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Questions and Answers
What happens to the sales of a product as its price increases?
What is price elasticity?
Why do retailers collect price data about their competitors?
How do retailers typically set prices?
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What is the purpose of branding strategies in retailing?
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What is the result of increasing the price of a product on customer behavior?
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Why do retailers consider the prices being charged by competitors?
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What is the initial purpose of adjusting cost-based prices?
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What is the goal of retailers when setting prices?
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What is the formula for retail price when markup is given as a percentage?
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What is the main reason why pricing decision is important in retailing?
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What is the main purpose of break-even analysis?
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What type of costs vary directly with the quantity of product produced and sold?
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What is the formula for value in retailing?
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What is the primary objective of high-low pricing strategy?
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What is the purpose of markdowns, according to the text?
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What is the main advantage of everyday low pricing (EDLP) strategy?
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What is the term for the actual sales realized for the merchandise minus its costs?
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What is price elasticity, according to the text?
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What is the primary consideration in setting retail prices, according to the text?
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What is the purpose of a low price guarantee policy?
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What is the relationship between retailers' prices and their competitors', according to the text?
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What is the main objective of leader pricing strategy?
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What is price bundling in retailing management?
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What is the term for pricing items with odd numbers, typically ending in nine?
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What is the benefit of price lining according to the text?
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What is the main difference between price bundling and multiple-unit pricing?
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Why do consumers perceive prices ending in nine as low prices?
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Which of the following is a reason for taking clearance markdowns?
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What is one possible way to liquidate markdown merchandise?
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What is the main goal of promotional markdowns?
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What is the main challenge of individualized variable pricing?
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What is self-selected variable pricing?
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What is the purpose of coupons?
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What is the difference between clearance markdowns and promotional markdowns?
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What is the purpose of rebates?
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Study Notes
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
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Description
This quiz covers the importance of pricing decisions in retailing, including the impact of customer alternatives and perceived value. It also explores two basic retail pricing strategies.
