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it is the point at which the exchange between the buyer &seller takes place, where supply& demand are equal. Arriving at the right price for a product or service is one of the most difficult task today various factors need to be considered before setting up an appropriate price. Pricing is an integral part of retail strategy and cannot work in isolation. Cost and perating expenses need to be considered while establishing the retail price.
marketing mix. it is the factor which is the source of revenue for the retailer. !he price of a merchandise also communicates the image of the retail store to the customers. "arious factors like the target market, store policies competition and economic condition need to be taken into consideration while setting up an appropriate price for a product.
arriving at a pricing strategy is the business model that the retailer has chosen to follow. The next factor to be taken into consideration is the demand for the product and the target market. The store policies and the store image. Competition for the product & competitors price for the similar products. The economic conditions prevalent at times play a major role in pricing policy.
The first element to be considered in the cost of goods which is the cost of merchandise and various other expenses, which are involved in the movement of goods from the manufacturer to the actual store. These expenses may be fixed or variable.
Fixed costs are referred to as overhead are the expenses that dont vary according to the production amounts!such as rent for office space office e"uipments insurance utilitiesetc.
These are the expenses that do vary with the amount of service provided or goods produced. They include costs such as hourly pay for a contractor on a specific project raw!materials etc.
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prices for the identical products/services sold to different consumers. 0g %estaurant meals women haircuts.
'ori(ontal price fixing. involves agreements between
retailers that are in direct competition with each other to set the same prices
Vertical Price Fixing 1ertical #rice Fixing !! 2greements to fix prices between
parties at different levels of the same marketing channel. 1endors cant force retailers to sell at manufacturer suggested retail price 3&*%#4. %etailers can sell above &*%#. 5ften vendors tie selling products are &*%# with co!op advertising allowance
Predatory Pricing
0stablishing merchandise prices to drive competition from the marketplace. 6llegal7 %etailers can charge different prices at different locations if costs are different.
#redatory pricing. arises when a dominant retailer sets
prices below its costs to drive competitors out of business. %etailer hopes to raise prices in the near future and regain lost profits. 0g 8almart vs small retailers
Comparative Price Advertising Compares price of merchandise offered for sale with a
higher 9regular: price or &*%#. ;ood because it gives consumers information about what merchandise should sell for. 6llegal if used to deceive consumer.
customers are lured into the stores by advt a product at lower than normal price 3bait4 and once they are into the store induce them to purchase a higher price model 3switch4. Can occur by having inade"uate inventory of the advt product/salesperson disparage the "uality of advt model and promote the superiority of higher priced model.
ait!and!"witch
<ure customers into store by advertising a product at
a lower than usual price 3the bait4 and then induces customer to switch to higher!priced model 3the switch4. Can occur by
%etailer out of advertised model. %etailer has advertised model but disparages
it.
)efore determining the price of the product one needs to determine the cost of the product and take into consideration the 9)reak!0ven: point.
makes or loses money in producing a product or delivering a service. 6t is the process used to uncover the break even numbers. )efore calculating the break!even point it is necessary to determine the fixed as well as the incremental cost per unit=variable cost>
To calculate the )reak!even point the point at which the business will neither make a profit or a loss the following formula can be used.
It is the difference between the cost of the product and the final selling
price. The mark up can be in rupee terms or in terms of percentage. Mark ups can also be calculated on the cost of the product or the retail price. A markup can be expressed as an either a rupee amount or as a percentage of selling price. A rupee markup occurs when the retailer adds a fixed amount to the cost of the product. a) Markup% (at retail)=(retail selling price merchandise cost) !etermines the retail selling price. b) Markup% (at cost)=(retail selling price merchandise cost) !etermines the merchandise cost.
"umulati#e markup$
It is the difference between the cost price of the merchandise and the initial retail price.
Maintained markup$ It is the difference between the gross merchandise cost and the actual selling price.
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Price Ad*ustments
%etailers adjust prices over time 3markdowns4 and for different customer segments 3variable pricing4
8hy do retailers take markdownsB 'ow do they optimi(e markdown decisionsB 'ow do they reduce the amount of markdowns by working
with vendorsB 'ow do they li"uidate markdown merchandiseB 8hat are the mechanics of taking markdownsB
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#romotional &arkdowns
To increase sales and promote
merchandise To 6ncrease traffic flow and sale of complementary products generate excitement through a sale
merchandise
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through percentages fall below a certain level %ule!based. Cuts prices on the basis of how long the merchandise has been in the store
&arkdown 5ptimi(ation
*oftware is used to determine when and how much markdowns
should be taken to produce the best results by continually updating pricing forecasts on the basis of actual sales and factoring in differences in price sensitivities
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$iscrimination4 G *et uni"ue price for each customer e"ual to customers willingness to pay 2uctions #ersonali(ed 6nternet #rices $iscrimination4 G 5ffer the same price schedule to all customers Huantity discounts 0arly )ird *pecial 5ver 8eekend Travel $iscount
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(hoppers at *1rop2s use their loyalty card at a 1ios1 and receive unadvertised personali3ed coupons
Variable Pricing and Price Clearance &arkdowns for Fashion &erchandise )iscrimination Continued
Coupons #rice )undling
&c$onalds 1alue &eal
&ultiple!Dnit #ricing or Huantity $iscount 1ariable #ricing by &arket *egments 3Third $egree of #rice
$iscrimination4 G Charge different groups different prices *eniors $iscounts Kids &enu Lone #ricing 3Third $egree of #rice $iscrimination4 G Charge different prices in different stores markets regions
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related to willingness to pay Fashion sensitive customers will pay more so charge higher prices when fashion first introduced G reduce price later in season #rice sensitive customers will expend effort to get lower prices G coupons 0lderly customers eat earlier and are more price sensitive so offer early bird specials
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The pricing polic% adopted b% the retailer can be$ "ost oriented pricing !emand oriented pricing "ompetition oriented pricing
Cost-oriented pricing:
In "ost oriented pricing& A basic mark up is added to
Thus&
Demand-oriented pricing
This polic% focuses on the *uantities that the
customers would bu% at #arious prices. It largel% depends upon the percei#ed #alue attached to the product b% the customer. As& sometimes high priced product is percei#ed as being of high *ualit% and a low priced product is percei#ed as being of low *ualit%. An understanding of the target market and the #alue proposition is the ke% to demand oriented pricing.
Competition-oriented pricing
+hen the prices adopted b% the competitors pla% a
ke% role in determining the price of the product& then it is said to be competition oriented pricing.
'ere the retailer ma% price the product at par with the
competition.
That is, abo#e the competitor-s price or below the
price.
Pricing "trategies
Price
This is the only element in the marketing mix that brings in the revenues. All the rest are costs
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You pay rent for your apartment, tuition for your education, and a fee to your dentist or physician. The airline, railways, taxi and bus companies charge you a fare; the local utilities call their price a rate; and the local bank charges you interest for the money you borrow. The guest lecturer is paid an honorarium and the government official takes a bribe to pass a file which was his job anyway.
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between the regular none!sale price and the deep!discount sale price of high/low retailers $oesnt mean lowest price %etailers have adopted a low price guarantee policy to reinforce their 0$<# strategy 2dvantages.
2ssures customers of low prices %educes advertising and operating expenses %educes stockouts and improves inventory management
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Pricing "trategies
0$<# 2ssures customers low prices %educes advertising and operating expenses )etter supply chain management
Fewer stockouts 'igher inventory turns
i")o 4 igher profits through price discrimination 4 'ore e5citement 4 &uild short"term sales and generates traffic
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Pricing "trategies
Penetration Pricing
Penetration Pricing
#rice set to Mpenetrate the market M<ow price to secure high volumes Typical in mass market products G chocolate bars food stuffs
household goods etc. *uitable for products with long anticipated life cycles &ay be useful if launching into a new market
&ar-et "-imming
&ar-et "-imming
'igh price <ow volumes *kim the profit from the market *uitable for products that have short life
cycles or which will face competition at some point in the future 3e.g. after a patent runs out4
0xamples include. jewellery digital
any are predicting a firesale in laptops as supply exceeds demand.
Value Pricing
Value Pricing
#rice set in accordance with customer
products/exclusive products
Loss Leader
Loss Leader
;oods/services deliberately sold below cost to encourage sales
elsewhere
Typical in supermarkets e.g. at Christmas selling bottles of gin at N I
in the hope that people will be attracted to the store and buy other things
#urchases of other items more than covers Mloss on item sold
Psychological Pricing
Psychological Pricing
Dsed to play on consumer perceptions Classic example G %s I---.-- instead of %s AJJJ7
high and they lose market share too low and the price leader would match price and force smaller rival out of market
8here competition is limited Mgoing rate pricing may be applicable G banks
petrol supermarkets electrical goods G find very similar prices in all outlets
,ender Pricing
,ender Pricing
&any contracts awarded on a tender basis Firm 3or firms4 submit their price for carrying out the work #urchaser then chooses which represents best value &ostly done in secret
Price )iscrimination
Price )iscrimination
Charging a different price for the same
"rices for rail travel differ for the same journey at different times of the day
)estroyer3Predatory Pricing
$eliberate price cutting or offer of Mfree gifts/products to force
rivals 3normally smaller and weaker4 out of business or prevent new entrants
2nti!competitive and illegal if it can be proved
production &C pricing G allows flexibility #articularly relevant in transport where fixed costs may be relatively high 2llows variable pricing structure G e.g. on a flight from <ondon to Oew Pork G providing the cost of the extra passenger is covered the price could be varied a good deal to attract customers and fill the aircraft
Aircraft flying from #ristol to $dinburgh % Total !ost &including normal profit' ( )*+,,,, of which )*-,,,, is fixed cost. /umber of seats ( *0,, average price ( )1-.2+ ! of each passenger ( 3,,,4*0, ( )*3.+, 5f flight not full, better to offer passengers chance of flying at )*3.+, and fill the seat than not fill it at all6
*All figures are estimates only
Contribution Pricing
Contribution Pricing
"ontribution = .elling /rice 0 1ariable (direct costs)
the fixed costs *imilar in principle to marginal cost pricing )reak!even analysis might be useful in such circumstances
,arget Pricing
,arget Pricing
*etting price to Mtarget a specified profit level 0stimates of the cost and potential revenue at different
prices and thus the break!even have to be made to determine the mark!up &ark!up ? #rofit/Cost x +JJ
Cost!Plus Pricing
Cost!Plus Pricing
Calculation of the average cost 32C4 plus a mark up 2C ? Total Cost/5utput
In(luence o( Elasticity
#rice!setting methods.
&arkup Competitive 1endor
#rice!setting determinants.
$emand Competition Cost #roduct <egal
#rice!setting policies.
5ne!price 1ariable!price 5dd!price Dnit!price #rice <ining
&arkdown Control
Product Considerations
$ifferent products have the ability to command different
6nventory %easons
)eginning!of!month 0nd!of!
Comparison %easons
)etween store operations 8ith trade statistics 8ith expressions of financial
0mphasis %easons
&ar-up
6nitial &arkup. 8hat you hope to receive7 &aintained &arkup. 8hat you actually receive7
;ross &argin ? &aintained markup
Three Types
$iscounts. reductions granted to employees and special customers @. &arkons. &arkups taken after the initial price is set I. &arkdowns. $ownward adjustments in the original selling price &arkdown R ? 3original price G reduced price4 / reduced price %emember. %etail %eductions ? &arkdowns Q shortages Q employee discounts Q customer discounts
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Causes o( &ar-downs
)uying related causes. 2ssortment error Timing error. late shipment or ordering too much &isjudging "uality *upplier error. late damaged or incorrect shipments *elling related causes. #ricing error. hence little consumer interest Dsing markdowns to stimulate sales 2ggressive selling. trading customer up misleading claims returns