Pricing Merchandise

AD-VI

KEY CONCEPTS

AD VI- Marketing III Prashanth KC

Earning a profit
Net sales are all of the sales that have been made minus customer returns and allowances. Cost of goods sold is the amount the buyer has paid for the merchandise that the store has held for that same time period.

Gross margin is the margin of dollars between what the merchandise cost and what it was sold for.
Expenses is the amount of money spent to run the business. It includes salaries, advertising, rent, heat and light. Profit-the amount of money that is left over after all of the merchandise that is offered for sale has been sold and all of the expenses of running the business have been paid.

Earning a profit

Net sales cost of goods sold

= gross margin expenses

$ 70,000 42,000
28,000 24,000

% 100
60 40 34.3

= profit

4,000

5.7

Net sales cost of goods sold = gross margin Gross margin expenses = profit

Definition of price
The sum or consideration or sacrifice for which a thing may be bought or attained

Price varies in importance from

one market to another different segments in the same market

For example
Low cost non-fashion markets price critical Fashion markets less price critical Products designed for price segment economy family car Products designed regardless of price sports car

Pricing considerations as part of the marketing mix

List price Price range Discounts Allowances Payment period Credit terms Trade-ins

 Value and worth are often more important than price

Factors determining the price the buyer will pay

Buyers ability to raise funds for that purpose Other demands on buyers budget Price charged for a substitute Price charged by a competitor Buyers ability to do without Nearness or satiation to that need

Pricing considerations
Company objectives
Maximise sales Maximise cash flow Meet/prevent competition

Competition match/cut/higher price Government legislation Costs materials, distribution, promotion, etc.

Pricing considerations continued

Stage in the product life cycle
Introduction high price to cover R & D, or low price to encourage trial Growth penetration/skimming strategies Maturity/decline competitive/price cutting

Market segment price consistent with image Product image discounting, quality, exclusive Extras service, selections and convenience may offset price

Setting the price

Cost orientated methods: Cost plus pricing
Aims to ensure that no product is sold at a loss Particularly used for non-standard items Used with tender proposals

An example of cost plus pricing

Item Cotton Trim Details Quantity Unit cost Total cost 2.70 0.08 0.16 0.04 0.90

Jersey 1.5 metres 1.80/metre Polyfil thread 1 0.08 Metal zip 1 @ 20cm 0.24 0.24 Knitted collar 1 0.16 Label With logo & 1 0.04 care instructions Labour to cut, make & trim @15 minutes Cost of production Manufacturers mark up @ 25% Manufacturers selling price (excluding VAT) Retailers mark up @ 65% Retail price excluding VAT Value Added Tax @ 17.5% Retail price including VAT 4.12

1.03 5.15 3.35 8.50 1.49 9.99

Market based pricing

Where retailer has a feel for the market or market research has shown a price that will be acceptable for a certain item

Calculation of target buying prices

Cotton jersey hooded top including VAT at 17.5%

12.99

Less VAT at 17.5%

Retail price excluding VAT Less retailers mark-up at 65% of buying price Retailer buying price or Manufacturers selling price

1.93
11.06

7.19
3.87

Mark-ups and mark-downs

A mark-up is where profit is expressed as a percentage of costs and is shown by:
(Price Cost) ------------------- x 100 Cost

A mark-down is shown by:

(Price Cost) ------------------- x 100 Price

Markups and Markdowns

Markup: % amount (calculated on cost) added to cost in order to arrive at MRP.

Markdown: amount reduced from MRP to arrive at new RP. It is calculated in % terms.

Markup:
The dollar difference between the delivered cost of the merchandise and the retail price placed on it when it is first brought into stock is called initial markup. Retail stores plan initial markup percentages to ensure that the income derived from sales will be adequate to cover : All expenses incurred in the operation of the business Anticipated reductions in the retail value of the inventory , such as mark downs , stock shortages, and employee discounts a reasonable margin of profit for the store The planned markup should be aimed at achieving the goal figure indicated on the dollar merchandise plan; no less or no higher.

Markups and Markdowns

Calculations:
Markup= % of margin calculated on cost added to arrive at MRP Markup%= (Difference b/w MRP and Cost / Cost) * 100

Cost = MRP Margin

Margin = MRP Cost MRP = Cost + Markup

Markdown%= (Difference b/w old MRP and new MRP after markdown / Old MRP) * 100

Break even pricing

Break even analysis is an aid that can show the relationship between :
Fixed costs Variable or marginal costs Output or volume

The break-even point

Revenue & cost Break-even point

Fixed costs

Investment

Investment

Quantity sold

Additional factors to consider when determining price levels

Demand Consumers perception of value
Consumers price THRESHOLD

Pricing strategies
Penetration pricing Price skimming Competitive pricing Price leaders and followers Price fixing Psychological pricing
Premium Odd-even Range

Pricing strategies continued

Demand orientated pricing
Differential or off-peak Variable Geographic

Future issues
International pricing Internet pricing