Looking to improve inventory productivity and control? See this first session of the 3-part Retailer Success webinar series from Retail Pro International and Management One, the consulting brains behind Retail Pro Planning Open to Buy software, to discover principles and tactics that will help you manage inventory better and compete profitably. • See why the lowest price is not always the right price • Explore the psychology of price from the retailer and consumer's point of view • Learn tactics to remain competitive and maximize long-term profits

1. The Markup and Markdown Game
THE
PSYCHOLOGY
OF PRICE
Paul Erikson | Retail Pro Planning | planning@retailpro.com

2. 2

3. 3
“All our knowledge
has its origin in our
perceptions”
– Leonardo da Vinci

4. INITIAL MARKUP
FINDING THE RIGHT PRICE

5. 5

6. 6© Jo Jakeman – Flickr

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“…I double the
cost and then add
a $1 or $2…”
“…I multiply
the cost by
2.2…”
“…that’s what
I always price
it at…”

8. 3 KEY
ELEMENTS

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Markdowns
Operating
Expenses
Desired
Net Profit
3 Key Elements

10. 10
Markdowns
Operating
Expenses
Desired
Net Profit
3 Key Elements

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Markdowns
Operating
Expenses
Desired
Net Profit
3 Key Elements

12. IMU TARGET
FORMULA

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Markdown %
+ Operating Expense %
+ Net Profit Goal %
100% + Markdown %
IMU =

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Markdowns
20%
Operating Expenses
40%
Desired Net Profit
6%
1.0 + .20
.06 + .40 + .20
= .55

15. 15
IMU 52.5% 55%
MDS 20% 20%
MMU 43% = $430K 46% = $460K
EXP 40% = $400K 40% = $400K
NET 3% = $ 30K 6% = $ 60K
Annual Sales $1,000,000

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52.5% 55%
$ 9.00 cost $ 9.00 cost
$19.00 retail $19.99 retail
Pricing for Profit

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•Premium prices set expectation of
excellence in consumers’ minds
•Jeans priced at $100, sneakers for $250,
and a car for $80000 make customers think
they are buying better products
Prestige Pricing
$

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DISPLAY RED PRICES TO MEN

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20. POSITION
LOW PRICES TO THE LEFT
HIGH PRICES TO THE RIGHT

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.
GOOD
MOVIES
RATED
BAD
MOVIES
RATED

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• .
.

23. REMOVE THE COMMA

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$1,499Research has found
removing commas
can make the price
seem lower $1499
VS

25. COMPETITIVE PRICING

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MULTIPLE PRICING
DISCOUNT PRICING
LOSS LEADERS
KNOW YOUR COMPETITION
CUSTOMER SERVICE
COMPETITIVE PRICING
JOSEPH A. BANK

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MULTIPLE PRICING
DISCOUNT PRICING
LOSS LEADERS
KNOW YOUR COMPETITION
CUSTOMER SERVICE
COMPETITIVE PRICING
JC PENNEY
COMPETITIVE PRICING

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MULTIPLE PRICING
DISCOUNT PRICING
LOSS LEADERS
KNOW YOUR COMPETITION
CUSTOMER SERVICE
COMPETITIVE PRICING

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MULTIPLE PRICING
DISCOUNT PRICING
LOSS LEADERS
KNOW YOUR COMPETITION
CUSTOMER SERVICE
COMPETITIVE PRICING

30. 30
MULTIPLE PRICING
DISCOUNT PRICING
LOSS LEADERS
KNOW YOUR COMPETITION
CUSTOMER SERVICE
COMPETITIVE PRICING

31. STEERING CLEAR OF
COST-BASE PRICING

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33. REDUCE THE
PAIN OF PAYING

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UBER IS DIFFERENT

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REMOVE THE
CURRENCY
SYMBOL

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SEPARATE PAYMENT MEDIUMS

37. MARKDOWNS
THE GOOD AND THE BAD

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The Good
Keeps
inventory
fresh
Assures
good cash
flow
Cost of
doing
business

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The Good
Keeps
inventory
fresh
Assures
good cash
flow
Cost of
doing
business

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Keeps
inventory
fresh
Assures
good cash
flow
Cost of
doing
business
The Good

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Higher than
other expenses
on the income
statement
Raises the cost
of goods sold
and result in a
net loss
The Bad

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Higher than
other expenses
on the income
statement
Raises the cost
of goods sold
and result in a
net loss
The Bad

43. EXCESSIVE
MARKDOWNS
ROOT CAUSES

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Poor
buying
Large
assortments
Duplication
Root Causes

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Poor
buying
Large
assortments
Duplication Overbuying
Root Causes

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1. 90% of your sales come from
inventory less than 10 weeks old
2. Recognize short shelf life
3. Recognize slow sellers in season
Overbuying

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• More likely to avoid a loss than
seek a win
• Money is good! Giving it up is
bad!
• Framing sales around “Save”
versus how much they are
spending
• “You saved $xx by shopping
with us today”
Lowest price doesn’t always win the sale

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•Irritating to the consumer
•Dangerous for the retailer
Psychology of Percentages

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•Consumers more likely to respond
to a known amount
•Simple is the new hook
•Recent studies have
•Tested $ effectiveness
Use dollar savings, not percentages

50. MARKDOWN
RULES

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Plan
Plan
Plan
Markdown Rules

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Use a
budget…
don’t be
under
Markdown Rules

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Price points,
not
percentages
Markdown Rules

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Learn from
every
markdown
Markdown Rules

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Pay
your tuition
Markdown Rules

56. MARKDOWN
TRUTHS

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MARKDOWN TRUTH #1
Always explain to your customer
why the items are marked down

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Overbuying is the number one
cause of excessive markdowns
MARKDOWN TRUTH #2

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Your first markdown is the cheapest!
MARKDOWN TRUTH #3

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The price you paid has nothing
to do with the markdown price
MARKDOWN TRUTH #4

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Learn from every markdown
MARKDOWN TRUTH #5

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Emphasize amount of saving
rather than the price itself
MARKDOWN TRUTH #6

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Always keep your markdown
items at the back of the store!
MARKDOWN TRUTH #7

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Can you name the retail
vertical that never discounts?
MARKDOWN TRUTH #8

65. Contact us at planning@retailpro.com to request
your free inventory analysis today and see:
• Which classes are performing well?
• Where can you increase sales?
• How can you reduce your markdowns?
• How can you generate more cash flow?
• Does your expense structure work for your business?
Request your free
inventory analysis
today