Chapter 13 – Retail Pricing
13-1
CHAPTER 13
RETAIL PRICING
ANNOTATED OUTLINE
INSTRUCTOR NOTES
• 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.
• If retailers set prices higher than the benefits they offer,
sales and profits will decrease.
• If retailers set prices too low, their sales might increase,
but profits might decrease due to the lower profit margin.
See PPT 13–3
Query students on what is a good
value for them when buying a
specific product, such as jeans or
I. Pricing Strategies
• Retailers use two basic retail pricing strategies: high/low
pricing and everyday low pricing (EDLP).
LO 13-1 Explain the difference
between a high/low pricing
strategy and an everyday low-
pricing strategy.
See PPT 13–6
Chapter 13 – Retail Pricing
13-2
B. Everyday Low Pricing
• This strategy stresses continuity of retail prices at a level
somewhere between the regular nonsale price and the
deep-discount sale price of the retailer’s competitors.
• Some retailers have adopted a low–price guarantee policy
in which they guarantee that they will have the lowest
possible price for a product or group of products. The
See PPT 13–5
Name retailers using EDLP
strategies from the following:
C. Advantages of the Pricing Strategies
• Advantages of High/Low Pricing:
o Increases profits through price discrimination
• Advantages of EDLP:
o Assures customers of low prices
See PPT 13–6
A chain of supermarkets that has
strong national buying power
wants to open several stores in a
II. Setting Retail Prices
LO 13-2 Identify the factors
retailers consider when pricing
Chapter 13 – Retail Pricing
13-3
A. Customer Price Sensitivity
• As the price of a product increases, the sales for the
product will decrease because fewer and fewer customers
See PPT 13–08, 13-9
1. Price Elasticity
• A commonly used measure of price sensitivity is price
elasticity. Price elasticity is the percentage change in
quantity sold divided by the percentage change in price.
• A number of factors affect the price sensitivity for a
product.
• The more substitutes a product or service has, the more
likely it is to be price elastic.
Ask students to list products or
services they would estimate to be
price elastic and others they
would estimate to be price
inelastic.
B. Competition
• Retailers can price above, below, or at parity with the
Ask students for examples of
retailers using each of these
Chapter 13 – Retail Pricing
13-4
C. Pricing of Services
• Additional issues need to be considered when pricing
1. Matching Supply and Demand
• Services are intangible and thus cannot be inventoried.
2. Determining Service Quality
• Due to the intangibility of services, it is often difficult for
D. Using Analytical Tools to Set Prices
• Many retailers need to set prices for over 50,000 SKUs and
make thousands of pricing decisions each month. From a
See PPT 13–15
1. Setting Prices Based on Costs
• Many retailers set prices by marking up the item’s cost to
2. Retail Price and Markup
Chapter 13 – Retail Pricing
13-5
• When setting prices based on merchandise cost, retailers
start with the following equation:
Retail price = Cost of merchandise + Markup
• The markup is the difference between the retail price and
(Retail price – Cost of merchandise)/Retail price
• The retail price based on the cost and markup percentage
is:
Setting prices is primarily
dependent on the margin
management component of the
strategic profit model. Although, if
prices are lowered, the velocity of
sales in terms of inventory turnover
See PPT 13–16, 13-17, and 13–18
3. Initial Markup and Maintained Markup
• Retailers rarely sell all items at the initial price. They
frequently reduce the price of items for special promotions
or to get rid of excess inventory at the end of a season.
• Initial markup is the difference between the retail selling
See PPT 13–19 and 13–20
Instructors may wish to stress the
difference between maintained
Chapter 13 – Retail Pricing
13-6
4. Setting Prices Using Break-Even Analysis
• Break-even analysis determines how much merchandise is
required to be sold to achieve a break-even (zero) profit at
See PPT 13–27, 13-28, and 13–29
5. Calculating Break-Even for a New Product
• The break-even point (BEP) is the quantity at which total
revenues are equal to total cost, and beyond which profit
occurs.
Assume you have a lemonade
stand that rents for $5.00.
Lemonade costs $.30 and sells for
$.50/cup. BEPquantity would be:
$5.00 ÷ $.20 = 25 cups.
6. Calculating Break-Even Sales
• The retailer can calculate how much sales would have to
increase to profit from a price cut.
7. Setting Prices Using Optimization Software
• A relatively new approach to setting retail prices takes a
more comprehensive approach using pricing optimization
Chapter 13 – Retail Pricing
13-7
8. Setting Prices by Relying on Internet, Mobile, and Social
Capabilities
• The growth of the electronic channel, the popularity of
social media, and the adoption of smartphones has greatly
III. Markdowns
• Retailers initially set prices on the basis of the merchandise
cost and desired maintained margin.
• Markdowns are a reduction in the initial retail price.
LO 13-3 Examine how and why
retailers take markdowns.
A. Reasons for Taking Markdowns
• Markdowns can be classified as either clearance (to get rid
of merchandise) or promotional (to generate sales).
See PPT 13–31
Ask students why retailers take
Chapter 13 – Retail Pricing
13-8
1. Optimizing Markdown Decisions
Retailers have traditionally created a set of arbitrary rules
for taking markdowns to dispose of unwanted
merchandise. Such a rule-based approach, however, is
See PPT 13–32 and 13–33
2. Reducing the Amount of Markdowns
• 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
Ask students how retailers can
reduce the amount of markdowns.
Ask students under what
circumstances markdown money
would be legal. Under the
Robinson Patman Act, it would only
be legal if it were offered to all
3. Liquidate Markdown Merchandise
• Retailers can use one of six strategies to liquidate unsold
merchandise: sell to another retailer, consolidate unsold
See PPT 13–34
Chapter 13 – Retail Pricing
13-9
4. Sell to Another Retailer
• Sell the unsold merchandise to another retailer.
5. Consolidate Unsold Merchandise
• Markdown merchandise can be consolidated in a number
of ways.
merchandise.
6. Sell on the Internet
7. Return to Vendor
• Some large retailers have enough clout to negotiate an
agreement that some merchandise be returned to vendors.
8. Donate to Charity
9. Carry Over the Merchandise to the Next Season
• The final liquidation approach—to carry over merchandise
Chapter 13 – Retail Pricing
13–10
IV. Pricing Techniques for Increasing Sales and Profits
• There are three strategies that could be used to increase
retail sales without resorting to price discrimination.
LO 13-4 Identify the pricing
techniques retailers use to
increase sales and profits.
See PPT 13-35, 13-36, 13–37
A. Dynamic Pricing
• Dynamic pricing, also known as individualized pricing,
B. Promotional Markdowns
• Retailers employ promotional markdowns to promote
merchandise and increase sales. Markdowns can increase
customer traffic flow.
C. Clearance Markdowns for Fashion Merchandise
• While the discussion of clearance markdowns earlier in the
D. Coupons
• Coupons offer a discount on the price of specific items
competition.
Ask students if they, or anyone they
know, use coupons regularly. Why
or why not? This is a way of
E. Price Bundling
Ask students to identify retailers
that use price bundling, and what
Chapter 13 – Retail Pricing
13–11
• Price bundling is the practice of offering two or more
different products or services for sale at one price.
products they use. (It is used a lot
with travel — cruises, tours)
F. Quantity Discounts
• Quantity Discounts, or multiple-unit pricing is similar to
price bundling in that the lower total merchandise price
increases sales, but the products or services are similar,
G. Zone Pricing
• Zone pricing is the practice of charging different prices in
different stores, markets, regions, or zones.
H. Leader Pricing
• Leader pricing is the practice of pricing certain items lower
than normal to increase customers’ traffic flow or boost
sales of complementary products. Some retailers call these
products loss leaders.
See PPT 13–40
Ask students what retailers
typically use a leader pricing
strategy, and what products they
use.
I. Price Lining
• Retailers frequently offer a limited number of
See PPT 13–41
Ask students to identify retailers
Chapter 13 – Retail Pricing
13–12
J. Odd Pricing
• Odd pricing, which has a long history in retailing, refers to
the practice of using a price that ends in an odd number,
typically a 9.
• Because merchandise had an odd price, salespeople
typically had to go to the cash register to give the customer
See PPT 13–42
Ask students if they think an odd
pricing strategy works. For
example, if they bought a pair of
jeans for $29.99, what price would
they tell a friend when asked later
– $29 or $30?
V. Legal and Ethical Pricing Issues
• In addition to customer price sensitivity, cost and
competition, retailers need to consider legal and ethical
issues when setting prices.
LO 13-5 Indicate the legal and
ethical issues retailers should
consider when setting prices.
These issues are summarized in PPT
13–44.
A. 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. Typically, the retailer
Chapter 13 – Retail Pricing
13–13
B. Predatory Pricing
• Predatory pricing is a particular form of price
discrimination where a dominant retailer sets prices below
its costs to drive competitive retailers out of business.
C. Resale Price Maintenance
• Vendors often encourage retailers to sell their
merchandise at a specific price, known as the
manufacturer’s suggested retail price (MSRP), in order to
D. Horizontal Price Fixing
• Horizontal price fixing involves agreements between
retailers that are in direct competition with each other to
set the same prices.
Retailers can, however, offer
different prices to different
customers as long as the pricing
policies aren’t discriminatory.
E. Bait-and-Switch Tactics
• Bait-and-switch is an unlawful, deceptive practice that
lures customers into a store by advertising a product at a
Ask students if they have ever
experienced bait–and–switch.
Chapter 13 – Retail Pricing
13–14
advertised price when it arrives.
VI. Summary
• Setting prices is a critical decision in implementing a retail
strategy, because price is a critical component in
customers’ perceived value.
cost of doing business, and thus buyers plan for them.
• Retailers use a variety of techniques to maximize sales and
profits by charging different prices to different customers.
These techniques include dynamic pricing, promotional
markdowns, clearance markdowns for fashion
merchandise, coupons, price bundling, quantity discounts,
zone pricing, leader pricing, price lining, and odd pricing.