Lecture Retailing management (6/e): Chapter 15 - Pricing. This chapter presents the following content: Why is pricing important? Considerations in setting retail prices, price setting approach used by retailers, types of price discrimination, how can retailers reduce price competition?...
Chapter 15 Pricing McGrawHill/Irwin Retailing Management, 6/e Copyright © 2007 by The McGrawHill Companies, Inc. All rights reserved 15- Merchandise Management Planning Merchandise Assortments Retail Communication Mix Pricing Buying Systems Buying Merchandise 15- Why is Pricing Important? Pricing decisions is important because customers have alternatives to choose from and are better informed Customers are in a position to seek good value Value = perceived benefits price So, retailers can increase value and stimulate sales by increasing benefits or reducing price 154 Considerations in Setting Retail Prices The four factors retailers consider in setting retail prices: • • • • The price sensitivity of consumers The cost of the merchandise and services Competition Legal restrictions 155 Considerations in Setting Retail Prices 15- Price Setting Approach Used by Retailers • Need to set price for 1000’s of products many times during year • Set prices based on pre-determined markup and merchandise cost • Make adjustments to markup price based on customer price sensitivity and competition 15- Price Sensitivity and Demand When price increases sales can decrease as fewer customers feel the product is a good value 15- Types of Price Discrimination • First Degree – Set unique price for each customer equal to customer’s willingness to pay – Auctions, Personalized Internet Prices • Second Degree – Offer the same price schedule to all customers – Quantity discounts – Coupons – Markdowns Late in Season – Early Bird Special – Over Weekend Travel Discount • Third Degree – Charge different groups different prices – Kids Menu – Seniors Discounts 15- Results of Price Experiments Quantity Sold at Different Prices 1510 1546 Advantages of the Hi/low Pricing Strategy Increases profits through price discrimination Sales create excitement Sells merchandise PhotoLink/Getty Images Hi-Lo Pricing • Most Department Stores, Publix, Kmart • Benefits to Consumer – Spend Time to Find Lowest Price • Benefits to Retailer – Maximize Profits Price Discrimination – Problem: Trains People to Buy on Deal 1547 Advantages of EDLP Pricing Strategy Assures customers of low prices Reduces advertising and operating expenses Reduced stockouts and improved inventory management The McGraw-Hill Companies, Inc./Luke David, photographer 1548 Everyday Low Pricing • Wal-Mart, Category Specialists, Dillards, Food Lion • Benefits to Consumers – Assured of Low Price on Every Visit – Less Stockouts • Benefits to Retailer – Lower Advertising Expense – Lower Labor Costs 1549 Pricing Strategies EDLP • Builds loyalty – guarentees low prices to customers • Lower advertising costs • Better supply chain management – Fewer stockouts – Higher inventory turns 1550 Hi-Lo • Higher profits – price discrimination • More excitement • Build short-term sales and generates traffic Determining Service Quality 1551 Customers are likely to use price as an indicator of both service costs and service quality This can depend on several factors: Other information available to the customer When service cues to quality are readily accessible When brand names provide evidence of a company’s reputation When the level of advertising communicates the company’s belief in the brand The risk associated with the service purchase Royalty-Free/CORBIS Variable Pricing • Application of price discrimination – By location – zone pricing – Early Bird Special – Seniors Discounts – Over Weekend Travel Discount – Quantity Discount • Electronic channel has potential for charging a different price to each customer 1552 Using Price to Stimulate Sales • Leader Pricing might attract cherry pickers • Price Lining • Odd Pricing 1553 1554 Leader Pricing • Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products • Best items: purchased frequently, primarily by price-sensitive shoppers • Examples: bread, eggs, milk, disposable diapers Dennis Gray/Cole Group/Getty Images Allan Rosenberg/Cole Group/Getty Images Ryan McVay/Getty Images Price Lining 1555 • A limited number of predetermined price points • Ex: $59.99 (good), $89.99 (better), and 129.99 (best) • Benefits: – Eliminates confusion of many prices – Merchandising task is simplified – Gives buyers flexibility – Can get customers to “trade up.” Benefits of Price Lining 1556 • Confusion that arises from multiple price choices is eliminated • The merchandising talk is simplified • It gives buyers greater flexibility • It gives can be used to get customers to “trade up” to a more expensive model Guidelines for Price-ending Decisions 1557 When the price sensitivity of the market is high, it is advantageous to raise or lower prices so they end in high numbers like When the price sensitivity of the market is NOT high, the risk to one’s image of using is likely to outweigh the benefits Even dollar prices and round numbers are appropriate Upscale retailers appeal to price-sensitive segments of the market through periodic discounting Combination strategy works best: break from standard of using round number endings to use endings when communicating discounts and special offers Odd Pricing 1558 • A price that ends in an odd number ($.57)or just under a round number ($98) • Retailers believe practices increases sales, but probably doesn’t • Does delineate: – Type of store (downscale store might use it.) – Sale Internet and Price Competition The Internet offers unlimited shopping experience Seeking lowest price? Use shopping bots or search engines These programs search for and provide lists of sites selling what interests the consumer (c) image100/PunchStock Retailers using the electronic channel can reduce customer emphasis on price by providing services and better information 1559 1560 The Three Most Important Things in Retailing Location, location, location Now, it is more : Information, information, information!! ... Profit = Sales - COGS-Var Cost - Fixed Cost = Sales - COGs% * Sales - VC%*Sales - FC Break-even Sales * (1-COGS% -VC%) = FC Break-even Sales = FC/(1-COGS% -VC%) Break-even Sales = FC/(GM%-VC%) = $80,000/(. 2-. 1)... price – old price)/(old price) = (1100 -1 50 0)/1100 (1 0-9 )/9 = -0 .2667 1111 = -2 .4005 151 3 Price Elasticity 151 4 For products with price elasticities less than -1 , the price that maximizes profits... Breakeven % = 100 x (-% price change) Sales Change % initial margin -% price change 39.78% = The McGraw-Hill Companies, Inc/Ken Karp photographer 100 x – (-1 6.67) (7/12) + (-1 6.6) 153 2 153 3 Using Breakeven