Retail Pricing - Presentation Transcript

1. RETAIL PRICING o CONCEPT OF RETAIL PRICING o Integral part of retail marketing mix o Source of revenue for the retailer o Communicate the image of the retail store o FACTORS THAT NEED TO BE TAKEN INTO CONSIDERATION o Demand for the product and the target market o Store policies and the image to be created o Competition for the product and the competitor’s price o Economic conditions prevailing at that time o PRICING OBJECTIVE o In agreement with the mission statement o In agreement with the merchandising policies 2. RETAIL PRICING o ELEMENTS OF RETAIL PRICE o Cost of goods : Cost of Merchandise o Expenses incurred towards transportation o Taxes, duties levies etc. o Expenses Incurred : Fixed expenses o Variable expenses o Fixed Expenses : Expenses that do not vary with quantum of o business o eg. Shop rent, Head Office costs etc o Variable expenses : Level of sales directly effects variable expenses. o eg. Merchandise margins, product mix costs o Their Management either enhances or destroy o profitability 3. RETAIL PRICING o FIXING THE RETAIL PRICE o Consideration : Profit to be earned o Profit from Merchandise planed before price fixation o Profit to be arrived at is expressed as a mark up percentage o Retail Price = Cost + Mark Up o Or Cost = Retail Price - Mark Up o Or Mark Up = Retail Price - Cost o Components of the formula can be expressed in o Rupee Term or as a percentage 4. RETAIL PRICING o THE FOLLOWING FORMULA WOULD APPLY o Mark Up percentage can be expressed as o Percentage of retail price or as a percentage of cost price o Mark Up percent (based on Retail Price) = Mark Up in Rupees / Retail Price o Mark Up percent (based on Cost) = Mark Up in Rupees / Cost 5. RETAIL PRICING o ILLUSTRATION o Assume the cost of merchandise = Rs.200.00 o The Mark Up is = Rs.150.00 o Retail Price = 200 + 150 = 350 o Mark Up % on Retail = 150 / 350 = 42.86% o Mark Up % on Cost = 150 / 200 = 75 % o Mark Up fixed is termed as Initial Mark Up o Rarely are all products sold completely at fixed prices o Reduction in price are often made and could be due to Markdowns, Employee discounts, Customer Discounts or Shrinkage 6. RETAIL PRICING o ILLUSTRATION OF COST PLUS PRICING o Cost of fabric = Rs.150.00 per meter o Fabric consumption = 1.30 meters o Total Fabric Cost = Rs.195.00 o Manufacturing Cost = Rs.100.00 o Basic Cost = Rs.295.00 o Packaging Cost = Rs. 50.00 o Cost Price = Rs.345.00 o Mark Up @ 60% = Rs.207.00 o Retail Price = Rs. 552.00 Rounded Off Rs.550.00 7. RETAIL PRICING o DEVELOPING A PRICING STRATEGY o Cost Oriented o Demand Oriented o Competition Oriented o COST ORIENTED PRICING o Basic mark up is added to the cost of merchandise o Retail price is considered to be a function of the cost and the mark up o Thus Retail Price = Cost + mark Up o Or Cost = Retail Price – Mark Up o Or Mark Up = Retail Price - Cost o Difference between the selling price and cost is Mark Up o Mark up should cover for operating expenses and transportation etc 8. RETAIL PRICING o DEMAND ORIENTED PRICING o Focuses on quantities the customers would buy at various prices o Largely depends on perceived value attached to the product by customers o Sometimes a high priced product is perceived to be of high quality o Sometimes a low priced product is perceived to be of inferior quality o Key to demand oriented pricing o Understanding of the target market o Value based proposition that they would look for 9. RETAIL PRICING o COMPETITION – ORIENTED PRICING o Competition is the criteria of fixing the price o Competitors play a key role in determining price o Retailer fixes price on par with the competitors o Retailer fixes price above the competitor’s price o Retailer fixes price below the competitor’s price 10. RETAIL PRICING o IMPORTANT TERMS USED BY RETAILERS IN PRICING o Price Lining : When retailers sell merchandise only at a given price o Price Zone or Price Range : Range of prices for a particular merchandise line o Price Point : A specific price in that price range 11. RETAIL PRICING o APPROACHES TO PRICING STRATEGY o Market Skimming o Market Penetration o Leader Pricing o Price Bundling o Multi-Unit Pricing o Discount Pricing o Everyday Low Pricing o Odd Pricing 12. RETAIL PRICING o MARKET SKIMMING o Strategy to charge a high price initially o Gradually reduce it if necessary o Policy is a form of price discrimination over time o To be effective several conditions are to be considered o MARKET PENETRATION o Opposite of Market Skimming o Aim to capture a large market share by charging low price o Low prices stimulate purchases o Low prices discourages competitors from entering the market o Economies of scale is required in manufacturing or retail to be effective 13. RETAIL PRICING o LEADER PRICING o Retailer sells few items at deep discounts o This increases traffic and sales on complementary items. o The product must appeal to a large number of people o The concept should appear as a bargain o Items best suited for this type of pricing are those that are bought frequently o Example : bread, eggs, biscuit, milk etc. o PRICE BUNDLING o Retailer bundles a few products and offers them at a particular price o Price bundling helps sale of related items o Example: A PC at a fixed price including a printer and a web camera o Value Meal offered by McDonalds 14. RETAIL PRICING o MULTI UNIT PRICING o Retailer offers discounts to customers who buy in large quantities or who buy a product in bundle o This involves value pricing for more than one of the same item o Multi unit pricing helps move products that are slow moving o Example: Offer price of one T-shirt for Rs.255.99 and two T-shirts for Rs.355.99 o DISCOUNT PRICING o Used as a strategy by outlet stores who offer merchandise at the lowest market prices 15. RETAIL PRICING o EVERY DAY LOW PRICING o Popularly known as EDLP o Strategy adopted by retailers who continually price their products lower than the other retailers in the area o Example: Food Bazaar, Wal-Mart and Toys “R” U’s regularly use this strategy o ODD PRICING o Strategy is to set retail prices in such a manner that the price ends in odd numbers o Example: Rs.99.99, Rs.199.99 or Rs.299.99 o Followed by: ?????? 16. If you get your customers because of price, you are going to Loose them because of price. 17. Basic Pricing Strategies o Mark-up Pricing o Markup on cost can be calculated by adding a pre-set (often industry standard) profit margin, or percentage, to the cost of the merchandise. o Markup on retail is determined by dividing the dollar markup by retail. o Be sure to keep the initial mark-up high enough to cover price reductions, discounts, shrinkage and other anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection can use different mark-ups on each product line. o Vendor Pricing o Manufacturer suggested retail price (MSRP) is a common strategy used by the smaller retail shops to avoid price wars and still maintain a decent profit. By pricing products with the suggested retail prices supplied by the vendor, the retailer is out of the decision-making process. Another issue with using pre-set prices is that it doesn't allow a retailer to have an advantage over the competition. o Competitive Pricing o Consumers have many choices and are generally willing to shop around to receive the best price. Retailers considering a competitive pricing strategy will need to provide outstanding customer service to stand above the competition. o Pricing below competition simply means pricing products lower than the competitor's price. This strategy works well if the retailer negotiates the best prices, reduces costs and develops a marketing strategy to focus on price specials. o Prestige pricing, or pricing above competition , may be considered when location, exclusivity or unique customer service can justify higher prices. Retailers that stock high-quality merchandise that isn't available at any other location may be quite successful in pricing their products above competitors. o Psychological Pricing o Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is odd-pricing using figures that end in 5, 7 or 9. It is believed that consumers tend to round down a price of $9.95 to $9, rather than $10. 18. Other Pricing Strategies o Keystone pricing is not used as often as it once was. Doubling the cost paid for merchandise was once the rule of pricing products, but very few products these days allow a retailer to keystone the product price. Putney Pricing strategy is being used by some retailers to increase margins. o Multiple pricing is a method which involves selling more than one product for one price, such as three items for $1.00. Not only is this strategy great for markdowns or sales events, but retailers have noticed consumers tend to purchase in larger amounts where the multiple pricing strategy is used. o Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices and other promotional Markdowns. o Merchandise priced below cost is referred to as loss leaders . Although retailers make no profit on these discounted items, the hope is consumers will purchase other products at higher margins during their visit to the store. o It is important to understand the concept of Known value items or KVI’ s If th retailer wishes to increase the footfalls with the help of loss leaders o As you develop the best pricing model for your retail business, understand the ideal pricing strategy will depend on more than costs. It is difficult to say which component of pricing is more important than another. o Just keep in mind, the right product price is the price the consumer is willing to pay, while providing a profit to the retailer. 19. EDLP vs. High Low Pricing o There are two kinds of retailers in the industry: HILO and EDLP. o HILO means grocery stores that normally have high prices (HI) that run rotating super-cheap loss-leaders (LO). o The EDLP stores specialize in Everyday Low Prices–so their sales are rarely as good, but their standard prices are considerably lower. o There are three kinds of typical shopper. Some are store-faithful. The amount that they buy in a particular week depends heavily upon the sales offered. o Others choose the store by the sale. The amount they buy is fairly consistent, but where they spend it varies. o The third type is very rare–people who go to multiple stores every week. These people far more time than money and are sometimes labelled as ‘Cherry Pickers’ o EDLP pricing is more suitable for Hypermarkets, Supermarkets and Price clubs such as Wal Mart, Costco, Kmart etc. They promise the customers to save not on individual items but on a basket of items.So you are more likely to save at Wal Mart if you buy from them on a daily basis items of regular and repeat use rather than pick and choose from time to time. One important condition that drives EDLP pricing is the “Low Price” image of the retailer is the consumer’s mind. o HILO Pricing is more suited for Departmental Stores who face obsolescence and tempt customers to peg up their buying during the SALE period. They make money during the HI phase when the products are not on discount but they also make sure that they do not loose as much when they are on SALE. o A HILO pricing is supported by ‘Premium’ image of the retailer as it helps the retailer to up charge the customer during the HI phase. The HI LO pricing will fail in a scenario if the customers do not find enough value when the products are put on sale. 20. They have gone…What About You ????? SALE 21. Price Elasticity of Demand o Price Elasticity = % Change in sales o %Change in Price o Price elasticity of 2 implies that for a 10 % cut in price the retailer can expect a sales lift of about 20 % o Price Elasticity varies from product to product. It will be different for grocery and Apparel. Which is higher ? 22. o Beyond a point the demand flattens irrespective of the Discount % o Deal Decay – The longer the item is on a deal the lower is the height of deal spike o The Deal spike also depends upon how long ago there was a deal on the same product 23. Asymmetric Deal Behavior High Price High Quality National Brand Low Price Low Quality Local Brand Private Label Sales SALE !! o High Price High Quality National Brands tend to eat away the share o of low Quality, low Price Local Brands when Price promoted whereas the o Reverse may not happen o Why ??? o As the Margins on Private Label and Local brands are usually higher the retailer may end of loosing money as a result of such a price promotion o A retailer may not do it unless supported by the National Brand 24. Cross Fertilization o The promo on one category can favorably as well as adversely affect the sale of another category o Complimentary categories may see a rise in sales Ex : Shirts and Trousers, Mens Shoes and Mens Apparel o Substitute Categories may see a fall in sales Ex : Orange and Apple Juice 25. Impact on Store Traffic o Loss leaders may help increase Store traffic o To avoid Cherry Picking the retailer must club categories in order to minimize losses o Also the store must be geared up to handle and take advantage of higher footfalls o Conversion in other products than the loss leader needs to be the key focus 26. The avalanche Effect o Display Budget o Price cut o Major Ad o Week after Week ? o Two together ? o All 3 together ? 27. The incremental jump in Sales from running the 3 together =275 pieces Cumulative increase of running the 3 seperately = 198 Pieces 28. Caution !! o Promotions give an instant kick but they have serious long term impact o Frequent promotions can condition the customer to wait for the SALE o If not handled carefully Promotions can play havoc with a retailers positioning o Cannibalization and destruction of value chain have to be seriously considered while designing promotions Developing Pricing Strategies :Developing Pricing Strategies Price: is only element in marketing mix produces revenues, all other elements represent cost determines the amount of income generated from sales of product differentiate product from competitors If too much generate fewer sales If too little sacrifice profits

Break-even Analysis :Break-even Analysis Break-even analysis: method of calculating the minimum volume of sales needed at a given price to cover all costs Variable costs: business costs that increase with the number of units produced Fixed Costs: business costs that remain constant regardless of the number of units Break-even point: sales volume at a given price that will cover all of a company costs

Break Even Analysis (cont.) :Break Even Analysis (cont.) Doesn’t dictate price to charge Provides some insight into number of units to sell at a given price to make profit Useful when calculating the effect of special pricing promotion Allows to try different prices & see results by using spreadsheet software

Break-even Point :Break-even Point Break-even point= fixed costs selling price per unit – variable costs per unit

Factors Affecting Pricing Decisions :Factors Affecting Pricing Decisions Pricing determined by: Merchandise Location Promotion Credit Customer service Store image Legal constraints

External Influences on Pricing Strategy :External Influences on Pricing Strategy Pricing strategy Customers Competitors Suppliers Government Price & Marketing objectives :Price & Marketing objectives Match price to objectives in strategic marketing plan Common objectives increase market share increase sales improve profits project a particular image combat competition Slashed prices boost sales & fend-off lower-priced rival brands Premium pricing with other marketing mix give luxury position

Price & Government regulations :Price & Government regulations To protect consumers & encourage fair competition Classes of pricing regulated: Price fixing (agreement among companies supplying the same products as to prices they will charge) Price discrimination (unfairly offering attractive discounts to some customers not to others) Deceptive pricing (pricing schemes consider misleading)

Pricing & Consumer perceptions :Pricing & Consumer perceptions Customers will elicit perception of quality from price Rough price range usually in customers mind Unexpectedly low price triggers fear the item is low quality Unexpectedly high price make buyers question is product worth

Pricing & Consumer demand :Pricing & Consumer demand Costs establish floor for price Demand establish ceiling for price Theoretically: if price too high demand fall & Producers reduce prices to stimulate demand if price too low demand increases & producers motivated to raise prices When prices climb & profits improve producers boost output until supply & demand balance

Price elasticity :Price elasticity Some products insensitive to changes in price & Some products highly responsive Price elasticity: a measure of the sensitivity of demand to changes in price

Pricing Methods :Pricing Methods Cost-based Demand Based Competition-based pricing Price skimming Penetration pricing

Cost-based Pricing :Cost-based Pricing Cost-based pricing (cost plus pricing): Starting with cost of production Then add markup to the cost of product Simple but little sense Ignores demand & competitors prices, & not lead to best price Ensure certain profit but sacrifice profit opportunity

Slide 16:In demand based pricing: Price is set on the basis of consumer demands. It determines the range of price acceptable to the target market. Demand oriented pricing takes into account two psychological aspects of pricing Price quality Prestige pricing

Competition -based Pricing :Competition -based Pricing Maximize profit by establishing optimal price for product How to optimize the price? Based on analysis of product’s competitive advantage User’s perception of item Market targeted When price established, focus on keeping costs at level allows healthy profit Few businesses fail from over pricing Many businesses fail from underpricing Price Skimming :Price Skimming Skimming: charging a high price for a new product during the introductory stage & lowering the price later Price vary depending on stage in product life cycle During introductory phase objective to recover development costs ASAP, so price is high & the drop later when product no longer novelty & competition heats up Makes sense under 2 conditions: Product quality & image support higher price Competitors cannot enter market with competing products & undercut price

Penetration Pricing :Penetration Pricing Penetration Pricing: introducing a new product at a low price in hopes of building sales volume quickly Advantages: discouraging competition because the low price Limits profit for everyone Helps expanding entire product category by attracting customers who don’t buy at higher, skim-pricing levels If you compete pioneers in category, this strategy helps in taking customers away from pioneer Makes sense when market highly price sensitive, so low price generates additional sales & company maintain low-price position long to keep out competition

Price Adjustment Strategies :Price Adjustment Strategies Price discounts Bundling Dynamic Pricing

Price Discounts :Price Discounts Discount Pricing: offering a reduction in price Depend on type of customer targeted & type of item offered Discount boost sales but can touch off price wars between competitors Price war encourage customers to focus only on pricing not on value or benefits Price war can hurt entire industry for years To offset loss of revenue stock shelves with more profitable items otherwise if you couldn't compete you close up business

Examples :Examples Wholesaler or retailer Discount: to encourage orders Customer cash discount: to reward customers who pay cash or pay promptly Quantity discount: to Large volumes buyer Seasonal discount: to who buy out of season Value pricing: charging affordable price for high quality offering (for certain times or certain customer segment)

Bundling :Bundling Definition: Combining several products & offering the bundle at a reduced price Promote sales of products consumers might not otherwise buy Make products harder for consumers to make price comparison

Dynamic Pricing :Dynamic Pricing Definition: Charging different prices depending on individual customers & situations By using internet technology Enables to move slow-selling merchandise instantly Allows to experiment with different pricing levels Tactics: Auction pricing (buyers bid against each other & the highest bid buy) Group buying (buyers obtain volume discount by joining buying groups) Name-your-price (buyers specify how much to pay & sellers choose whether to sell) All stores need to manage inventory, costs and expenses. This means knowing how to run your business from the top to the bottom. To help you compete in today's competitive business environment, here are some tips, tactics, and ideas to use to become a more profitable retailer. 1 — Implement a computerized system to manage, control, and balance your inventory.

2 — Make your business distinctive and carry merchandise your competitors don't have

3 — Price merchandise at what the customer is willing to spend, not on what it costs.

4 — Focus on buying more named brand promotional and off-price merchandise.

5 — Make a budget and follow a detailed open-to-buy plan to eliminate overbuying.

6 — Seek out manufacturers to purchase merchandise at below wholesale prices.

7 — Test different aspects to promote business: -- new offers -- new items -- new prices.

8 — Identify vendor performance regarding sales, mark-up, turnover, and profits. 9 — Don't accept deliveries you can't use, or arrive after the specified completion dates.

10 — Use sales forecasts, expense sheets, and financial statements on regular basis.

11 — Computerize your business to streamline everyday tasks and business procedures.

12 — Develop a tracking system for those products that are your best-sellers.

13 — Buy closer to the selling season to minimize the risk of making a bad buy.

14 — Attend trade shows and join buying groups to find better values.

15 — Seek suggestions from vendors on ways you can boost business.

16 — Use a store questionnaire to aid you in determining customers' wants and needs.

17 — Negotiate with your vendors to obtain better prices and faster deliveries.

18 — Ask your main vendors to share in paying freight costs.

19 — Inquire if your suppliers will help with co-op advertising.

20 — Consider adding private label merchandise to establish better margins.

21 — Create an initial pricing strategy for special value and off-price products.

22 — Evaluate your open-to-buy and expenses on a regular basis.

23 — Establish a flexible buying plan that allows for special in-season purchases.

24 — Replace fringe, non-compelling, and borderline inventory classifications.

25 — Use toll-free telephone numbers for reorders and communication with venders.

26 — Develop a timely markdown strategy to dispose of out-of-season inventory.

27 — Avoid shortages of your most popular and profitable classifications.

28 — Implement a reorder strategy for your best-selling items.

29 — Promptly return substandard and problem merchandise. 30 — Ask for invoice extensions and take trade discounts allowed for timely payments.

31 — Offer customers better prices, more values, wider selections, and add-ons.

32 — Specify delivery and completion deadlines for all initial orders and future reorders.

33 — Display merchandise to make it easier for customers to see, feel, touch, and buy.

34 — Look for new opportunities to increase prices on items your competitors don't carry.

35 — Insist on credits or adjustments for late deliveries and substituted orders.

36 — Bargain for exclusive rights and products that will not be sold to the competition.

37 — Ask for markdown money for excessive or unreasonable in-season selling losses.

38 — Eliminate excessive stock in slow-moving and unprofitable categories.

39 — Adjust your stock on hand with estimated sales projections and customers needs.

40 — Pay attention to your monthly overhead and business expenses ratios.

By managing your business more effectively, you'll be able to provide better values, attract more customers, improve your average sales transaction, and offer customers new opportunities to visit your store.