Retail Management: A Strategic Approach: Pricing in Retailing

Retail Management: A Strategic
Approach
Thirteenth Edition
Chapter 17
Pricing In Retailing
Copyright 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
17.1 To describe the role of pricing in a retail strategy and
to show that pricing decisions must be made in an
integrated and adaptive manner
17.2 To examine the impact that consumers, government,
manufacturers, wholesalers and other suppliers,
current/potential competitors have on pricing decisions
17.3 To present a framework for developing a retail price
strategy: objectives, broad policy, basic strategy,
implementation, and adjustments
Pricing Options for Retailers
Discount orientation
At-the-market orientation
Upscale orientation
Figure 17.2 Feeling Ripped Off
Figure 17.3 Factors Affecting Retail
Price Strategy
Price Elasticity of Demand
The sensitivity of customers to price changes in terms of the
quantities they will buy:
Elastic Small percentage changes in price lead to
substantial percentage changes in the number of units
bought.
Inelastic Large percentage changes in price lead to
small percentage changes in the number of units bought.
Table 17.1 A Movie Theaters Elasticity
of Demand
a Expressed as a positive number.

Market Segments by Price Sensitivity
Economic consumers
Status-oriented consumers
Assortment-oriented consumers
Personalizing consumers
Convenience-oriented consumers
The Government and Retail Pricing
Horizontal Price Fixing
Vertical Pricing Fixing
Price Discrimination (Robinson-Patman Act)
Minimum Price Laws
Unit Pricing
Item Price Removal
Price Advertising
Justifiable Price Discrimination
Under the Robinson-Patman Act
Products are physically different.
The retailers paying different prices are not competitors.
Competition is not injured.
Price differences are due to differences in supplier costs.
Market conditions change costs rise or fall or competing
suppliers shift prices.
Competition and Retail Pricing
Market pricing Retailers often price similarly to each
other and have less control over price because consumers
can easily shop around.
Administered pricing Firms seek to attract consumers
on the basis of distinctive retailing mixes.
Figure 17.4 A Framework for
Developing a Retail Price Strategy
Objectives and Pricing
Market
Skimming
Market
Penetration
Table 17.2 BEs Toy City: Demand, Costs,
Profit, and Return on Inventory Investmenta
Selling Total Sales Average Total Cost Total Average
Price Demand Revenue Cost of of Goods Operating Total Total Total
($) (units) ($) Goods($) ($) Costs ($) Costs ($) Costs ($) Profit ($)
9.00 114.000 1,026.000 7.60 866.400 104.000 970.400 8.51 55.600
10.00 104.000 1,040.000 7.85 816.400 94.000 910.400 8.75 129.600
11.00 80.000 880.000 8.25 660.000 88.000 748.000 9.35 132.000
12.00 60.000 720.000 8.75 525.000 80.000 605.000 10.08 115.000
Average Return-
Average Inventory Inventory on-
Selling Inventory Inventory Investme Turnover Inventory
Price Profit/Unit Markup at Profit/Sale on Hand Turnover nt at Cost ($) Investme
($) ($) Retail (%) s (%) (units) (units) ($) nt (%)
9.00 0.49 16 5.4 12,000 9.5 91,200 9.5 61
10.00 1.25 22 12.5 13,000 8.0 102,050 8.0 127
11.00 1.65 25 15.0 14,00 5.7 115,500 5.7 114
12.00 1.92 27 16.0 15,000 3.8 140,000 3.8 82
Note: The average cost of goods reflects quantity discounts. Total operating costs include all operating expenses.
a Number have been rounded.
Figure 17.6 Specific Pricing Objectives
To maintain a proper image
To encourage shoppers not to be overly price-conscious
To be perceived as fair by all parties (including suppliers, employees, and customers)
To be consistent in setting prices
To increase customer traffic during slow periods
To clear out seasonal merchandise
To match competitors prices without starting a price war
To promote a we-will-not-be-undersold philosophy
To be regarded as the price leader in the market area by consumers
To provide ample customer service
To minimize the chance of government actions relating to price advertising and antitrust matters
To discourage potential competitors from entering the marketplace
To create and maintain customer interest
To encourage repeat business
Price Policy Choices
No competitors will have lower prices; no competitors
will have higher prices; or prices will be consistent with
competitors.
All items will be priced independently or the prices for all
items will be interrelated to maintain image and ensure
proper markups.
Price leadership will be exerted; competitors will be price
leaders and set prices first; or prices will be set
independent of competitors.
Prices will be constant over a year or season; or prices
will change if costs change.
Price Strategy
Demand-oriented pricing
Cost-oriented pricing
Competition-oriented pricing
Demand-Oriented Pricing
Psychological pricing
Price-quality association
Prestige pricing
Figure 17.7 How to Determine Direct
Product Profitability
Ideal Yield Management
Applications (1 of 2)
Significant variation in demand by time of day, season,
day of week (weekend vs. weekday).
Demand that is capable of being segmented. Significant
differences in price elasticity by marker segment.
Existence of reservations: Demand is somewhat
predictable. Service is reserved by consumers in different
time periods (ranging from well in advance to just before
the service expires). Uncertainty of actual usage despite
reservations creates possibility of unsold seats. Service
providers can protect against no-shows through
overbooking.
Ideal Yield Management
Applications (2 of 2)
Cost characteristics: Low costs of marginal sales in
comparison to marginal revenues.
High fixed costs.
Capacity limits: Capacity is relatively fixed. The fixed
number of output units needs to be allocated among
customers. Service providers have excess capacity at
certain times and excess demand at other times. When
demand peaks, many services face binding capacity
constraints that prevent serving additional customers.
Integration of Approaches to Price
Strategy
If prices are reduced, will revenues increase greatly? (Demand
orientation)
Should different prices be charged for a product based on
negotiations with customers, seasonality, and so on? (Demand
orientation)
Will a given price level allow a traditional markup to be attained?
(Cost orientation)
What price level is necessary for a product requiring special
costs? (Cost orientation)
What price levels are competitors setting? (Competitive
orientation)
Can above-market prices be set due to a superior image?
(Competitive orientation)
Figure 17.8 Specific Pricing Decisions
How important is price stability? How long should prices be maintained?
Is everyday low pricing desirable?
Should prices change if costs and/or customer demand vary?
Should the same prices be charged to all customers buying under the same conditions?
Should customer bargaining be permitted?
Should odd pricing be used?
Should leader pricing be utilized to draw customer traffic? If yes, should leader prices be
above, at, or below costs?
Should consumers be offered discounts for purchasing in quantity?
Should price lining be used to provide a price range and price points within that range?
Should pricing practices vary by department or product line?
Price Strategy Concepts
Customary Pricing Flexible Pricing
Everyday low pricing Contingency Pricing
Variable Pricing Odd Pricing
Yield Management Leader Pricing
Pricing
Multiple-Unit Pricing
One-Price Policy
Price Lining
Pros and Cons of Everyday Low Pricing
Pros: Cons:
Reduced advertising Decreased excitement
expense
Potentially less store traffic
More predictable sales due to specials
levels
Less cherry-picking by
Fewer peaks and ebbs consumers who only
of sales distribution purchase specials
Reasons to Use Multiple-Unit Pricing
A firm could seek to have shoppers increase their total
purchases of an item.
This approach can help sell slow-moving and end-of-
season merchandise.
Price bundling may increase sales of related items.
Price Adjustments
Adaptive mechanism
Markdown
Additional markup
Employee discount
Figure 17.11 Price Lining
Timing Markdowns
Early markdown policy
Late markdown policy
Staggered markdown policy
Automatic markdown plan
Storewide clearance

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Retail Management: A Strategic

a Expressed as a positive number.

Is everyday low pricing desirable?

Should prices change if costs and/or customer demand vary?

Should customer bargaining be permitted?

Should odd pricing be used?

above, at, or below costs?

Should consumers be offered discounts for purchasing in quantity?

Should pricing practices vary by department or product line?

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