Price is the value placed on what is exchanged,

it is the point at which the exchange between the buyer &seller takes place, where supply& demand are equal. Arriving at the right price for a product or service is one of the most difficult task today various factors need to be considered before setting up an appropriate price. Pricing is an integral part of retail strategy and cannot work in isolation. Cost and Operating expenses need to be considered while establishing the retail price.

Price is an integral element of retail

marketing mix. it is the factor which is the source of revenue for the retailer. The price of a merchandise also communicates the image of the retail store to the customers. Various factors like the target market, store policies competition and economic condition need to be taken into consideration while setting up an appropriate price for a product.

Factors to be considered while setting up an appropriate price are:

The primary factor that need to be considered while

arriving at a pricing strategy is the business model that the retailer has chosen to follow. The next factor to be taken into consideration is the demand for the product and the target market. The store policies and the store image. Competition for the product & competitors price for the similar products. The economic conditions prevalent at times play a major role in pricing policy.

FACTORS TO BE CONSIDERED WHILE PRICING A PRODUCT.

Retail business model

Uniquenes s of the product

Nature of competitio n

Store policies and image

Economic conditions

The first element to be considered in the cost of goods which is the cost of merchandise and various other expenses, which are involved in the movement of goods from the manufacturer to the actual store. These expenses may be fixed or variable.

Fixed costs are referred to as overhead, are the expenses that dont vary according to the production amounts-such as rent for office space, office equipments,insurance,utilities etc.

These are the expenses that do vary with the amount of service provided or goods produced. They include costs such as hourly pay for a contractor on a specific project, raw-materials etc.

Before determining the price of the product, one needs to determine the cost of the product and take into consideration the Break-Even point.

It is the point at which the retailer neither

makes or loses money in producing a product or delivering a service. It is the process used to uncover the break even numbers. Before calculating the break-even point, it is necessary to determine the fixed as well as the incremental cost per unit[variable cost]

To calculate the Break-even point, the point at which the business will neither make a profit or a loss, the following formula can be used:

Break even revenue =

Fixed costs 1-Variable cost per unit

It is the difference between the cost of the product and the final

selling price. The mark up can be in rupee terms or in terms of percentage. Mark ups can also be calculated on the cost of the product or the retail price. A markup can be expressed as an either a rupee amount or as a percentage of selling price. A rupee markup occurs when the retailer adds a fixed amount to the cost of the product.

a) Markup% (at retail)=(retail selling price-merchandise cost) Determines the retail selling price. b) Markup% (at cost)=(retail selling price-merchandise cost) Determines the merchandise cost.

Cumulative markup:

The cumulative markup is calculated for a group of products.

Initial markup:

It is the difference between the cost price of the merchandise and the initial retail price.

Maintained markup: It is the difference between the gross merchandise cost and the actual selling price.

The pricing policy adopted by the retailer can be: Cost-oriented pricing Demand-oriented pricing Competition-oriented pricing

Cost-oriented pricing:
In Cost-oriented pricing, A basic mark-up is

added to the cost of the merchandise to arrive at a price.

Here retail price is considered to be the function

of cost and markup.

Thus,

Retail price = Markup =

Cost + Markup Retail price - Cost

Demand-oriented pricing
This policy focuses on the quantities that the

customers would buy at various prices. It largely depends upon the perceived value attached to the product by the customer. As, sometimes high priced product is perceived as being of high quality and a low priced product is perceived as being of low-quality. An understanding of the target market and the value proposition is the key to demand oriented pricing.

Competition-oriented pricing
When the prices adopted by the competitors play

a key role in determining the price of the product, then it is said to be competition oriented pricing.
Here the retailer may price the product at par with

the competition.
That is; above the competitors price or below the

price.

Pricing Strategies

Price
This is the only element in the marketing mix that

brings in the revenues. All the rest are costs

PRICING
You pay rent for your apartment, tuition for your education, and a fee to your dentist or physician. The airline, railways, taxi and bus companies charge you a fare; the local utilities call their price a rate;

and the local bank charges you interest for the

money you borrow. The guest lecturer is paid an honorarium and the

government official takes a bribe to pass a file

which was his job anyway.

Pricing Strategies

Penetration Pricing

Penetration Pricing
Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars, food stuffs,

household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market

Market Skimming

Market Skimming
High price, Low volumes Skim the profit from the market

Suitable for products that have short life

cycles or which will face competition at some point in the future (e.g. after a patent runs out)
Examples include: jewellery, digital

technology, new DVDs.

Many are predicting a firesale in laptops as supply exceeds demand.

Value Pricing

Value Pricing
Price set in accordance with

customer perceptions about the value of the product/service

Examples include status

products/exclusive products

Companies may be able to set prices according to perceived value.

Loss Leader

Loss Leader
Goods/services deliberately sold below cost to encourage sales

elsewhere
Typical in supermarkets, e.g. at Christmas, selling bottles of gin at $

3 in the hope that people will be attracted to the store and buy other things
Purchases of other items more than covers loss on item sold

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions Classic example Rs 3999.99 instead of Rs 4000!

Going Rate (Price Leadership)

Going Rate (Price Leadership)

In case of price leader, competitor have difficulty in competing on price

too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
Where competition is limited, going rate pricing may be applicable

banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

Tender Pricing

Tender Pricing
Many contracts awarded on a tender basis

Firm (or firms) submit their price for carrying out the work
Purchaser then chooses which represents best value Mostly done in secret

Price Discrimination

Price Discrimination
Charging a different price for the same

good/service in different markets

Requires different price elasticity of

demand in each market

Prices for rail travel differ for the same journey at different times of the day

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory Pricing
Deliberate price cutting or offer of free gifts/products to force

rivals (normally smaller and weaker) out of business or prevent new entrants
Anti-competitive and illegal if it can be proved

Absorption/Full Cost Pricing

Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to cover

both fixed and variable costs

Marginal Cost Pricing

Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer item of

production MC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively high Allows variable pricing structure e.g. on a flight from London to New York providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost Pricing

Example:

Aircraft flying from Bristol to Edinburgh Total Cost (including normal profit) = 15,000 of which 13,000 is fixed cost* Number of seats = 160, average price = 93.75 MC of each passenger = 2000/160 = 12.50 If flight not full, better to offer passengers chance of flying at 12.50 and fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

Contribution Pricing
Contribution = Selling Price Variable (direct costs)

Prices set to ensure coverage of variable costs and a contribution

to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances

Target Pricing

Target Pricing
Setting price to target a specified profit level
Estimates of the cost and potential revenue at different

prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100

Cost-Plus Pricing

Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up
AC = Total Cost/Output

Influence of Elasticity

Retailers View Price in Terms of:

1.
2. 3. 4.

Profitability Sales Volume Consumer traffic Store image

Setting the Retail Price

Price-setting objectives:
Sales Profit Competition

Price-setting methods:
Markup Competitive Vendor

Price-setting determinants:
Demand Competition Cost Product Legal

Price-setting policies:
One-price Variable-price Odd-price Unit-price

Price Lining

Adjusting the Retail Price

Discount adjustments Markon Adjustments Markdown Adjustments Causes of markdowns Timing of markdowns Size of markdowns Markdown strategies Promotional Price-line Markdown Control

Price Can be Used to Communicate

Status
Snob appeal Quality Low purchase risk Economy

Merchandise Cost: A Major Determinant of Price

Gross Invoice Price Trade Discounts Quantity Discounts Seasonal Discounts Other Discounts = Net Invoice Price
Net Invoice Price Cash Discounts + Transportation Charges + Workroom Expenses = Merchandise Cost Price = Merchandise Cost + Profit

Product Considerations
Different products have the ability to command

different prices at different times and in different locations. Must consider:

Perishability
Product quality Product uniqueness

Retailers Compute Markup on Retail Selling Price for Several Reasons:

Psychological Reasons
Markup on selling price is

Inventory Reasons
Beginning-of-month, End-of-

always lower than a markup on cost

month and purchases are calculated at retail

Comparison Reasons
Between store operations With trade statistics

Emphasis Reasons

With expressions of financial

operating ratios which are computed as a % of sales

Markup
Initial Markup: What you hope to receive!
Maintained Markup: What you actually receive! Gross Margin = Maintained markup Initial Markup % is the key element in guiding

retailers price setting decisions

Adjusting the Retail Price

1.

Three Types
Discounts: reductions granted to employees and special customers 2. Markons: Markups taken after the initial price is set 3. Markdowns: Downward adjustments in the original selling price Markdown % = (original price reduced price) / reduced price Remember: Retail Reductions = Markdowns + shortages + employee discounts + customer discounts

Causes of Markdowns
Buying related causes: Assortment error Timing error: late shipment or ordering too much Misjudging quality Supplier error: late, damaged or incorrect shipments Selling related causes: Pricing error: hence little consumer interest Using markdowns to stimulate sales Aggressive selling: trading customer up, misleading claims, returns

Causes of Markdowns (cont.)

Operationally related causes: Damaged or dirty merchandise Odd lots Market shifts

Factors Affecting Timing of Markdowns

Type of merchandise Store image Length of selling season Nature of target customer

Size of initial markup

Availability of selling and storage space Retailers sales promo policies - mini sales vs. big-event sales