Pricing In Retailing
Chapter 17
Dr. Pointer’s Notes
Overview
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Pricing is the value that is placed on
something. That something is usually
goods and service
Products must be priced in a way that
both achieves profits and satisfies
customers
Basic pricing Options
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Discount orientation – low prices as
competitive advantages
At the market orientation – uses
average prices to offer solid value
Upscale orientation – using a
prestigious image as competitive
advantage
External Factors Affecting
Retail Pricing
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Consumers
Governmental issues
Manufacturers/wholesalers/suppliers
Current and potential competitors
Consumer Factors
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Price elasticity of demand – Measures
sensitivity of consumers to price
changes.
A small change in prices results in a big
change is quantity – very elastic
Change in prices does not result in
significant change in quantity it is
inelastic. Elasticity = ∆ Q/ ∆P
Consumer_2
Price sensitivity varies by market
segment based on market orientation
1. Economic Consumers
2. Status-oriented consumers
3. Assortment oriented consumers
4. Personalizing consumers
5. Convenience oriented consumers
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Government Issues
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Horizontal pricing fixing – parties within the
same level in channel agree to set prices
Vertical price fixing – when manufacturers or
wholesalers seek to control the retail prices of
their products
Price discrimination –occurs when retailers
sell same product at different prices to
different consumers under same conditions.
Robinson- Patman act bars price
discrimination
Justifiable reasons
to price discriminate
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Products are physically different
Retailers paying different prices are not
competitors
Competition is not injured
Price differences are due to differences
in costs
Market conditions change
Government issues
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Minimum price laws- can not sell certain
items for less than costs
Predatory pricing- seeks to reduce
competition by pricing products very low
Loss leaders - price products below costs to
attract more store traffic
Unit pricing- must provide total price and
price per a certain unit such as price per oz.
or price per lb
Government issues
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Item price removal – some states ban this
Price advertising – cannot advertising a price
reduction unless it has actually been done
Price matching- legal in many states
Bait and switching – illegal practice of
advertising a low price but then try to switch
customers to another product when they
enter the store or say the product is not
available.
Manuf, wholesalers and Other
Suppliers
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May have conflicts between manuf,
wholesalers regarding the pricing of
merchandise
Private label is increasing – selling
against the brand
Gray market goods are sold by retailers
and not liked by manufacturers
Competition and retail Pricing
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Market pricing- many retailers are in
market and consumers have many to
chose from which makes prices of
products very similar
Administered pricing- seeks to attract
consumers based on uniqueness of
offering rather than price
Factors Affecting Retail
Price Strategy
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Price objectives
Broad price policy
Price strategy
Implementation of strategy
Price adjustments
Pricing objectives
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Sales or market share – market
penetration strategy – seek big
revenues by reducing prices
Profit objectives – market skimming
strategy. Sets premium prices and
attracts customers who are less price
senstitive. Objective is recovery of cash
quicker.
Examples of Specific pricing
Objectives (Fig. 17-5)
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Maintain a proper image
Clear seasonal inventory
Provide good customer service
Encourage repeat business
Match competitors prices
Increase shopper traffic
Broad Price Policy
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Broad price policy a retailer generates
an integrated price plan with short and
long run perspective
Price policy is integrated with target
market, retail image, and other
elements of retail mix
Example of policy: no competitors will
have lower prices
Price Strategy
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Demand Oriented –price set based on
consumers desire
Cost Oriented – costs are calculated and
profits are added to set price
Competition oriented – prices set to
match competition
Demand Oriented
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Use demand to estimate what
consumers are willing to pay
Price- quality association – higher price
the higher the quality
Prestige pricing – higher the price the
better, consumers preferences
Cost Oriented
Adding a $ amount to costs to set price
 Markup pricing
 Markup – difference between
merchandise costs and selling price
Example: retailer cost for a shirt is $25
He sells shirt for $45
Markup - $45-25 = $20
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Markup examples Continued
Markup percentage = price-cost/price
(30%) markup desired
$12.00 retailers costs
What will the selling price be?
.30 = X - $12.00/ X
12/1-.30= 12/.70 = $17.14
Retail selling price is $17.14
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Markup examples Continued
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Desire a 40% markup , if the candy
retails for .79, what costs should a
retailer pay for the candy
.79 (1-.40)= .79 (.60) = .474
see examples in text page 426
Markup
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Initial markup
Maintained markups
Variable markup policy
Direct product profitability
Competition oriented pricing
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Use competitions prices ONLY as a
guide
can price above, below or at same level
as competition
Integrated approaches to
pricing strategy
Must consider many factors such as
1. if price reduces will revenues increase
greatly
2. Will a given price, allow a traditional
markup to be attained
3. Can above market prices lead to
superior image
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Implementation of Price Strategy
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2.
3.
4.
Customary and variable pricing
Customary pricing –sets price at one level
and seek to keep them at these levels
Everyday low pricing (EDLP) sell goods at
consistently low prices
Variable pricing – change prices as costs
vary
Yield management pricing – determines
price that yields the greatest profits for a
given period.
Implementation of Price Strategy
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1.
2.
3.
One price policy and flexible pricing
One price policy – charge all
customers the same price
Flexible pricing – let consumers
bargain over prices
Contingency pricing -
Implementation of Price Strategy
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Odd pricing- set prices below even dollar amt,
.49 .99. 1.99, 99.99
Leader pricing
selling selected items at reduced price to build
store traffic
 Multiple –unit – 2 for .79
bundled pricing combines several products
 Price lining- sell products at a limited price
range.
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Price Adjustments
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Price adjustments let retailer use price
as an adaptive mechanism
1. markdowns 2. additional markups
3. employee discount
Markdowns are taken because of
competition, seasonality, demand
patterns, merchandise costs and
pilferage.
Price Adjustments
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Markdown percentage =
Dollar markdown/net sales
Off-retail markdown percentage =
original price – new price/original price
Price Adjustments
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Markdown control
Timing markdowns
1. Early markdowns – may results in selling
out quicker than late markdowns
2. Staggered markdown –
- automatic markdown plan
4. storewide clearance
Problem set
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Please prepare the following problems
from your text page 439
Questions
4,5,6,7 and 12