Lecture Retailing management (6/e): Chapter 15 - Levy Weitz

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

2


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.

3


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
6

• 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

7


15-

Types of Price Discrimination

8

• 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

9


Quantity Sold at Different Prices

1510


Profit at Different Prices

1511


Price Elasticity

1512

Elasticity = percent change in quantity sold
percent change in price


Price Elasticity
Elasticity = percent change in quantity sold
percent change in price
= (new quantity sold – old quantity sold)/old quantity sold
(new price – old price)/(old price)
= (1100-1500)/1100
(10-9)/9
= -0.2667

.1111
= -2.4005

1513


Price Elasticity

1514

For products with price elasticities less than -1, the price that maximizes
profits can be determined by the following formula:

Profit maximizing price = price elasticity x cost
price elasticity +1


Competitive Price Data

1515


1516

How Can Retailers Reduce Price Competition?
• Develop lines of
private label
merchandise
• Negotiate with national
brands manufacturers

for exclusive
distribution rights
• Have vendors make
unique products for the
retailer

PhotoLink/Getty Images


Legal and Ethical Pricing Issues

1517

Price Discrimination
Predatory Pricing
Resale Price Maintenance
Horizontal Price fixing
Bait and Switch tactics
Scanned vs. Posted Prices
PhotoDisc/Getty Images


Example of Markups

Retail = Cost + Markup
100% = 70% + 30%

Retail = $10.00 and markup = 30%
Retail = Cost + Markup
$ 10.00 = $7.00 + $ 3.00

1518


Retail Price and Markup

1519

Retail Price 
$125
Margin 
$50

Markup as a Percent 
of Retail Price               
40% = $50/$125

Cost of 
Merchandise   
$75
Retail Price = cost + markup


Markup Percent

1520

Markup percent is a markup as a percentage of the retail price.

Markup percent = retail price – cost of merchandise

retail price
= 125 – 75
125
= 40%


Markups

1521

Initial markup – retail selling price initially
set for the merchandise minus the cost
of the merchandise.
Maintained markup – the
actual sales realized for the
merchandise minus its costs
Rob Melnychuk/Getty Images


Initial and Maintained Markup
Reductions 
$.10
Maintained 
Markup   
$.30
Maintained Markup as a 
Percent of Retail Price      
         30% = $.30/$1.00

Initial Retail 

Price $1.00

Cost of 
Merchandise   
$.60

1522


Example of Setting the
Initial Retail Price
Cost = $100

Planned Initial Markup = 56.85%

Retail Price = $100

+ (56.85% x Retail Price)

Solve for Retail Price
.4315 x retail price = 100
Retail Price = $100/.4315 = 231.75

Initial Retail Price = Cost of Merchandise
(1-markup percentage)

1523


Reasons for Taking Markdowns

• Get rid of slow-moving, obsolete,
uncompetitive priced merchandise
• Increase sales and promote merchandise
• Generate cash to buy additional
merchandise
• Increase traffic flow and sale of
complementary products generate
excitement through a sale

1524


1525

Liquidating Markdown Merchandise

PhotoLink/Getty Images

• Place merchandise on Internet auction site
• Sell the remaining merchandise to another
retailer
• Consolidate the unsold merchandise
• Give merchandise to charity
• Carry the merchandise over to the next season