retail pricing, pricing strategies, price discrimination, considerations in setting prices, Price Optimization Software,markup, break even analysis, price adjustments, markdowns, variable pricing, EDLP

1. Retail Pricing
Dr. Parveen Nagpal

2. Retail Pricing
The importance of pricing decisions is growing because today’s customers
have more alternatives to choose from and are better informed about the
alternatives available in the marketplace.
Thus, they are in a better position to seek a good value when they buy
merchandise and services.
Value is the ratio of what customers receive (the perceived benefit of the
products and services offered by the retailer) to what they have to pay for it.
Value = Perceived benefits
Price
Thus, retailers can increase value and stimulate more sales (exchanges) by
either increasing the perceived benefits offered or reducing the price.

3. Retail Pricing
To some customers, a good value means simply paying the lowest price
because other benefits offered by retailers are not important to them.
Others are willing to pay extra for additional benefits as long as they believe
they are getting their money’s worth in terms of product quality or service.
If retailers set prices higher than the benefits they provide, sales and profits
will decrease.
In contrast, if retailers set prices too low, their sales might increase but profits
might decrease because of the lower profit margin.
In addition to offering an attractive value to customers, retailers need to
consider the value proposition offered by their competitors and legal
restrictions related to pricing.
Thus, setting the right price can be challenging.

4. Considerations in Setting Retail Price
1. Price Sensitivity of Consumers and Cost
Generally, as the price of a product increases, the sales for the product will
decrease because fewer and fewer customers feel the product is a good
value.
The price sensitivity of customers determines how many units will be sold at
different price levels.
If customers in the target market are very price-sensitive, sales will decrease
significantly when prices increase and vice – versa.
Price Elasticity - A commonly used measure of price sensitivity, or the
percentage change in quantity sold divided by the percentage change in
price.

5. Considerations in Setting Retail Price
There are various factors affect the price sensitivity for a product:
i. The more substitutes a product or service has, the more likely it is to be
price-elastic (sensitive).
ii. Products and services that are necessities are price-inelastic. Thus,
medical care is price-inelastic, whereas airline tickets for a vacation are
price-elastic.
iii. Products that are expensive relative to a consumer’s income are price-
elastic. Thus, cars are price elastic, and books and movie tickets tend to
be price-inelastic

6. Considerations in Setting Retail Price
2. Competition
Consumers have lots of choices for goods and services, and they search for
the best value.
Retailers therefore need to consider competitors’ prices when setting their
own.
Setting price on the basis of customer price sensitivity (elasticity) ignores the
effects of competitors’ prices.
Retailers can price above, below, or at parity with the competition.
The chosen pricing policy must be consistent with the retailer’s overall
strategy and its relative market position.
Retailers can reduce price competition by: Developing lines of private label
merchandise, Negotiating with national brands manufacturers for exclusive
distribution rights, Having vendors make unique products for the retailer.

7. Considerations in Setting Retail Price
3. Economic Constraints
Some products are more sensitive to changes in unemployment and workers
wages than others.
Makers of luxury products will need to drop prices especially when the
economy is in a downturn. In other words, during economic slowdown, prices
are lowered to generate demand.
4. Other elements of the marketing mix
It is important to understand that prices cannot be set without reference to
other parts of the marketing mix.
The distribution channels used will affect price – different prices might be
charged for the same product sold direct to consumers or via intermediaries.
The price of a product in the decline stage of its product life-cycle will need to
be lower than when it was first launched.

8. Setting Retail Price
Theoretically, retailers maximize their profits by setting prices on the basis of
the price sensitivity of customers and the cost of merchandise.
In reality, retailers need to set price for over 50,000 SKUs many times during
year.
They set prices based on pre-determined markup and merchandise cost
They make adjustments to markup price based on customer price sensitivity
and competition.
Retail Price (RP) = Cost of merchandise (COM) + Markup (MKP)
Thus Markup = Retail price - cost of merchandise
Mark up covers the retailers operating expenses needed to sell the
merchandise.

9. Setting Retail Price
Retailers frequently reduce the price of items for special promotions or to sell
excess stock at the end of season
Also employee discounts are given
Factors that reduce the actual selling price from initial sales price are called as
reductions
Thus there is a difference between initial markup and maintained markup.
Initial markup = RP initially set – COM
Maintained markup = Actual realized sale - cost of product
Maintained markup= Gross margin for the product.

10. Setting Retail Price
Setting prices by simply marking up merchandise cost neglect other factors
(e.g., price sensitivity, competition, the sales of complementary products)
Price Optimization Software
– Utilizes a set of algorithms that analyzes past and current merchandise sales
prices.
– Estimates the relationship between prices and sales generated.
– Determines the optimal (most profitable) initial price for the merchandise
and size and timing for markdowns.

11. Setting Retail Price
Markups
Initial Markup: Retail selling price is initially set for the merchandise minus
the cost of the merchandise.
Maintained Markup: The actual sales realized for the merchandise minus its
costs.
Reductions
• Markdowns (Sales)
• Discounts to employees
• Inventory shrinkage due to shoplifting and employee theft

12. Setting Retail Price
Break-Even Analysis
Retailers want to know the break-even sales to generate a target profit.
Break-even volume and dollars justify introducing a new product, product
line, or department.
Break-even analysis determines, on the basis of a consideration of fixed and
variable costs, how much merchandise needs to be sold to achieve a break-
even (zero) profit.
• Fixed costs: do not change with the quantity of product produced and sold.
• Variable costs: vary directly with the quantity of product produced and sold
(e.g., direct labor and materials used in producing a product)

13. Price Adjustments
Retailers adjust prices over time (markdowns) and for different customer
segments (variable pricing).
• 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
Markdown Optimization – Software 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.

14. Variable Pricing and Price Discrimination
Retailers use a variety of techniques to maximize profits by charging different
prices to different customers
• Individualized Variable Pricing (First Degree of Price Discrimination)
– Set unique price for each customer equal to customer’s willingness to pay
– Examples: Auctions, Personalized Internet Prices (Retailers can assess each
customer’s willingness to pay by analyzing past purchase behavior and then
serve up Web pages with unique pricing based on the customer’s willingness to
pay)
• Self-Selected Variable Pricing (Second Degree of Price Discrimination)
An alternative approach for variable pricing is to offer the same multiple-price
schedule to all customers but require that customers do something to get the
lower price. Example, sports teams alter ticket prices on the basis of the
opponent, the day of the week, and the time of the year; but these prices are
set before the season.

15. Variable Pricing and Price Discrimination
- Promotional Markdowns: to promote merchandise, increase sales and
increase customer traffic flow. Retailers plan promotions in which they take
markdowns for holidays, for special events, and as part of their overall
promotional program.
- Clearance Markdowns for Fashion Merchandise: when retailers want to get
rid of unwanted merchandise, this merchandise can also be used to attract
different market segments based on their degree of price sensitivity. Fashion-
conscious customers who have a high willingness to pay because they want to
be the first to wear the latest fashions self-select to pay higher prices. More
price-sensitive customers wait to buy the merchandise at the end of the
season when prices are lower
- Coupons: induce customers to try products for the first time, convert first-time
users to regular users, encourage large purchases, increase usage, and protect
market share against the competition.

16. Variable Pricing and Price Discrimination
- Price Bundling: practice of offering two or more different products or services
for sale at one price. E.g. McDonald’s offers a bundle of a sandwich, french
fries, and a soft drink in a Value Meal at a discount compared with buying the
items individually.
- Multiple-Unit Pricing/ Quantity Discount: refers to the practice of offering
two or more similar products or services for sale at one lower total price. For
example, a pack of 3 tee shirts sold at Rs. 800, when an individual is priced at
Rs. 300/-.

17. Variable Pricing and Price Discrimination
• Variable Pricing by Market Segments (Third Degree of Price
Discrimination)
Retailers may charge different prices to different demographic market
segments. Example:
- Movie theaters have lower ticket prices for seniors and college students,
presumably because these segments are more price-sensitive than other
customers.
- Zone Pricing: practice of charging different prices in different stores,
markets, regions or zones. Retailers generally use zone pricing to address
different competitive situations in their various markets. Some multichannel
retailers implement zone pricing by asking customers to enter their zip code
before they are quoted a price.

18. Suggestions to Avoid Price Discrimination
Set prices based on customer characteristics related to willingness to pay
Fashion sensitive customers will pay more so retailers can charge higher
prices when the fashion is first introduced and gradually reduce price later in
season
Price sensitive customers will expend effort to get lower prices hence
coupons can be given
Elderly/ senior customers are more price sensitive so retailers may offer early
bird special.
Provide as much information about the product or service as possible so that
the customer can decide whether the price is fair.
Make relevant cost and quality information available to customers.

19. Pricing Strategies
Retailers use two basic retail pricing strategies -
High/Low Pricing
Retailers using a high/low pricing strategy frequently - often weekly - discount
the initial prices for merchandise through sales promotions.
However, some customers learn to expect frequent sales and simply wait
until the merchandise they want goes on sale and then stock up at the low
prices
Advantages: Increases profits through price discrimination, Sales create
excitement by drawing lot of customers, Helps sell merchandise faster
(especially the slow-selling merchandise)
Limitations: People become accustomed to buy on deal and wait, May have
an adverse effect on profits.

20. Pricing Strategies
Everyday Low Pricing (EDLP)
Mostly adopted by discount stores, D-Mart, this strategy emphasizes the
continuity of retail prices at a level somewhere between the regular non-sale
price and the deep-discount sale price of high/low retailers.
Although EDLP retailers embrace their consistent pricing strategy, they
occasionally have sales, just not as frequently as their high/low competitors.
To reinforce their EDLP strategy, some retailers have adopted a low-price
guarantee policy that guarantees customers the retailer will have the lowest
price in a market for products it sells.
The guarantee usually promises to match or better any lower price found in
the market and might include a provision to refund the difference between
the seller’s offer price and the lower price.

21. Pricing Strategies
Advantages:
Assures customers of low prices: The EDLP strategy lets customers know that
they will get the same low prices every time they patronize the EDLP retailer.
Customers do not have to read the ads and wait for items they want to go on
sale
Reduces advertising and operating expenses: The stable prices caused by
EDLP limit the need for the weekly-sale advertising used in the high/low
strategy. In addition, EDLP retailers do not have to incur the labor costs of
changing price tags and signs and putting up sale signs.
Reduces stockouts and improves inventory management: The EDLP approach
reduces the large variations in demand caused by frequent sales with large
markdowns. As a result, retailers can manage their inventories with more
certainty.

22. Pricing Techniques to Increase Sales & Profits
• Leader Pricing
Certain items are priced lower than normal to increase customers' traffic flow
or to boost sales of complementary products.
The best items for leader pricing are frequently purchased products (loss
leaders)
The retailer hopes consumers will also purchase other products while buying
loss leaders. E.g. frequently purchased products like bread, milk, eggs etc.
One problem with leader pricing is that it might attract shoppers referred to
as cherry pickers, who go from one store to another, buying only items that
are on special. These shoppers are clearly unprofitable for retailers.

23. Pricing Techniques to Increase Sales & Profits
• Price Lining
Retailers offer a limited number of predetermined price points within a
classification.
Customers and retailers can benefit from such a strategy:
- Confusion that often arises from multiple price choices is eliminated.
- Merchandising task is simplified for the retailer.
- Price lining can also give buyers greater flexibility.
- Customers may “trade up” to more expensive offerings
E.g. If a camera store starts carrying a “super deluxe” model, customers will
be more likely to purchase the model that was previously the most expensive.
Retailers must decide whether it is more profitable to sell more expensive
merchandise or save money by paring down their stock selection.

24. Pricing Techniques to Increase Sales & Profits
• Odd Pricing
The practice of using a price that ends in an odd number, typically a 9.
The theory behind odd pricing is the assumption that shoppers do not notice
the last digit or digits of a price, so that a price of $2.99 is perceived as $2.
An alternative theory is that “9” endings signal low prices. Thus, for products
that are believed to be sensitive to price, many retailers will round the price
down to the nearest 9 to create a positive price image. If, for example, the
price would normally be $3.09, many retailers will lower the price to $2.99.

25. Legal and Ethical Pricing Issues
• Predatory Pricing
Predatory pricing arises when a dominant retailer sets prices below its costs to
drive competitive retailers out of business.
The predator hopes to raise prices when the competition is eliminated and
earn back enough profits to compensate for its losses.
• Resale Price Maintenance
Vendors often encourage retailers to sell their merchandise at a specific price,
known as the manufacturer’s suggested retail price (MSRP).
Vendors set MSRPs to reduce retail price competition among retailers,
eliminate free riding, and stimulate retailers to provide complementary
services.
Vendors enforce MSRPs by withholding benefits such as cooperative
advertising or even refusing to deliver merchandise to noncomplying retailers.

26. Legal and Ethical Pricing Issues
• Horizontal Price Fixing
It involves agreements between retailers that are in direct competition with
each other to set the same prices.
This practice clearly reduces competition and is illegal.
As a general rule of thumb, retailers should refrain from discussing prices or
terms and conditions of sale with competitors.
If buyers or store managers want to know competitors’ prices, they can look
at a competitor’s advertisements, its Web sites, or its stores.

27. Legal and Ethical Pricing Issues
• Bait-and-Switch Tactics
It is an unlawful, deceptive practice that lures customers into a store by
advertising a product at a lower-than-normal price (the bait) and then, once
they are in the store, induces them to purchase a higher-priced model (the
switch).
Bait and switch usually involves the store either having inadequate inventory
for the advertised product or pushing salespeople to disparage the quality of
the advertised model and emphasize the superior performance of a higher-
priced model.
To avoid disappointing customers and risking problems with the Federal Trade
Commission (FTC), the retailer needs to have sufficient inventory of
advertised items and offer customers rain checks if stockouts occur.

28. Legal and Ethical Pricing Issues
• Scanned versus Posted Prices
Although customers and regulators are concerned about price-scanning
accuracy, studies usually find a high level of accuracy.
In general, retailers lose money from scanning errors because the scanned
price is below the posted price.
However, consumer groups and state’s attorney generals’ offices do find and
pursue price discrepancies in retailers’ favor.
Periodic price audits are an essential component of good pricing practices.
Price audits of a random sample of items should be done periodically to
identify the extent and cause of scanning errors and develop procedures to
minimize errors.

29. Legal and Ethical Pricing Issues
• Deceptive Reference Prices
A reference price is the price against which buyers compare the actual selling
price of the product, and thus it facilitates their evaluation process.
The retailer labels the reference price as the “regular price” or “original
price.”
When consumers view the “sale price” and compare it with the provided
reference price, their perceptions of the value of the product or service will
likely increase.

30. References
1. Michael Levy & Barton A Weitz, “Retailing Management”, 8th Edition, Tata
Mc Graw Hill.
2. Swapna Pradhan, “Retailing Management – Text and Cases”, 5th Edition,
Tata Mc Graw Hill.
3. Nagpal, Sharma “Retail Management”, TYBMS, Sheth Publishers