Price is the value placed on what is exchanged,

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.

Price is an integral element of retail

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.

Factors to be considered while setting up an appropriate price are:

The primary factor that need to be considered while

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.

FACTORS TO BE CONSIDERED WHILE PRICING A PRODUCT.

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.

Legal and Ethical Pricing Issues

#rice $iscrimination #redatory #ricing %esale #rice &aintenance 'ori(ontal #rice fixing )ait and *witch tactics *canned vs. #osted #rices

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Ethical pricing issues

#rice discrimination. occurs when retailer charges diff

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.

Potential Deceptions of Comparative Price Advertising

Comparison price advertising inflates perceptions of savings and value, and reduces search for lower prices. Consumers use price to infer quality. If advertised reference price is fictitious, then customer is deceived.

Guidelines for Retailers to Avoid Deception in Comparative Price Advertising

ave reference price in effect a!out one"third of the time. Disclose how #sale$ prices are set and how long they will !e offered. %ffer a #satisfaction guaranteed policy$. &e careful when using '()P. *se o!+ective terms. *se reference prices that can !e easily verified.

Ethical pricing issues

)ait and switch tactics. deceptive practice wherein the

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.

ait and "witch #cont$%

%etailers should.
'ave sufficient "uantities ;ive a 9rain check: $ont disparage merchandise

)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.

6t is the point at which the retailer neither

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.

)reak even revenue ?

Fixed costs +!1ariable cost per unit

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$

The cumulati#e markup is calculated for a group of products.

Initial 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.

&aximi'e Pro(its through Price )iscrimination

8ant Charge 0very Customer the &aximum They 2re 8illing to #ay #roblem
$ont know willingness to pay 8ith list prices cant prevent high willingness to pay

customers from buying at low 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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+easons (or ,a-ing &ar-downs

Clearance &arkdowns to get rid of

slow!moving obsolete merchandise

#romotional &arkdowns
To increase sales and promote

merchandise To 6ncrease traffic flow and sale of complementary products generate excitement through a sale

To generate cash to buy additional

merchandise

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.ptimi'ing &ar-down )ecisions

Traditional 2pproach! Dse a set of arbitrary rules
*ell!Through. 6dentifies markdown items when its weekly sell!

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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&ar-down .ptimi'ation "o(tware Pro(itLogic

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Li/uidating &ar-down &erchandise

*ell the merchandise to another retailer Consolidate the unsold merchandise #lace merchandise on 6nternet auction site $onate merchandise to charity Carry the merchandise over to the next season

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Variable Pricing and Price )iscrimination

%etailers use a variety of techni"ues to maximi(e profits by charging different prices to different customers
6ndividuali(ed 1ariable #ricing 3First $egree of #rice

$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

*elf!*elected 1ariable #ricing 3*econd $egree of #rice

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(hoppers at *1rop2s use their loyalty card at a 1ios1 and receive unadvertised personali3ed coupons

e&ay, Auction on porsche speeder -./0

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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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"olution to Problems in Implementing Price )iscrimination

*et prices based on customer characteristics

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

the cost of the merchandise to arri#e at a price.

'ere retail price is considered to be the function of

cost and markup.

Thus&

(etail price = Markup =

"ost ) Markup (etail price "ost

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

P+ICI01
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.

Pricing "trategies: 2igh3Low Pricing

$iscount the initial prices through fre"uent sales promotions
2dvantages 6ncreases profits through price discrimination *ales create excitement *ells merchandise $isadvantages Train people to buy on deal and wait 'ave an adverse effect on profits

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Pricing "trategies: Everyday Low Pricing

0mphasi(es the continuity of retail prices at a level somewhere

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.

technology new $1$s.

Value Pricing

Value Pricing
#rice set in accordance with customer

perceptions about the value of the product/service

0xamples include status

products/exclusive products

!ompanies may be able to set prices according to perceived value.

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

1oing +ate #Price Leadership%

1oing +ate #Price Leadership%

6n case of price leader competitor have difficulty in competing on price G too

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

good/service in different markets

%e"uires different price elasticity of

demand in each market

"rices for rail travel differ for the same journey at different times of the day

)estroyer Pricing3Predatory Pricing

)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

Absorption3Full Cost Pricing

Absorption3Full Cost Pricing

Full Cost #ricing G attempting to set price to cover

both fixed and variable costs

&arginal Cost Pricing

&arginal Cost Pricing

&arginal cost G the cost of producing 5O0 extra or 5O0 fewer item of

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

&arginal Cost Pricing

0xample.

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)

#rices set to ensure coverage of variable costs and a Mcontribution to

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

+etailers View Price in ,erms o(:

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#rofitability *ales 1olume Consumer traffic *tore image

"etting the +etail Price

#rice!setting objectives.
*ales #rofit Competition

#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

Ad*usting the +etail Price

$iscount adjustments &arkon 2djustments &arkdown 2djustments Causes of markdowns Timing of markdowns *i(e of markdowns &arkdown strategies
#romotional #rice!line

&arkdown Control

Price Can be 4sed to Communicate5

*tatus *nob appeal Huality <ow purchase risk 0conomy

&erchandise Cost: A &a*or )eterminant o( Price

;ross 6nvoice #rice G Trade $iscounts G Huantity $iscounts G *easonal $iscounts G 5ther $iscounts ? 2et In#oice /rice Oet 6nvoice #rice G Cash $iscounts Q Transportation Charges Q 8orkroom 0xpenses ? Merchandise "ost #rice ? &erchandise Cost Q #rofit

Product Considerations
$ifferent products have the ability to command different

prices at different times and in different locations. &ust consider.

#erishability #roduct "uality #roduct uni"ueness

+etailers Compute &ar-up on +etail "elling Price (or "everal +easons:

#sychological %easons
&arkup on selling price is always

6nventory %easons
)eginning!of!month 0nd!of!

lower than a markup on cost

month and purchases are calculated at retail

Comparison %easons
)etween store operations 8ith trade statistics 8ith expressions of financial

0mphasis %easons

operating ratios which are computed as a R of sales

&ar-up
6nitial &arkup. 8hat you hope to receive7 &aintained &arkup. 8hat you actually receive7
;ross &argin ? &aintained markup

6nitial &arkup R is the key element in guiding retailers

price setting decisions

Ad*usting the +etail Price

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

Causes o( &ar-downs #cont$%

5perationally related causes.
$amaged or dirty merchandise 5dd lots &arket shifts

Factors A((ecting ,iming o( &ar-downs

Type of merchandise *tore image <ength of selling season Oature of target customer *i(e of initial markup 2vailability of selling and storage space %etailers sales promo policies ! 9mini: sales vs. 9big!event: sales