Retail Pricing Strategies

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