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WEEK 6: RETAIL PRICIN G

LEARNING OBECTIVES:
LO1: Discuss the factors a retailer should consider when establishing pricing objectives and policies
LO2: Describe the differences between the various pricing strategies available to the retailer
LO3: Describe how retailers calculate the various markups
LO4: Discuss why markdown management is so important in retailing and describe some of the errors
that cause markdowns
LO1: What factors should a retailer consider when establishing pricing objectives and policies?
1. PRICING OBJECTIVES
a. Profit-Oriented Objectives
b. Target Return: is a pricing objective that states a specific level of profit, such as percentage of
sales or return on capital invested, as an objectives
c. Profit Maxim cz10/12/2015VSsewr334ization: is a pricing objective that seeks to obtain as much
profit as possible. A retailer should seek to set prices, not to get as much as possible from each
customer, but at a level conducive to build customer loyalty and withstand the competition.
However, in some cases, a retailer may have a temporary monopoly and want to take advantage
of it. Now let us see how pricing can be done through:
a. Skimming: is a pricing objective which price is initially set high merchandise to skim the
cream of demand before selling at more competitive prices
b. Penetration: is a pricing objective in which price is set at a low level in order to
penetrate the market and establish a loyal customer base.
d. Sales-Oriented Objectives: two of the objectives most commonly used in retailing are growth in
market share and growth in dollar sales.
e. Status Quo Objectives: retailers who are happy with their market share and level of profits
sometimes adopt status quo objectives or dont rock the boat pricing policies. Hence, they
prefer to compete on quality of food or merchandise, service, location instead of price.
2. PRICING POLICIES
Pricing policies are rules of action, or guidelines that ensure uniformity of pricing decisions
within a retail operation.
a. Pricing below the Market: is a policy that regularly discounts merchandise from the established
market price in order to build store traffic and generate high sales and gross margin dollars per
square foot of selling space.
b. Pricing at Market Levels: or it is called price zone is a range of prices for a particular merchandise
line that appeals to customers in a certain market segment
c. Pricing Above the Market: is a policy where retailers establish high prices because non-price
factors (exe. High cost structure, low sales volume, etc.) are more important to their target
market than price. Other factors are: (a) Merchandise Offerings (like specialty items); (b)
Services Provided; (c) Convenient Locations; (d) Extended Hours of Operations
DISCUSSION QUESTIONS
1. How does a stores location affect the price it can charge?
2. When should a retailer use the penetration pricing objectives?
3. If a retailer wants to use an above-market pricing policy, how should that retailers retailing mix
be different from the competition?

LO2: What are the various pricing strategies available to the retailer?
The pricing strategies should be in accord with the other components of the stores retail mix: location,
promotion, display, service level, and merchandise assortment.
1. Customer Pricing: is a policy in which the retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
2. Variable Pricing: is a policy that recognizes that differences in demand and cost necessitate that
the retailer change prices in a fairly predictable manner.
3. Flexible Pricing: is a policy that encourages offering the same products and quantities to
different customers at different prices.
4. One-Price Policy: is a policy that establishes that the retailer will charge all customers the same
price for an item.
5. Price Lining: is pricing policy that is established to help customers make merchandise
comparisons and involves establishing a specified number of price points for each merchandise
classification. Trading up occurs when a retailer uses price lining and a salesperson moves a
customer from a lower-priced line to a higher one. Trading down occurs when a retailer uses
price lining, and a customer initially exposed to higher-priced lines expresses the desire to
purchase a lower-priced line.
6. Odd Pricing: is the practice of setting retail prices that end in the digits 5, 8, 9 such as $29.95,
$49.98, or $9.99. This practice is believed to increase sales since customers tend to see the first
digit thus seems to be cheaper.
7. Multiple-Unit Pricing: occurs when the price of each unit in a multiple-unit package is less than
the price of each unit if it were sold individually. Exe. Cigarettes, candy bars, shirts, etc.
8. Bundle Pricing: bundling generally involves selling distinct multiple items offered together at a
special price. It is very useful because it may increase customer purchase intention.
9. Leader Pricing: is when a high-demand item is priced low and is heavily advertised in order to
attract customers into the store. Loss leader is an extreme form of leader pricing where an item
is sold below a retailers cost. High-low pricing involves the use of high every day prices and low
leader specials on items typically featured in weekly ads.
10. Bait-and-Switch Pricing: advertising or promoting a product at an unrealistically low price to
serve as bait and then trying to switch the customer to a higher-priced product.
11. Private-Label Brand Pricing: a private-label brand can often be purchased by a retailer at a
cheaper price, have a higher markup percentage, and still be priced lower than a comparable
national brand.
DISCUSSION QUESTIONS
1. What is the difference between variable and flexible pricing?
2. Would you prefer to buy a car from a dealer using a flexible or a one-price policy? Why?
3. What type of retailer is most likely to use leader pricing?
LO3: How does a retailer calculate the various markups?
Markup is the selling price of the merchandise less its cost, which is equivalent to gross margin.
1. Calculating Markup
SP = C + M
Where C is the dollar cost of merchandise per unit, M is the dollar markup per unit, and SP is the
selling price per unit.
2. Markup Methods

% Markup on Selling Price = (SP C) / SP = Markup / SP


% Markup on Cost = Markup / Cost
Finding % Markup on Cost when % Markup on Selling Price is Known:
%Markup on Cost = % Markup on Selling Price / (100% - % Markup on Selling)
Finding % Markup on Selling Price when % Markup on Cost is known:
%Markup on Selling Price = (% Markup on Cost) / (100% + % Markup on Cost)
Finding Selling Price when cost and % Markup on Cost are known:
Selling Price = Cost + % Markup on Cost
Finding Selling Price when cost and % Markup on Selling Price are known:
Selling Price = Cost / (1 - % Markup on Selling Price)
3. Initial Versus Maintained Markup
Initial markup is the markup placed on the merchandise when the store receives it. It is assumed to be
equal to the maintained markup or achieved markup (the actual selling price less the cost).
Initial Markup = (original retail price - cost) / original retail price
Maintained markup = (actual retail price - cost) / actual retail price
There are five reasons can account for the differences between initial and maintained markups.
1. The need to balance demand with supply. Since most markup formula are cost-oriented,
rather than demand-oriented, adjustments in selling prices will occur.
2. Stock shortages. These occur from theft by employees or customers and by mismarking the
price when merchandise is received or sold. Clerical error probably accounts for more
stock shortages than theft.
3. There are employee and customer discounts. Employees are usually given some discount
privileges after they have worked for the firm for a specified period of time. Also, certain
customer groups may be given discount privileges.
4. Cost of alterations. Some fashion-apparel items require alteration before the product is
acceptable to the customer. While mens clothing is often altered free of charge, there
is usually a small charge for altering womens wear.
5. Cash discounts. These are offered to retailers by manufacturers or suppliers to encourage
prompt payment of bills. Any cash discounts taken reduce the cost of merchandise and
therefore make the maintained markup higher that the initial markup.
4. Planning Initial Markups
a. Initial Markup Equation
To determine the initial markup, use the following formula:
Initial markup percentage = (operating expenses + net profit + markdowns + stock
shortages + employee and customer discounts + alteration costs cash
discounts) / (net sales + markdowns + stock shortages + employee and
customer discounts)
Since markdowns, stock shortages, and employee and customer discounts are retail reduction
from stock levels and gross margin is the sum of operating expenses and net profit, hence we
can simplify the formula:

Initial markup percentage = (gross margin + alternation costs cash discounts +


reductions) / (net sales + reduction)
Because some retailers treat cash discounts as other income and not as a cost reduction, hence
the initial markup can be simplified into:
Initial markup percentage = (gross margin + alternation costs + reductions)
/ (net sales + reduction)
b. Markup Determinants
In planning markups, it is useful to know some of the general rules of markup determination:
a. 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.
b. The higher the handling and storage costs of goods, the higher the markup.
c. 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.
d. The higher the demand inelasticity of price for the goods, the greater the markup
percentage.
DISCUSSION QUESTIONS
1. Compute the markup on selling price for an item that retails for $49.95 and costs $31.20
2. Complete the following:
Dress Shirt
Sport Shirt
Belt
Selling Price ($)
40.00
49.99
15.00
Cost ($)
23.00
25.35
6.50
Markup in dollars ($)
Markup percentage on cost (%)
Markup percentage on selling price (%)
3. A buyer tells you that she realized a markup of $50 on an interview suit for a college senior. You
know that her markup is 25% of retail. What did the suit cost her?
4. If the markup cost is 76%, what is the markup on selling price?
5. Intimate Apparel wants to produce a 9% operating profit this year on sales of $1,200,000. Based
on past experiences, the owner made the following estimates:
Net alteration expenses
Markdowns
Stock shortages

$1,100
61,000
12,200

Employee discount
Operating expenses
Cash discounts earned

$5,400
275,000
4,100

Given these estimates, what average initial markup should be asked for the upcoming year?
LO4: Why is markdown management so important in retailing?
A. MARKDOWN ERRORS
Although retailers would prefer to have their initial markup equal to the maintained markup,
this seldom happens. Markdown is any reduction in the price of an item from its initially established
price.
Markdown percentage = amount of reduction / original selling price
Thus, maintained markup (gross margin) is the key to profitability because it is the difference between
the actual selling price.

Since retailers do not possess perfect information about supply and demand factors, the entire
merchandising process is subject to error:
1) Buying Errors, it happens when the retailer buys the wrong merchandise or buys the right
merchandise in too large a quantity. Or maybe, the merchandise purchased could have been in
the wrong styles, sizes, colors, patterns, or price range.
2) Pricing Errors, the goods may have been bought in the right styles, at the right time, and in the right
quantities, but the price on the item may simply be too high that creates purchase resistance by
the customers.
3) Merchandising Errors, failure by the buyer to inform the sales staff of how the new merchandise
relates to the current stock, ties in the most common merchandising error. Another mistake is
the failure to keep the department manager and sales force informed about the new
merchandise lines. Another merchandising error is improper handling of the merchandise by the
sales staff or ineffective visual presentation of the merchandise. Mishandling errors include
failure to stock the new merchandise behind old merchandise whenever possible or simply
misplacing the merchandise.
4) Promotion Errors, the consumer has not been properly informed or prompted to purchase the
merchandise because the advertising, personal selling, sales-promotion activities, or in-store
displays were too weak or sporadic to elicit a strong response from potential customers.
B. MARKDOWN POLICIES
1. Early Markdown Policy
Fashion retailers use the following set of rules when taking early markdowns:
after the third week, mark it down 25 percent from the original price
after the seventh week, mark it down 50 percent from the original price
after the 11th week, mark it down 75 percent from the original price
after the 16th week, sell it to an outlet store, give it to charity, or place it on an
online auction
2. Late-Markdown Policy
Allowing goods to have a long trial period before a markdown is taken is called a latemarkdown policy. This policy avoids disrupting the sale of regular merchandise by too frequently
marking goods down. As a consequence, customers will learn to look forward to a semiannual or
annual clearance in which all or most merchandise is marked down. Thus, the bargain hunters or
low-end customers will be attracted only at infrequent intervals.
DISCUSSION QUESTIONS
1. Why should a retailer plan on taking markdown during a merchandising season?
2. Which markdown policy would be best for sporting goods?
3. The buyer for the womens sweater department has purchased wool sweaters for $35,69. She
uses an odd pricing policy and wants to sell them at a 49% markup on selling price. At what price
should each sweater be sold?