pricing strategy lecture

1. Lecture 11:
Price Strategy:
Setting & Adjusting
Retail Price

2. ©2013 Pearson Education Publishing as Prentice Hall 17-2
Learning Outcomes
• 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
• To examine the impact that consumers,
government, manufacturers, wholesalers
and other suppliers, current/potential
competitors have on pricing decisions
• To present a framework for developing a
retail price strategy: objectives, broad
policy, basic strategy, implementation,
and adjustments

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○ There are factors that retailers must
consider when setting prices, let us first
define the term price.
○ In the simplest sense, price is the
amount of money charged for a product.
○ More broadly, it is the sum of all the
values that consumers give up in order
to gain the benefits of having or using a
product or service
○ Price is the only element in the retail mix
that produces revenues; all other
elements represent cost.
What is Price?

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Basic Pricing Model

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Feeling Ripped Off

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Factors Affecting
Retail Price Strategy

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Basic Pricing Model
According to the pricing model, the two most basic
factors to consider are as follows:
1. Product Costs – the retailer’s cost to make
the merchandise available to the customer
sets the price floor. This means that there are
no profits earned if prices are set below cost.
2. Customer Perceptions of Value – when
customers buy a product they exchange
something of value to acquire something they
value. Retailers need to understand how much
value consumers place on the benefits that
they will receive from a product. This value
sets the price ceiling as there will be no
demand if prices are set above this level.

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• Retailers often think that cutting
prices is the best answer.
• This is often not so.
• In fact, unnecessary price
reductions can lead to lost profits
and destructive price wars.
• Also, price reductions can cheapen
a brand by giving the impression
that price is more important than
delivering value to customers.

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• Retailers must carefully consider all
aspects of their marketing strategy
in order to come up with the most
effective pricing.
• With that said, there are two distinct
methods of setting retail prices:
1. Cost-oriented Method
2. Demand-oriented method

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• the retail price is determined
by adding a fixed percentage
to the cost of the merchandise
Cost-oriented
Method
• the retail prices are based on
what customers would expect
or be willing to pay
Demand-
oDemand-oriented
Methodriented
Method
Demand-oriented
Method

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• At this point, it may occur to you that
the two above pricing methods are
exactly in sync with the two basic
factors identified in the pricing model
which we discussed earlier.
• The cost-oriented method shows a
deliberate consideration of product
costs.
• The demand-oriented method shows
careful consideration of customer
perceptions of value.

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• This method to pricing involves
taking a financial orientation to
pricing where the performance of
pricing decisions is assessed
based on gross margin.
• One form of cost-oriented pricing
is mark-up pricing.
Cost-oriented Method

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• In mark-up pricing, retailers set prices
by adding per-unit merchandise costs,
retail operating expenses, and desired
profit. The difference between
merchandise costs and selling price is
the mark-up.
• For example, if a retailer like
Collectibles buys a pair of shoes for
J$2000 and sells it for J$4000, the
extra $2,000 (mark-up) covers
operating costs and profit.
Cost-oriented Method

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• The level of mark-up depends on the a
product’s traditional mark-up, the
supplier’s suggested list price,
inventory turnover, competition, rent
and other overhead costs, the extent
to which the product must be serviced,
and the selling effort.
• Mark-ups are usually calculated on a
percentage basis. In the example, the
mark up is 50% at retail or 100% at
cost.
Cost-oriented Method

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• This is how mark-up percentage is calculated:
o Mark-up percentage at retail = Retail Selling Price –
Merchandise Cost
Retail Selling Price
o Mark-up percentage at cost = Retail Selling Price –
Merchandise Cost
Merchandise Cost
• This method of pricing is popular among
retailers. It is simple because a retailer can apply
a standard mark-up for a product more easily
than it can estimate demand at various prices
Cost-oriented Method

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• At the end of the day, the customer will have
the final say on whether a product’s price is
too high.
• In this method of pricing, the primary
consideration is customer value.
• The retailer must first assess customer needs
and value perceptions then ensure that prices
are seen as offering good value in the
customers’ minds.
• Often times, customers are not just looking for
the lowest price. Rather, customers tend to be
more interested in the best value for their
money – which may be derived from a
superior shopping experience.
Demand-oriented Method

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• The key to using this method of
pricing is to understand the price
elasticity of demand- the impact of
sales as a result of changes in prices
or in other words, the sensitivity of
customers to price changes in terms
of the quantities that they will buy.
• If small changes in price leads to a
substantial percentage in the number
of units bought, demand is price
elastic.
Demand-oriented Method

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• In principle, retailers are able to set
higher prices on products for which
customers are less price-sensitive.
• Outlined below are the factors that
determine customers’ sensitivity to
prices:
1. Substitute Awareness Effect
2. Total Expenditure Effect
3. Difficult Comparison Effect
4. Benefits/Price Effect
Demand-oriented Method

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• Difficult Comparison Effect –
Customers are more sensitive to
price when comparison of
competing offerings is difficult.
Demand-oriented Method

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○ Substitute Awareness Effect –
customers are more sensitive to price
when there are a number of
alternative retail outlets to choose
from.
○ For example, King Street, downtown
Kingston with a vast number of
Indian-owned jewellery/appliance
stores offering very similar
merchandise. Customer choices are
primarily price-driven.
Demand-oriented Method

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○ Total Expenditure Effect – Customers
are more price-sensitive when the
expenditure is large, both in dollars
and as a percentage of income.
○ For example, customers shopping in
ATL Appliances are more sensitive to
the price of a Samsung French-door
refrigerator that retails for over
J$300,000 as opposed to a Samsung
clothes iron that retails for J$4,000.
Demand-oriented Method

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○ Benefits/Price Effect – customers
are more sensitive to prices when
they cannot perceive special
benefits from the product.
○ For example, high end restaurant
brand such as Majestic has a high
image and a sense of exclusivity
that customers are prepared to pay
higher prices for as they perceive
higher benefits that justify higher
prices.
Demand-oriented Method

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○ The cost-oriented method is designed
to ensure that retailers earn desired
levels of profits; it is quick, mechanical,
and relatively simple to use.
○ On the other hand, the demand-
oriented method is consistent with the
core philosophy of the marketing
concept as it takes customers’ needs
and wants into consideration. Also, it
helps the retailer to determine profit-
maximizing prices. The drawback of
the demand-oriented pricing is that it is
difficult to implement.
Best Pricing Method

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○ Which pricing method is best?
○ The answer is both! Each method
has its advantages.
Best Pricing Method

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○ It is therefore prudent, that
retailers use a combined demand
and cost-oriented method.
○ The retailer should use the cost-
oriented method as the initial
basis of the pricing strategy,
considering forecasted profit
levels.
○ Then, the demand-oriented
method could be used to fine-tune
the pricing strategy.
Best Pricing Method

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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.

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Market Segments by Price Sensitivity
● Economic consumers
● Status-oriented consumers
● Assortment-oriented consumers
● Personalizing consumers
● Convenience-oriented
consumers

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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

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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.

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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.

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A Framework for Developing a
Retail Price Strategy

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Market
Skimming
Market
Penetration
Objectives and Pricing

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Specif
ic
Pricin
g
Object
ives

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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.

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Pros and Cons of
Everyday Low Pricing
Pros:
● Reduced
advertising
expense
● More predictable
sales levels
● Fewer peaks and
ebbs of sales
distribution
Cons:
● Decreased
excitement
● Potentially less store
traffic due to specials
● Less “cherry-picking”
by consumers who
only purchase
specials

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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.

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Timing Markdowns
● Early markdown policy
● Late markdown policy
● Staggered markdown
policy
● Automatic markdown
plan
● Storewide clearance