40 Questions
Why is pricing decision important in retailing?
Because customers have alternatives and are better informed
What is the formula for value in retailing?
Value = Perceived benefits / Price
What is the main characteristic of high-low pricing strategy?
Frequent discounts through sales promotions
What is the advantage of everyday low pricing (EDLP) strategy?
Assures customers of low prices
What is the provision of low price guarantee policy?
To match or better any lower price found in the local market
What is the measure of price sensitivity?
Price elasticity
What is the advantage of EDLP strategy in terms of inventory management?
Reduces stockouts
What is the objective of high-low pricing strategy?
To increase profits through price discrimination
What is the result of increasing the price of a product?
Fewer customers perceive the product as a good value
What is price elasticity?
The percentage change in quantity sold divided by the percentage change in price
What is the primary objective of retailers when setting prices?
To maximize profits
What is the formula to calculate retail price?
Retail price = Cost of merchandise + Markup
Why do retailers collect price data about their competitors?
To adjust their prices to remain competitive
What is one way retailers attempt to reduce price competition?
By utilizing branding strategies to offer unique merchandise
What is the purpose of break-even analysis?
To determine how much merchandise needs to be sold to achieve a break-even profit
What is the difference between fixed and variable costs?
Fixed costs don't change with the quantity of product produced and sold
What is the relationship between a product's price and its sales?
As the price increases, the sales decrease
What is the purpose of initial markup?
To set the initial selling price of a product
Why is it important for a retailer's pricing policy to be consistent with their overall strategy?
To be consistent with their relative market position
What is the purpose of maintained markup?
To determine the actual sales realized for a product minus its costs
What is the purpose of measuring price sensitivity?
To determine how many units will be sold at different price levels
Why do retailers take markdowns?
To clear inventory and make room for new products
What can retailers do to offer unique merchandise?
Develop a line of private-label merchandise
What is variable pricing?
Charging different prices for different customer segments
What is the primary purpose of clearance markdowns?
To get rid of slow-moving, obsolete merchandise
What is an example of self-selected variable pricing?
Quantity discounts
What is a potential drawback of individualized variable pricing?
It can cause ill-will on the part of customers
Why might a retailer use promotional markdowns?
To increase sales and promote merchandise
What is a way to liquidate markdown merchandise?
Sell the merchandise to another retailer
What is the primary difference between clearance markdowns and promotional markdowns?
Clearance markdowns are used to clear out inventory, while promotional markdowns are used to promote merchandise
What is the term for setting unique prices for each customer based on their willingness to pay?
Individualized variable pricing
What is a characteristic of clearance markdowns for fashion merchandise?
Higher prices are charged at the beginning of the season
What is the primary purpose of leader pricing?
To increase customer traffic flow and boost sales of complementary products
What is the benefit of price lining in terms of merchandising?
It simplifies the merchandising task
What is the characteristic of odd pricing?
A price ending in an odd number, typically a nine
What is the primary difference between price bundling and multiple-unit pricing?
The products offered are different in price bundling and similar in multiple-unit pricing
What is the purpose of rebates?
To provide a discount on the final selling price
What is the benefit of price lining in terms of customer behavior?
It gives buyers flexibility and encourages them to trade up to more expensive offerings
What is the primary advantage of coupons?
They provide a discount on the price of specific items when purchased at a store
What is the risk of leader pricing?
It attracts cherry pickers
Study Notes
Retail Pricing
- Pricing decision is important because customers have alternatives to choose from and are better informed
- Value = Perceived benefits / Price
- Retailers use two basic retail pricing strategies: high-low pricing and everyday low pricing (EDLP)
High-Low Pricing
- Retailers frequently discount initial prices for merchandise through sales promotions
- Advantages:
- Increases profits through price discrimination
- Sales create excitement
- Sells merchandise
Everyday Low Pricing (EDLP)
- Retailers stress continuity of retail prices at a level between regular nonsale price and deep discount sale price of competitors
- Some retailers have adopted a low-price guarantee policy to assure customers of low prices
- Advantages:
- Assures customers of low prices
- Reduces advertising and operating expenses
- Reduces stockouts and improves inventory management
Considerations in Setting Retail Prices
- Price sensitivity (價格敏感度)
- Measured by price elasticity (價格彈性)
- Competition
- Retailers can price above, below, or at parity with competition
- Cost
- Legal constraints
- Customer price sensitivity
- As price increases, sales will decrease because fewer customers feel the product is a good value
- Measured by price elasticity
Setting Retail Prices
- Retailers set prices by marking up the item's cost to yield a profitable gross margin
- Then, these cost-based prices are adjusted based on insights about customer price sensitivity and competitive pricing
Retail Price and Markup
- Retail price = Cost of merchandise + Markup
- Retail price = Cost of merchandise + Retail price x Markup %
- Retail price = Cost of merchandise / (1 – Markup %)
- Markups:
- Initial markup: retail selling price initially set for the merchandise minus the cost of the merchandise
- Maintained markup: the actual sales realized for the merchandise minus its costs
Profit Impact of Setting a Retail Price:
- Break-even analysis determines how much merchandise needs to be sold to achieve a break-even (zero) profit
- Fixed costs don't change with the quantity of product produced and sold
- Variable costs vary directly with the quantity of product produced and sold
Price Adjustments
- Retailers adjust prices over time (markdowns) and for different customer segments (variable pricing)
- Reasons for taking markdowns:
- Clearance markdowns to get rid of slow-moving, obsolete merchandise
- Promotional markdowns to increase sales and promote merchandise
- To generate cash to buy additional merchandise
Liquidating Markdown Merchandise
- Sell the merchandise to another retailer
- Consolidate the unsold merchandise
- Place merchandise on an Internet auction site
- Donate merchandise to charity
- Carry the merchandise over to the next season
Variable Pricing and Price Discrimination
- Individualized variable pricing (first degree of price discrimination): set unique price for each customer equal to customer's willingness to pay
- Self-selected variable pricing (second degree of price discrimination): offer the same price schedule to all customers
- Clearance markdowns for fashion merchandise result in higher prices at the beginning of the season than at the end
- Coupons offer a discount on the price of specific items when purchased at a store
- Rebates provide a discount on the final selling price returned to the buyer in the form of cash
- Price bundling: offering two or more different products or services for sale at one price
- Multiple-unit pricing: similar to price bundling, but with similar products or services
Pricing Techniques for Increasing Sales
- Leader pricing: certain items are priced lower than normal to increase customer traffic flow and/or boost sales of complementary products
- Price lining: a limited number of predetermined price points to simplify merchandising tasks and give buyers flexibility
- Odd pricing: prices ending in an odd number, typically a nine
Learn how retailers set prices based on customer price sensitivity, merchandise cost, and competitor pricing to maximize profits.
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