RETAIL PRICING

SMITU MALHOTRA
Value

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.

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 Retail Pricing

Pricing is only one variable of

value
Value = fn (Price, quality, etc )
PRICING RELATIONSHIP WITH
……..
• MERCHANDISE ( COGS OR MARGIN )
• LOCATION
• STORE IMAGE
• CUSTOMER SERVICE.
Pricing is a function of

• strategy,
• Product type,
• Product penetration,
• Product role
 Strategy
What message you want to connote??

Cost Leader

Differentiated Niche
Cost Leader EDLP

Differentiated High-low

Niche Demand
oriented
So, basic questions….
• What is EDLP?
• How well does EDLP work?
• What does it take to make EDLP work?
• When and how should EDLP be employed?
EDLP & Hi-Lo
• EDLP: The retailer charges a constant, lower everyday price with no temporary
price reductions (TPRs)
• Hi-Lo: The retailer charges higher prices on an everyday basis, but runs
frequent promotions where prices are reduced to below EDLP level
EDLP- some observations
• This strategy 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.
• EDLP does not necessarily mean the lowest price in the
market.
• A more accurate description of this strategy is everyday
same prices because the prices don’t have significant
fluctuations.
• Some retailers have adopted a low price guarantee
policy in which they guarantee that they will have the
lowest possible price for a product or group of products.
The guarantee usually promises to match or better any
lower price found the local market, and includes a
provision to refund the difference between the seller’s offer
price and the lower price.
Why EDLP?

• Brings credibility to prices! Frequent “sales” leads to customers getting to have a

“lower” reservation price.
• More level demand: Crowding during sales avoided
• Easier sales forecasting and operations management
• Lower promotion costs: Money can now be used for Brand Building rather than sales
promotion; Just see exhibit 10. Randall’s out-of-pocket ad. Exp. was $14.6 million,
representing $4/capita/year (3.7 million inhabitants, 1 st para)—implies a national
budget of 1 billion!
• More level service: “Crowding out” is avoided
• Stable prices mean comparison Shopping reduced leading to loyalty???
• Focus shifts from sales to merchandise management.
• Frequent promotions can lead to customer dissatisfaction
• Employee pricing errors get hidden if products are frequently promoted
Hi-Lo
• With this strategy, retailers offer prices that are sometimes above their
competitors EDLP but they use advertising to promote frequent sales.
 Advantages of Hi-Lo

• Discriminatory pricing possible and therefore same

merchandise can be sold to multiple segments at
different times.
• Powerful tool in the hands of sales people.
• Motivating customers as well.
• Sign of Quality: The retailer can use the “Hi” price as
an anchor. Just because a sale is on for Louis Phillip
shirts, does not make it a poor quality shirt. So the
initial impression of quality given by the higher price
on the merchandise continues even when the price
are lowered leading to perceptions of bargain.
Pricing Strategies
EDLP Hi-Lo
• Builds loyalty – • Higher profits –
guarantees low prices
price
to customers
discrimination
• Lower advertising
costs • More excitement
• Better supply chain • Build short-term
management sales and generates
• Fewer stockouts traffic
• Higher inventory turns

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Other concepts
 Using Markups

• Markup:
Is the selling price of the merchandise less its
cost, which is equivalent to gross margin
• Used as guide in pricing and provide desired
operating profit.
Relationship of Markups Expressed on
Selling Price and Cost
 Calculating Markups

Percentage of markup on selling price

= Selling Price – Cost
Selling Price

Percentage of markup on cost

= Selling Price – Cost
Cost
• If you know that a particular type of item could be
sold for $8 per unit and you need a 40 percent
markup on selling price to meet your profit
objective, then how much would you be willing to
pay for the item?
• Percentage of markup on selling price =
(SP -C)/SP
• 40% = ($8 - C)/$8
• C = $4.80
• Therefore, you would be willing to pay $4.80 for the item. If
the item cannot be found at $4.80 or less, it is probably not
worth stocking.
USING MARKUPS
• EXAMPLE 5-14
•

• A buyer for a children's department needs

$12,000 worth of merchandise at retail for the
month. She has already purchased 200 dresses
that cost $ 18.00 each and will retail for $30.00
each. What markup percent must she obtain on
the remaining purchases in order to average a
54% markup for the month?
• A buyer plans to purchase 300 pairs of slacks for
an anniversary sale to retail for $26.00 each. The
buyer has already placed an order for 170 pairs at
$12.00 each (cost). What is the most he can pay
for each remaining pair of slacks if he is to
achieve the department's markup goal of 52%?
Cumulative Markup
• An aggregate markup percent on group of goods with varying
markups
• = total markup x 100

total retail dollars

E.G – ties to be sold at 20/-. Ties bought as follows

100 ties at 9.25
200 ties at 9.50
200 ties at 9.75
Cumulative markup % = 100x10.75+200x10.50+ 200x
10.25/500x20 = 52.3%
• Eg 5-24

• The shoe department showed an opening inventory of

$80,000 at retail with a markup of 48%. During the month,
purchases were received in the amount of $30,000 at cost
that were marked up 52%. Find the cumulative markup
percent for the department.
Initial and Maintained Markups

• Initial markup = retail selling price initially

placed on the merchandise - cost of goods
sold
• Maintained markup = Actual sales that you
get for the merchandise minus cost of goods
sold
Setting Retail Price Based on Costs
Retail Price
$1.00

Margin
$.40
Cost of
Merchandise
$.60
Markup as a
Percent of Retail
Price 40%
= $.40/$1.00

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 Initial and Maintained Markup
Initial Retail
Reduction Price $1.00
s $.10
Maintained
Markup Cost of
$.30 Merchandise
$.60
Maintained Markup as
a Percent of Retail
Price 30% =
$.30/$1.00

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• The level of the markup depends on
• the product’s traditional markup,
• the supplier’s suggested list price,
• inventory turnover,
• competition,
• rent and other overhead costs,
• the extent to which a product must be serviced,
and
• the selling effort.
• Markup may also be planned by this formula:
•
• Initial Markup percentage
• (at retail) = retail operating expenses+profit +reductions
net
sales+reductions
•
• Initial markup percentage = (Operating expenses + Net profit + Markdowns

+ Stock shortages + Employee and customer discounts + Alterations costs - Cash

discounts)/(Net sales+ Markdowns + Stock shortages + Employee and customer
discounts)
• Initial markup percentage = (Gross margin + Alterations costs + Reductions)/
(Net sales + Reductions)
• Assume that a retailer plans to achieve net sales of $1 million and expects
operating expenses to be

$270,000. The net profit goal is $60,000. Planned reductions include $80,000
for markdowns, $20,000 for merchandise shortages, and $10,000 for employee
and customer discounts. Alteration costs are expected to be $20,000, and cash
discounts from suppliers are expected to be $10,000. What is the initial markup
percentage that should be planned? What is the cost of merchandise to be sold?
• Initial markup percentage = ($270,000+ $60,000 + $80,000 þ +20,000+
$10,000 + $20,000-$10,000)/($1,000,000+ $80,000 + $20,000 + $10,000)
= 40.54%
 What should be the initial markup percent in a
department having the following figures?

Net sales $170,000

Profit
• Sum 5-20 6,000
Expenses 80,000
Employee 400
discounts
Markdo 5,200
wns
Shortage 600
s

52.33
In planning initial markups, it is useful to know some of the
general rules of markup determination. These are
summarized as follows:

• 1. As goods are sold through more retail outlets, the

markup percentage decreases. On the other hand, selling
through few retail outlets means a greater markup
percentage.
• 2. The higher the handling and storage costs of the goods,
the higher the markup should be.
• 3. The greater the risk of a price reduction due to the
seasonality of the goods, the greater the magnitude of the
markup percentage early in the season.
• 4. The higher the demand inelasticity of price for the
goods, the greater the markup percentage.

Markup Determinants
Reductions

• Markdowns (Sales)
• Discounts to employees
• Inventory shrinkage due to
shoplifting and employee theft

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 PRICE CHANGES

• Markdown:
Is any reduction in the price of an item from its
initially established price
• Markdown Percentage:
Markdown percentage = Amount of
reduction/Original selling price
Reasons for Markdown
• Get Rid of Slow-Moving, Obsolete,
uncompetitively priced merchandise
• Increase Sales and Profits through Price
Discrimination
• Generate cash to buy better selling merchandise
• Increase traffic flow and sale of complementary
products and generate excitement through a Sale
• Four basic errors can occur:
• (1) buying errors,
• (2) pricing errors,
• (3) merchandising errors, and
• (4) promotion errors.
OTHER PRICE CHANGES
• TPRs – TEMPORARY PRICE REDUCTIONS
• ADDITIONAL MARKUP
• EXAMPLE 6-5

• For a midnight sale, 24 jackets were reduced from

S80 to $60. During the sale, 14 jackets were sold.
After the sale, the remaining 10 jackets were re-
marked to the original $80 price. Determine the
total markdown, markdown cancellation, and net
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