Pricing

What is Price?
Basis for exchange. What the retailer is willing to sell product/service for; what the consumer is willing to pay to obtain product/service No intrinsic value to ANYTHING. If the customer is willing to pay the price, thats what the product is worth.

Pricing Challenges for Retailers

1. All the sales in past decade have conditioned consumers to never pay full price 2. Economic recession and actually time since 1990s --makes price more important raises the value issue 3. Stores with everyday low prices are increasingly important

Two Price Strategies

1. Every day low price not necessarily lowest price
Advantages: fewer price wars, limited advertising, improved customer service, reduced stock outs, improved inventory management, better profit margins

2. High/low pricing price sometimes above EDLP, and sometimes below; frequent sales
Advantages: same stuff is sold to different markets, excitement, moves merchandise, signals quality, hard to maintain EDLP

Methods of setting price

1. Cost oriented take merchandise cost and add fixed percent markup 2. Demand oriented price is what customer will pay Which is preferred by marketers? Why? Retailers actually use both

Use of Cost Method

Relates to goal setting GMROI Problem: in retailing, the final selling price may not b original price. So how do you set original price, so that final price meets the profit objective? In other words, how do you give consumers their deal and still earn the profit you need?

Some new and some old stuff

Net sales - COGS Maintained markup - Alteration costs + cash discounts Gross Margin $120,000 58,000 62,000 3,000 59,000

Some important definitions

Initial markup amount product is initially marked up Original selling price = cost + initial markup Maintained markup amount the retailer expects to make on the sale of a particular item Maintained markup=Net sales COGS Maintained markup% = Maintained MU/Net Sales Ex: $62,000/120,000 = 51.67% Maintained Selling Price = Initial Selling PriceReductions (you build reductions into original selling price)

Initial MU Calculations
Initial Markup=Maintained Markup + Reductions Net sales + Reductions OR in percent terms
Initial Markup%=Maintained Markup% + Reductions% 100% + Reductions%

Example
Assume reductions = $14,400 Initial MU = 62,000 + 14,400 = 56.85% 120,000 + 14,400 OR in % terms = 51.67% + 12% = 56.85% 100% + 12% ** Initial MU is always greater than maintained MU if there are reductions

RSP, Cost and Mark Up

Retail Selling Price = Cost = Mark Up So if RSP is $100 and MU is 56.85%, what is cost? $100 = cost + (56.85% x RSP) $100 = cost + (56.85% x $100) $100 = cost + 56.85 $43.15 = cost Only trick to keep in mind here is that you always take % MU of RSP NOT of Cost

Adjustments to Price
Markdowns Markdown cancellations Additional markups Additional markdown cancellations

Markdowns
Reductions in initial retail selling price Reasons for taking markdowns
Clearance (get rid of stuff) Promotional (build store traffic)

Always calculate markdowns as a % of the the last RSP Selling price = $25; markdown = $5
Markdown % = 5/25 = 20%

Markdown Cancellation
Amount by which price is raised after a sale used only for promotional markdowns only in effect up to initial retail price IMPORTANT If an item is marked down 20% and then a 20% Markdown cancellation is applied, the new selling price will NOT be the price before the 20% markdown. WHY NOT?

Additional Markup
Increase in the initial selling price Rare, but does happen Why?

Demand-oriented pricing
What the traffic will bear This relates to price sensitivity Factors that affect price sensitivity
Substitute awareness effect Total expenditure effect Difficult comparison effect Benefits/price effect Situation effect