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Chapter 10 Retail Pricing

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  1. Chapter 10 Retail Pricing

  2. Exhibit 10.1 - Interaction Between a Retailer’s Pricing Objectives and Other Decisions LO 1

  3. Pricing Objectives LO 1

  4. Pricing Policies • Rules of action, or guidelines, that ensure uniformity of pricing decisions within a retail operation. • Below-market pricing policy - Regularly discounts merchandise from the established market price in order to build store traffic and generate high sales and gross margin dollars per square foot of selling space. LO 1

  5. Pricing Policies • Pricing at market levels • Price zone - Range of prices for a particular merchandise line that appeals to customers in a certain market segment. • Above-market pricing policy - Retailers establish high prices because nonprice factors are more important to their target market than price. LO 1

  6. Pricing Policies • Factors that permit retailers to price above market levels: • Merchandise offerings • Services provided • Convenient locations • Extended hours of operation LO 1

  7. Specific Pricing Strategies LO 2

  8. Specific Pricing Strategies • Price lining - Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification. • Trading up -Occurs when a retailer uses price lining and a salesperson moves a customer from a lower priced line to a higher one. • Trading down - Occurs when a retailer uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line. LO 2

  9. Specific Pricing Strategies • Retailers select price lines that have the strongest consumer demand. • Price lining helps buying more efficiently, simplifying inventory control, and accelerating inventory turnover. LO 2

  10. Specific Pricing Strategies LO 2

  11. Specific Pricing Strategies • Leader pricing - High-demand item is priced low and is heavily advertised in order to attract customers into the store. • Loss leader - Extreme form of leader pricing where an item is sold below a retailer’s cost. • High–low pricing - Use of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads. LO 2

  12. Using Markups • Markup - Selling price of the merchandise less its cost, which is equivalent to gross margin. • The basic markup equation: SP = C + M Where: C - dollar cost of merchandise per unit M - dollar markup per unit SP - selling price per unit LO 3

  13. Exhibit 10.3 - Relationship of Markups Expressed on Selling Price and Cost LO 3

  14. Exhibit 10.4 - Basic Markup Formulas LO 3

  15. Initial Versus Maintained Markup • Initial markup = (original retail price – cost)/original retail price • Maintained markup = (actual retail price – cost)/actual retail price LO 3

  16. Initial Versus Maintained Markup • Reasons for the difference between initial and maintained markups: • The need to balance demand with supply. • Stock shortages. • Employee and customer discounts. • Cost of alterations. • Initial markup may be different from maintained markup is cash discounts. LO 3

  17. Planning Initial Markups start • Initial markup percentage = (operating expenses + net profit + markdowns + stock shortages + employee and customer discounts + alterations costs - cash discounts)/ (net sales + markdowns + stock shortages + employee and customer discounts) OR • Initial markup percentage = (gross margin + alterations costs - cash discounts + reductions)/ (net sales + reductions) OR LO 3

  18. Planning Initial Markups • Initial markup percentage = (gross margin + alterations costs + reductions)/ (net sales + reductions) LO 3

  19. Planning Initial Markups • Rules of markup determination • As goods are sold through more retail outlets, the markup percentage decreases and vice versa. • The higher the handling and storage costs of the goods, the higher the markup. LO 3

  20. Planning Initial Markups • Rules of markup determination • The greater the risk of a price reduction due to the seasonality of the goods, the greater the magnitude of the markup percentage early in the season. • The higher the demand inelasticity of price for the goods, the greater the markup percentage. What will the market bear LO 3

  21. Markdown Management • Markdown - Any reduction in the price of an item from its initially established price. • Markdown percentage = Amount of reduction / original selling price LO 4

  22. Markdown Management • Retailers do not possess perfect information about supply and demand factors; as a result, the entire merchandising process is subject to error, which makes pricing difficult. • Buying errors • Pricing errors • Merchandising errors • Promotion errors LO 4

  23. Markdown Policy • Early markdown policy • Advantages: • Speeds the movement of merchandise. • Enables the retailer to take less of a markdown per unit to dispose of the goods. • Markdowns are offered quickly on goods that some consumers still think of as fashionable, and the store has the appearance of having fresh merchandise. • Allows the retailer to replenish lower-priced lines from the higher ones that have been marked down. LO 4

  24. Markdown Policy • Late-markdown policy - Allowing goods to have a long trial period before a markdown is taken. • Avoids disrupting the sale of regular merchandise by too frequently marking goods down. • The bargain hunters or low-end customers will be attracted only at infrequent intervals. LO 4

  25. Markdown Policy • Amount of markdown • Rule of thumb for early markdowns is that prices should be marked down at least 20 percent in order for the consumer to notice. Just noticeable difference important. • Retailers are able to have their suppliers supplement their markdown losses with markdown money or some other type of price reductions. LO 4

  26. Markdown Policy • Amount of markdown • Maintained markup = (actual selling price – cost) / actual selling price • Maintained markup percentage = initial markup percentage – [(reduction percentage) (100% - initial markup percentage)] Where: Reduction percentage = Amount of reductions/net sales LO 4

  27. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20 • What is the necessary formula?

  28. Exhibit 10.4 - Basic Markup Formulas LO 3

  29. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20 • What is the necessary formula? • (SP-C)/SP • Work it out

  30. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20 • What is the necessary formula? • (SP-C)/SP • Work it out • (49.95-31.2)/49.95 = 18.75/49.95 = 37.5%

  31. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20 • What is the necessary formula? • (SP-C)/SP • Work it out • (49.95-31.2)/49.95 = 18.75/49.95 = 37.5% • What would the markup on cost be (the cost plus)?

  32. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20 • What is the necessary formula? • (SP-C)/SP • Work it out • (49.95-31.2)/49.95 = 18.75/49.95 = 37.5% • What would the markup on cost be (the cost plus)? • 18.75/31.2 = 60% • So, cost of 31.20 plus 60% of 31.20 = 49.95 (some rounding error might exist)

  33. Complete the following (11): Dress ShirtSport ShirtBelt Selling Price ($) 40.00 49.99 15.00 Cost ($) 23.00 25.35 6.50 Markup in Dollars ($) Markup Percentage on Cost (%) Markup Percentage on Selling Price (%)

  34. Complete the following (11): Dress ShirtSport ShirtBelt Selling Price ($) 40.00 49.99 15.00 Cost ($) 23.00 25.35 6.50 Markup in Dollars ($) 40-23=1724.648.50 Markup Percentage 17/23 24.64/25.35 8.5/6.5 on Cost (%) =.739 = 97.2 = 1.31 Markup Percentage on Selling Price (%) 17/40 24.64/49.99 8.5/15 42.549.356.7

  35. A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost her • What formula do we need?

  36. Exhibit 10.4 - Basic Markup Formulas LO 3

  37. A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You know that her markup is 25 percent of retail. What did the suit cost her • What formula do we need? (I’m great on manipulation) • R-C=50 50/R = .25 .25R=50 50/.25 = 200 • R = 200 Cost = 200-50 = 150

  38. The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point? • SP = 45 MU on SP = .45 • It doesn’t say MU on SP – in which case I would assume SP (should I not say – tell me which you assume)

  39. The buyer for men’s shirts has a price point of $45 and requires a markup of 45 percent. What would be the highest price he should pay for a shirt to sell at this price point? • SP = 45 MU on SP = .45 • (45-C)/45= .45 45-C = .45*45 45-C = 20.25 • 45-20.25 = 24.75 • (45-24.75)/45 = .45

  40. Exhibit 10.4 - Basic Markup Formulas LO 3