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RetailManagement 12

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21 views34 pages

RetailManagement 12

Uploaded by

Astir Le
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Retail Management

Module 12: Retail Pricing and Sales Strategy


Pricing in Retail
Learning Outcomes: Pricing in Retail

12.1 Identify how pricing fits into the goals of a retail establishment
• 12.1.1 Define value
• 12.1.2 Differentiate between basic retail pricing strategies
• 12.1.3 Explain how pricing is integrated with the rest of the retail mix strategy
Defining Value

For customers:
• value is the perceived monetary worth of the combination of product, service, and utility.

“Value proposition” is a term used to describe an innovation, service, or feature intended to


make a company or product attractive to customers.

For retailers, value can take on even more meaning


Activity

Let’s imagine that you are considering jumping into the retail industry by opening a candy
store. You would have a myriad of things to address in your business plan. Make a list of your
responses to each question with a partner.

Who are your competitors? How much consumer revenue is currently being devoted to candy
sales in the existing market? What are the demographics of the customer base? How much is
the average purchase by the customer base? Where are the potential locations for your shop?
Retail Pricing Strategies

• Markup
• Keystone pricing
• Premium
• Discount
• Psychological pricing
• Bundle
• Tiered pricing
Pricing and the Retail Mix

• Product
• Promotion
• Presentation
• Personnel
• Place
• Pricing
Pricing Objectives
Learning Outcomes: Pricing Objectives

12.2 Explain how retailers determine pricing objectives


• 12.2.1 List some external factors that impact retail pricing
• 12.2.2 Match various pricing strategies with the business objective it represents
• 12.2.3 Define price elasticity
• 12.2.4 Calculate the price elasticity of a product based on the given situation
External Factors and Retail Pricing

What are three external factors of retail pricing?

• Competition
• Channel
• Geography
Pricing Strategies

Growing revenue is a common business objective


• Create comprehensive strategy across all dimensions of the company
• Expect that retailer would become more aggressive in pricing

• Increasing profit: raising margins through premium pricing and less aggressive promotion

• Penetration into a new market area: distribute existing product assortment, adding temporary
”loss leaders”
Price Elasticity

• Classic economic principle that helps us understand how much a change in price will affect
market behaviors

• Important to pricing decisions as it helps understand whether raising or lowering prices will
be better

• Denotes large impact on demand due to changes in price


Practice Question 1

What is the purpose of studying price elasticity in a retail context?


Price Elasticity Calculations

Formula for computing growth rate


• Percentage change = Change in quantity / Quantity

Price elasticity of demand


• Percentage change in quantity / percentage change in price

Midpoint method
• % change in quantity > % change in price > 1 = Elastic demand
• % change in quantity > % change in price <1 = Inelastic demand
Product Pricing Methods
Learning Outcomes: Product Pricing Methods

12.3 Use various pricing methods to determine product pricing


• 12.3.1 Using cost-oriented pricing equations, calculate the retail price, the cost, and the
markup percentage of a product
• 12.3.2 Calculate the break-even point for retail product sales
• 12.3.3 Explain how a retailer can use competition-oriented pricing to determine the price of
a product
• 12.3.4 Describe how retailers use demand-oriented pricing
Cost-Oriented Pricing Equations

Must know markup objective: markup is difference between what retailer paid and price at
which they sell it

Example: for a target 53% markup on item costing $9.00


• Cost complement = 100% - Markup
• Cost Complement = 100% - 53% = 47% or .47
• Retail price = $9.00 / .47 = $19.15
Break-Even Point

Gross margin dollars: raw profit of retail items after they sell
• Calculation is markup multiplied by units sold minus price adjustments

Gross margin percent


• Gross margin dollars – cost / sales dollars generated
• ($18,750 - $10,000 = $8,750) / $20,000 = 43.8% or .4375

Break-even point:
• Fixed Costs / Gross Margin Percentage
• $25,000 / .4375 = $57,143
Competition-Oriented Pricing

• Uses competitor’s pricing, promotions, and inventory position


• Today, prices are very transparent to most consumers
• Prevalent where products are easily identifiable

• Creates counter-strategy where retailers avoid direct comparison

• Sounds like a simple strategy, but there could be thousands of data points to track down
Demand-Oriented Pricing

Based on known periods of high or low demand and elasticity of price during those periods
• Example: pricing and selling dynamics at local farmer’s market
• Example: airline industry

Same demand-oriented pricing exists in retail industry


Practice Question 2

What is an example of demand-oriented pricing in a retail operation?


Price Adjustment Techniques
Learning Outcomes: Price Adjustment Techniques

12.4 Examine common price adjustment techniques


• 12.4.1 Understand the three types of price adjustments used by retailers
• 12.4.2 Explain how retailers can reduce the amount of product that ends up in markdowns
• 12.4.3 Summarize the options for liquidating markdown merchandise
Markdown Optimization Software

Promotion

Price protection

Markdown

Retailers may have set schedule of when markdowns are taken to ensure inventory will be
eliminated by target date
Reducing Product Markdowns

Remember that planning and purchasing of retail assortments is art and science
• Having a strong supply chain can help reduce lead time
• Keep timely receipts of a product
• Note the distribution of goods
• Quick reaction by merchants to show sellers
• Common denominator = execution
Liquidating Markdown Merchandise

• Once retailer decides to markdown product, it remains in inventory until it is sold out
• First method: set process, including markdown percent thresholds, that will be used to sell
through markdown merchandise
• Sell markdown goods in large chunks to third-party liquidation companies
• Retailers have designated channels within company to dispose of markdown products
Pricing Techniques
Learning Outcomes: Pricing Techniques

12.5 Examine pricing techniques used by retailers to increase sales and profits
• 12.5.1 Differentiate between first, second, and third-degree price discrimination
• 12.5.2 Define loss leader
• 12.5.3 Illustrate the technique of price lining
• 12.5.4 Explain the concepts of KVC and KVI and their impact on retail pricing
Loss Leader

• Pricing strategy where product is sold at price at or below market cost


• Describes concept that item is offered for sale at reduced price
• Tries to maintain current analysis of margins
• Examples: sale of diapers at toy store chains, large home improvement stores offer larger tools,
telecommunication company stores sell smartphones at discounted prices
Price-Discrimination

Exists within a market when sales of identical goods or services are sold at different prices by
same provider
• Goal is for seller to make most profit possible

• Three “degrees” of price discrimination:


• First: seller of good or service must know maximum price
• Second: price of good or service varies
• Third: price varies according to age, sex, location, status
Price Lining

• Technique used to group common items at set price-points

• Fits well with traditional retail assortment structure

• Keep number of retail price points to minimum despite disparate costs from vendors

• Does not require set number of price points


History of Odd Pricing

In the 1970s and 1980s, mass merchants developed the concept of “Key Items”
• Identified as way to ensure that products perceived to be most important to customer base
are given extra attention
Key item strategy involved: management inspection, product development, store presentation
guidelines, promotion plans, pricing against competition
• Example: pocket t-shirt from 190s at Gap Stores
• High quality, many different colors
KVC (Key Value Categories) and KVI (Key Value Items) expanded due to advances in data
analytics
Practice Question 3

• What do the acronyms KVC and KVI mean?


Quick Review

• What is the set of tactical pricing techniques?


• What are the Six P’s of Retail?
• Why study the basic economic principles in retail?
• What does competition-oriented pricing show retailers?
• Why do price adjustments support business objectives?

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