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Retail Pricing
CHAPTER 14
McGraw-Hill/Irwin

Retailing Management 8e

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

The McGraw-Hill Companies, All rights reserved.

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Why is Pricing Important?

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Pricing decision 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.

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Pricing Strategies:
High/Low Pricing

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Discount the initial prices through frequent

sales promotions
Advantages
Increases profits through price
discrimination
Sales create excitement
Sells merchandise
Disadvantages
Train people to buy on deal and wait
Have an adverse effect on profits

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Pricing Strategies:
Everyday Low Pricing

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Emphasizes the continuity of retail prices at a level

somewhere between the regular none-sale price and
the deep-discount sale price of high/low retailers
Doesnt mean lowest price
Retailers have adopted a low price guarantee policy
to reinforce their EDLP strategy
Advantages:
Assures customers of low prices
Reduces advertising and operating expenses
Reduces stockouts and improves inventory
management

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Pricing Strategies
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EDLP
Assures customers
low prices
Reduces
advertising and
operating expenses
Better supply chain
management

Hi-Lo
Higher profits through
price discrimination
More excitement
Build short-term sales
and generates traffic

Fewer stockouts
Higher inventory
turns
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Considerations in Setting Retail

Prices

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Customer Price Sensitivity and

Cost

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Relationship between Price Sensitivity and

Demand
When price
increases

sales

can

decrease
as fewer customers feel the product is a good
value
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Price sensitivity of customers

(demand curve)
Quantity Sold at Different
Prices

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If customers are very price

sensitive,
Sales decrease significantly
with price increase

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Profit at Different Prices

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Price Elasticity
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A commonly used measure of price sensitivity

Elasticity = percent change in quantity sold

percent change in price

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How Can Retailers Reduce Price

Competition?

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Develop lines of private label merchandise

Negotiate with national brands
manufacturers for exclusive distribution
rights
Have vendors make unique products for the
retailer

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Setting Retail Prices

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How Do Retailers Set Retail Prices?

Theoretically, retailers maximize their profits by
setting prices based on the price sensitivity of
customers and the cost of merchandise and
considering the prices being charged by competitors.
In reality, Retailers need to set price for over 50,000
SKUs 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
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Retail Price and Markup (MU)

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Margin
$50
Markup as a
Percent of Retail
Price
40%
= $50/$125
MU% = retail price cost
retail price

Retail Price
$125
Cost of
Merchandise
$75
Retail Price = cost + markup

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Markups
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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

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Initial and Maintained Markup

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Reductions
$.10
Maintained
Markup
$.30
Maintained Markup as
a Percent of Actual
Sales
33% =
$.30/$.90

Initial Retail
Price $1.00

Cost of
Merchandise
$.60

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

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Breakeven Analysis
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Understanding the Implication of Fixed and Variable Cost

Breakeven
point

Contribution/Unit
Fixed Costs
Unit Sales

Break-even
quantity

Fixed cost
Actual unit sales price - Unit variable
cost

The quantity at which total revenue equals total cost, and then profit
Occurs for additional sales
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Reasons for Taking Markdowns

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Clearance Markdowns to
get rid of slow-moving,
obsolete merchandise
Promotional Markdowns
To increase sales and
promote merchandise
To Increase traffic flow and
sale of complementary
products generate
excitement through a sale

To generate cash to buy

additional merchandise
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Liquidating Markdown
Merchandise

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PhotoLink/Getty Images

Sell the merchandise to another retailer

Consolidate the unsold merchandise
Place merchandise on Internet auction site
Donate merchandise to charity
Carry the merchandise over to the next
season

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Variable Pricing
and Price Discrimination

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Clearance Markdowns for Fashion Merchandise

Coupons
Price Bundling
McDonalds Value Meal

Multiple-Unit Pricing or Quantity Discount

Variable Pricing by Market Segments (Third Degree of
Price Discrimination) Charge different groups different
prices
Seniors Discounts
Kids Menu

Zone Pricing (Third Degree of Price Discrimination)

Charge different prices in different stores, markets,
regions

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Solution to Problems in
Implementing Price
Discrimination

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Set prices based on customer

characteristics related to willingness to
pay
Fashion sensitive customers will pay
more so charge higher prices when
fashion first introduced reduce price
later in season
Price sensitive customers will expend
effort to get lower prices coupons
Elderly customers eat earlier and
are more price sensitive so offer
early bird specials

C. Borland/PhotoLink/Getty Images

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Pricing Techniques for

Increasing Sales

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Leader Pricing
Price Lining
Odd Pricing

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Leader Pricing
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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 pricesensitive shoppers
Examples: bread, eggs, milk, disposable diapers
Might attract cherry pickers

Dennis Gray/Cole Group/Getty Images

Allan Rosenberg/Cole Group/Getty Images

Ryan McVay/Getty Images

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Price Lining
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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
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Odd Pricing
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A price that ends in an odd number (.9)

$2.99
Assumption:
Consumers perceive as $2 without noticing the
digits
9 endings signal low prices
Retailers believe the practice increases sales, but
probably doesnt
Does delineate:
Type of store (downscale store might use it.)
Sale
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Internet and Price Competition

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(c) image100/PunchStock

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
Retailers using the electronic channel can reduce
customer emphasis on price by providing services
and better information.

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Legal and Ethical Pricing Issues

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price discrimination An illegal practice in which a vendor sells the

same product to two or more customers at different prices.
predatory pricing A method for establishing merchandise prices
for the purpose of driving competition from the marketplace.
resale price maintenance laws Laws enacted in the early 1900s
to curb vertical price fixing. These laws were designed to help
protect small retailers by prohibiting retailers from selling below
manufacturers suggested retail price. Also called fair trade laws. In
1975, these laws were repealed by the Consumer Goods Pricing Act.
horizontal price fixing An agreement between retailers in direct
competition with each other to charge the same prices.
bait and switch An unlawful deceptive practice that lures
customers into a store by advertising a product at lower than usual
prices (the bait), then inducing the customers to switch to a higherprice model (the switch).

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