Retail Pricing Strategies

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Questions and Answers

What happens to the sales of a product as its price increases?

  • The sales will decrease (correct)
  • The sales will increase
  • The sales will remain the same
  • There will be no effect on sales

What is price elasticity?

  • The percentage change in quantity sold
  • The percentage change in quantity sold divided by the percentage change in price (correct)
  • The percentage change in price
  • The sum of percentage change in price and quantity sold

Why do retailers collect price data about their competitors?

  • To reduce price competition
  • To set higher prices
  • To see if they need to adjust their prices to remain competitive (correct)
  • To determine the cost of merchandise

How do retailers typically set prices?

<p>By marking up the item's cost to yield a profitable gross margin (A)</p> Signup and view all the answers

What is the purpose of branding strategies in retailing?

<p>To offer unique merchandise and reduce price competition (C)</p> Signup and view all the answers

What is the result of increasing the price of a product on customer behavior?

<p>Fewer customers will feel the product is a good value (A)</p> Signup and view all the answers

Why do retailers consider the prices being charged by competitors?

<p>To adjust their prices to remain competitive (B)</p> Signup and view all the answers

What is the initial purpose of adjusting cost-based prices?

<p>To consider customer price sensitivity and competitive pricing (C)</p> Signup and view all the answers

What is the goal of retailers when setting prices?

<p>To maximize profits (B)</p> Signup and view all the answers

What is the formula for retail price when markup is given as a percentage?

<p>Cost of merchandise + Retail price x Markup % (D)</p> Signup and view all the answers

What is the main reason why pricing decision is important in retailing?

<p>Because customers are in a position to seek good value (C)</p> Signup and view all the answers

What is the main purpose of break-even analysis?

<p>To determine how much merchandise needs to be sold to achieve a breakeven profit (D)</p> Signup and view all the answers

What type of costs vary directly with the quantity of product produced and sold?

<p>Variable costs (A)</p> Signup and view all the answers

What is the formula for value in retailing?

<p>Value = Perceived benefits / Price (C)</p> Signup and view all the answers

What is the primary objective of high-low pricing strategy?

<p>To increase profits through price discrimination (D)</p> Signup and view all the answers

What is the purpose of markdowns, according to the text?

<p>To adjust prices over time and for different customer segments (C)</p> Signup and view all the answers

What is the main advantage of everyday low pricing (EDLP) strategy?

<p>It assures customers of low prices (A)</p> Signup and view all the answers

What is the term for the actual sales realized for the merchandise minus its costs?

<p>Maintained markup (B)</p> Signup and view all the answers

What is price elasticity, according to the text?

<p>A measure of price sensitivity (A)</p> Signup and view all the answers

What is the primary consideration in setting retail prices, according to the text?

<p>Price sensitivity (B)</p> Signup and view all the answers

What is the purpose of a low price guarantee policy?

<p>To assure customers of low prices (C)</p> Signup and view all the answers

What is the relationship between retailers' prices and their competitors', according to the text?

<p>Retailers can price above, below, or at parity with their competitors (A)</p> Signup and view all the answers

What is the main objective of leader pricing strategy?

<p>To attract customers and increase sales of complementary products (B)</p> Signup and view all the answers

What is price bundling in retailing management?

<p>Offering different products or services for sale at one price (C)</p> Signup and view all the answers

What is the term for pricing items with odd numbers, typically ending in nine?

<p>Odd pricing (A)</p> Signup and view all the answers

What is the benefit of price lining according to the text?

<p>Eliminates confusion of many prices (B)</p> Signup and view all the answers

What is the main difference between price bundling and multiple-unit pricing?

<p>Price bundling offers different products, while multiple-unit pricing offers similar products (C)</p> Signup and view all the answers

Why do consumers perceive prices ending in nine as low prices?

<p>Because consumers perceive it as rounding down to the previous dollar (C)</p> Signup and view all the answers

Which of the following is a reason for taking clearance markdowns?

<p>To get rid of slow-moving, obsolete merchandise (C)</p> Signup and view all the answers

What is one possible way to liquidate markdown merchandise?

<p>Sell the merchandise to another retailer (C)</p> Signup and view all the answers

What is the main goal of promotional markdowns?

<p>To increase sales and promote merchandise (D)</p> Signup and view all the answers

What is the main challenge of individualized variable pricing?

<p>It is difficult to assess each customer's willingness to pay (A)</p> Signup and view all the answers

What is self-selected variable pricing?

<p>Offering the same price schedule to all customers (D)</p> Signup and view all the answers

What is the purpose of coupons?

<p>To offer a discount on the price of specific items (B)</p> Signup and view all the answers

What is the difference between clearance markdowns and promotional markdowns?

<p>Clearance markdowns are used to get rid of inventory, while promotional markdowns are used to drive sales (D)</p> Signup and view all the answers

What is the purpose of rebates?

<p>To provide a refund to customers as a portion of the purchase price (B)</p> Signup and view all the answers

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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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