Retail Management
Chapter 14 – Retail Pricing
PART I: SHORT ANSWER QUESTIONS
1. What types of retailers often have high/low pricing? What types of retailers
generally use an everyday low pricing strategy? How would customers likely react if
a retailer switched its pricing strategy? Explain your response.
• High/Low Pricing – Retailers using a high/low pricing strategy frequently—often
weekly—discount the initial prices for merchandise through sales promotions. Examples:
Department stores and specialty stores. Some customers learn to expect frequent sales
and simply wait until the merchandise they want goes on sale and then stock up at the
lower prices.
• Everyday Low Pricing – Many retailers, particularly supermarkets, home improvement
centers, and discount stores, have adopted an everyday low pricing (EDLP) strategy. This
strategy emphasizes the continuity of retail prices at a level somewhere between the
regular nonsale 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.
• Changing the pricing strategy may delight some customers and confuse others.
2. Why do retailers take markdowns?
• Markdowns can be classified as either clearance (to get rid of merchandise) or
promotional (to generate sales).
• When merchandise is slow-moving, obsolete, at the end of its selling season, or
priced higher than competition, it generally gets marked down.
• Markdowns are part of the cost of doing business. Retailers set their initial
markup high enough so that after markdowns and other reductions are taken, the
planned maintained markup is achieved.
• Retailers employ markdowns to promote merchandise to increase sales.
Markdown sales generate cash flow to pay for new merchandise.
• Markdowns are also taken to increase customers’ traffic flow.
• Markdowns may also increase the sale of complementary product
3. How do they optimize markdown decisions?
• Instead of depending on arbitrary rules for taking markdowns, retailers can benefit
significantly from merchandising optimization software.
• Merchandising optimization software is a set of algorithms that monitors
merchandise sales, promotions, competitors’ actions, and other factors to
determine the optimal (most profitable) price and timing for merchandising
activities, especially markdowns.
• The optimization software works by constantly refining its pricing forecasts on
the basis of actual sales throughout the season.
Retail Management
• Retailers must also work closely with their vendor partners to coordinate
deliveries and help share the financial burden of taking markdowns.
4. How do they reduce the amount of markdowns by working with vendors?
• Retailers can reduce the amount of markdowns by working closely with their
vendors to time deliveries with demand.
• Retail buyers can often obtain markdown money – funds a vendor gives the
retailer to cover lost gross margin dollars that result from markdowns and other
merchandising issues.
• Collaborative supply chain management systems reduce the lead time for
receiving merchandise so that retailers can monitor changes in trends and
customer demand more closely, thus reducing markdowns.
5. How do they liquidate markdown merchandise?
• Retailers can use one of five strategies to liquidate merchandise:
a. Sell the remaining merchandise to another retailer.
b. Consolidate the unsold merchandise.
c. Place the remaining merchandise on an Internet auction site, like eBay or have a
special clearance location on its own webpage.
