Retail Pricing Strategies

Reasons for Taking Markdowns

• Clearance markdowns: to get rid of slow-moving, obsolete merchandise
• Promotional markdowns: to increase sales and promote merchandise, increase traffic flow and sale of complementary products, and generate excitement through a sale
• 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: higher prices at the beginning of the season than at the end of the season
• Coupons: offer a discount on the price of specific items when they’re purchased at a store
• Rebates: provide a refund as a portion of the purchase price returned to the buyer in the form of cash

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 (initial retail selling price minus the cost of the merchandise) and Maintained markup (actual sales realized for the merchandise minus its costs)

Profit Impact of Setting a Retail Price: Break-Even Analysis

• Break-even analysis: determines how much merchandise needs to be sold to achieve a breakeven (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
• Break-even quantity = Fixed cost / (Actual unit sales price - Unit variable cost)

Price Adjustments

• Retailers adjust prices over time (markdowns) and for different customer segments (variable pricing)
• Reasons for taking markdowns:
  • Clearance markdowns
  • Promotional markdowns
  • To generate cash to buy additional merchandise

Retail Pricing Strategies

• High-Low Pricing: frequently discount the initial prices for merchandise through sales promotions
  • Advantages: increases profits through price discrimination, creates excitement, sells merchandise
• Everyday Low Pricing (EDLP): stresses continuity of retail prices at a level somewhere between the regular nonsale price and the deep discount sale price of the retailer’s competitors
  • Advantages: assures customers of low prices, reduces advertising and operating expenses, and improves inventory management

Considerations in Setting Retail Prices

• Price sensitivity: the percentage change in quantity sold divided by the percentage change in price
• Customer price sensitivity: as the price of a product increases, the sales for the product will decrease because fewer and fewer customers feel the product is a good value
• Competition: retailers can price above, below, or at parity with the competition
• Cost: retailers set prices by marking up the item’s cost to yield a profitable gross margin
• Legal constraint: retailers must consider legal constraints when setting prices

Pricing Techniques for Increasing Sales

• Leader Pricing: certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products
• Price Lining: a limited number of predetermined price points to eliminate confusion, simplify merchandising tasks, and give buyers flexibility
• Odd Pricing: pricing that ends in an odd number, typically a nine, to signal low prices