledge to bargain
successfully.
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
e) Odd Pricing

 Retail prices are set at levels below

even dollar values.
 Eg: $0.49, $1.88
 Is a form of psychological pricing
 People feel these prices represent
discounts or that the amounts are
beneath consumer price ceilings
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
f) Leader Pricing
 A retailer advertises and sells
selected items in its
goods/services assortment at
less than the usual profit
margin
 Goal : to increase customer
traffic for the retailer so that it
can sell regularly priced goods
& services in addition to the
specially priced items
 Eg: Fast food restaurant,
Furniture
PRICING TECHNIQUES FOR INCREASING
SALES
g) & PROFITS
Multiple-unit Pricing
 A retailer offers discounts to customers who buy in
quantity or who buy a product bundle
 Eg: Selling items at two for $0.75 rather than $0.39
for each one.
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
3 reasons:

i. A firm could seek to have

shoppers increase their total
purchases of an item
ii. Can help sell slow-moving and
end-of-season merchandise
iii. Price bundling may increase
sales of related items
(Bundled Price – retailer
combines several elements in
one basic price)
PRICING TECHNIQUES FOR INCREASING
SALES & PROFITS
h) Price Lining
 A retailer sell his/her merchandise at a limited range
of price points, with each point representing a
distinct level of quality
PRICE ADJUSTMENT
• Markdowns are the discount you take on
merchandise in your retail store from the original
sale price marked.
• Compared to a sale or promotional event, a
markdown (in its purest form) is when you
change the list price to a lowered price
permanently.
• 2 Reasons :
i. Clearance markdown
ii. Promotional markdown
PRICE ADJUSTMENT
i. Clearance Markdown

• When merchandise is
selling at slower rate
than planned, it will
become obsolete at end
of season.

• Slow selling merchandise decreases inventory

turnover, prevents buyer from acquiring new/better
selling merchandise and can mar a retailers image
PRICE ADJUSTMENT
ii. Promotional Markdown
• To promote merchandise and
increase sales
• Some complementary products
are marked down to promote the
sale of other items in the store
and to generate traffic
 END OF
CHAPTER
6