Merchandise Management

Pricing

·        Buying Systems 

·        Planning Merchandise Assortments 

·        Buying Merchandise

·        Retail Communication Mix 

Pricing Issues 

Pricing Strategies

·        Everyday Low Pricing (EDLP) Vs Hi-Lo Pricing

How Should Prices Be Set?

·        Demand Oriented Pricing

How Do Retailers Set Price?

·        Cost Oriented Pricing

Legal Issues in Pricing 

·        Everyday Low Prices (EDLP)

·        Charge the same price all the time

·        Set prices between regular non-sale price and deep discount sale prices of a high/low pricing competitor.

·        EDLP retailers typically still have some sales.

High/Low Pricing

·        Regular prices are higher than EDLP competitors, but merchandise frequently on sale at lower prices.

Everyday Low Pricing  E.D.L.P. 

Benefits to Consumers

·        Assured of Low Price on Every Visit

·        Less Stock outs

Benefits to Retailer

·        Lower Advertising Expense

·        Lower Labor Costs

Hi-Lo Pricing 

Benefits to Consumer

·        Spend Time to Find Lowest Price

Benefits to Retailer

·        Maximize Profits -- Price Discrimination 

Problem: Trains People to Buy on Deal

Pricing Strategies 

EDLP

·        Builds loyalty – guarantees low prices to customers

·        Lower advertising costs

·        Better supply chain management

·        Fewer stock outs

·        Higher inventory turns 

Hi-Lo

·        Higher profits – price discrimination

·        More excitement

·        Build short-term sales and generates traffic

Considerations in Setting Retail Price 

·        Price of Merchandise 

·        Cost of Merchandise 

 Methods for Setting Price 

·        Demand-Oriented – Charge as much a customers are willing to pay

·        Cost-Oriented – Set price at a fixed percent over cost of merchandise

·        Competitor-Oriented – Set price in relation to competitor’s prices

Reductions 

·        Markdowns (Sales)

·        Discounts to employees

·        Inventory shrinkage due to shoplifting and employee theft

Setting Retail Price Based on Cost 

Determine:

·        Cost of Goods Sold

·        Planned and Forecasted Reductions

·        Desired Maintained Markup

Calculate Initial Markup % Based on Cost of Goods Sold, Planned and Forecasted Reductions, and Desired Maintained Markup

Calculate Initial Retail Price Based on Cost of Merchandise and Initial Markup Percent

Setting Prices Based on Demand – Price Customer Is Willing to Pay 

·        Estimate Sales Made at Different Price Levels

·        Calculate Profit at Each Price Level

·        Set Prices to Maximize Profits

Methods for Estimating Sales at Different Price Levels 

·        Analyze Historical Sales and Prices Using Statistical Methods

·        Conduct Price Experiments

·        Use Judgment

Factors That Affect Customer’s Sensitivity to Price 

·        Customer Income (-)

·        Need for the Product (-)

·        Availability of Product from Competitors (+)

·        Frequency and Amount Spent on Product (+) 

Reasons for Taking Markdowns 

·        Get Rid of Slow-Moving, Obsolete, Uncompetitive Priced Merchandise

·        Increase Sales and Profits through Price Discrimination

·        Generate Cash to Buy Better Selling Merchandise

·        Increase Traffic Flow and Sale of Complementary Products Generate Excitement through a Sale 
 

Markdowns Are a Form of Price Discrimination 

·        Occurs when a firm sells the same product to two or more customers at different prices.

·        Generally illegal with a vendors sells to retailers except:

1.      Costs are different

2.     Quantity and functional discounts

3.     Changing market conditions

·        Generally legal when retailer sells to consumers.

1.      Negotiation is widely used for furniture, autos, and other “high ticket” items.

Solution to Problems in Implementing Price Discrimination 

·        Set prices based on customer characteristics related to willingness to pay

·        Fashion sensitive customers will pay more so charge higher prices when fashion first introduced – reduce price later in season

·        Price sensitive customers will expend effort to get lower prices – coupons

·        Elderly customers eat earlier and are more price sensitive so offer early bird specials

Types of Price Discrimination 

·        First Degree – Set unique price for each customer equal to customer’s willingness to pay

1.      Auctions

·        Second Degree – Offer the same price schedule to all customers

1.   Quantity discounts

·     Third Degree – Charge different groups different prices

1.      Markdowns Late in Season

2.     Early Bird Special

3.     Seniors Discounts

4.     Over Weekend Travel Discount

5.     Coupons 

How To Reduce Markdowns 

·        Use Markdown Optimization Models

·        Improve Sales Forecasts and Merchandise Budget Plan

·        Work with Vendors to Plan Deliveries

Liquidating Markdown Merchandise 

·        Auction merchandise on Internet (eBay or liquidation exchange)

·        Have special clearance location on own website

·        “Job out” the remaining merchandise to another retailer

·        Consolidate the marked-down merchandise

·        Give merchandise to charity

·        Carry the merchandise over to the next season

Coupons 

Purpose

·        Reduce price-to-price sensitive customers who will spend the effort to clip coupons

·        Induce customer to try products for first time

·        Convert first time users to regulars

·        Encourage large purchases

·        Increase usage

·        Protect market share

Rebates 

Money returned to the customer based on a portion of the purchase price.

Retailers’ perspective:  more advantageous than coupons since they increase demand, but retailer has no handling costs.

Manufacturers like rebates because:

·        Many customers don’t redeem.

·        They can offer price cuts to customers directly.

Using Price to Stimulate Sales 

·        Leader Pricing-setting a special low price on a product to attract buyers.

·        Price Lining-setting only a few price points rather than different prices for all products in a line.

·        Odd Pricing-prices that are “less than” the next full dollar price.  $23.99, $19.95, $1,995., $195,000, etc.

Leader Pricing 

Certain items are priced lower than normal to increase customer’s traffic flow and/or boost sales of complementary products.

Best items:  purchased frequently, primarily by price-sensitive shoppers.

Examples:  bread, eggs, milk, disposable diapers.

Price Lining 

A limited number of predetermined price points.

Ex:  $59.99 (good), $89.99 (better), and 129.99 (best)

Benefits:

Eliminates confusion of many prices.

Merchandising task is simplified.

Gives buyers flexibility.

Can get customers to “trade up.”

Odd Pricing 

A price that ends in an odd number ($.57) or just under a round number ($98).

Retailers believe practices increases sales, but probably doesn’t.

Does delineate:

Type of store (downscale store might use it.)

Sale

Legal Issues in Retail Pricing 

·        Price Discrimination

·        Vertical Price Fixing

1.      Resale Price Maintenance

·        Horizontal Price Fixing

·        Comparative Price Advertising

·        Bait and Switch Tactics

·        Scanned Versus Posted Prices 
  

Vertical Price Fixing 

·        Vertical Price Fixing -- Agreements to fix prices between parties at different levels of the same marketing channel.

·        Vendors can’t force retailers to sell at manufacturer suggested retail price (MSRP).

·        Retailers can sell above MSRP.

·        Often vendors tie selling products are MSRP with co-op advertising allowance

Predatory Pricing 

·        Establishing merchandise prices to drive competition from the marketplace.

Illegal!

·        Retailers can charge different prices at different locations if costs are different.

Comparative Price Advertising 

·        Compares price of merchandise offered for sale with a higher “regular” price or MSRP.

·        Good because it gives consumers information about what merchandise should sell for.

Illegal 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 

·        Have reference price in effect about one-third of the time.

·        Disclose how “sale” prices are set and how long they will be offered.

·        Offer a “satisfaction guaranteed policy”.

·        Be careful when using MSLP.

·        Use objective terms.

·        Use reference prices that can be easily verified.

Bait-and-Switch 

·        Lure customers into store by advertising a product at a lower than usual price (the bait) and then induces customer to switch to higher-priced model (the switch).

Can occur by:

1.      Retailer out of advertised model.

2.     Retailer has advertised model, but disparages it.