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.
• Retailers can increase value and stimulate more sales by
either increasing the perceived benefits offered or
reducing the price.
• If retailers set prices higher than the benefits they offer,
sales and profits will decrease.
See PPT 13–3
Query students on what is a good
value for them when buying a
specific product, such as jeans or
own choices as being good value.
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
A. High/Low Pricing
Ask students to name retailers
Chapter 13 – Retail Pricing
• This strategy is in response to competitive moves and to
the positive response from value-conscious consumers.
See PPT 13–4
B. Everyday Low Pricing
• A more accurate description of this strategy is everyday
same prices because the prices don’t have significant
fluctuations.
for retailers to offer a true EDLP
strategy.
C. Advantages of the Pricing Strategies
• Advantages of High/Low Pricing:
o Increases profits through price discrimination
o Sales create excitement
o Allows retailers to sell of slow-moving merchandise
• 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
competitive area. Which strategy
is best for them and why? How
would the situation be different
for a jewelry store chain?
II. Setting Retail Prices
• Retailers consider five factors when setting retail prices; (1)
LO 13-2 Identify the factors
retailers consider when pricing
their merchandise.
social; and (5) legal and ethical issues.
See PPT 13–7
A. Customer Price Sensitivity
• As the price of a product increases, the sales for the
product will decrease because fewer and fewer customers
feel the product is a good value.
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.
• Elasticity =
• 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.
• Products and services that are necessities are price
inelastic.
• Products that are expensive relative to a consumer’s
income are 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.
position.
• . Most retailers routinely collect price data about their
competitors to see if they need to adjust their prices to
remain competitive.
C. Pricing of Services
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
customers to assess service quality.
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
practical perspective, they cannot conduct experiments
nor do statistical analyses to determine the price sensitivity
for every item.
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
• 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
the cost of an item.
Markup percent =
(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
should also increase.
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
price originally placed on the merchandise and the cost of
the merchandise, whereas maintained markup is the
actual sales you get for the merchandise less its cost.
See PPT 13–19 and 13–20
Instructors may wish to stress the
difference between maintained
markup and gross margin. We find
it more important, however, to
stress that they are almost the
same thing. Even those students
markup is:
Initial markup % =
(Maintained markup % + % Reductions)
___________________________
100% + % Reductions
See PPT 13–20
4. Setting Prices Using Break-Even Analysis
• Break-even point quantity =Total fixed costs/(Actual unit
sales price – Unit variable cost)
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.
• To convert the break-even quantity to break-even sales
dollars, multiply the BEP quantity by the selling price.
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.
$5,000 ÷ $20 = 250 shirts
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
• Given its cost, however, (more than $1 million) the
software is only used currently by a small set of the largest
retail firms.
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
changed the way consumers get and use information to
make purchasing decisions based on price.
• The redemption of online coupons is growing at an
astronomical rate.
III. Markdowns
• Retailers initially set prices on the basis of the merchandise
cost and desired maintained margin.
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).
• Retailers employ markdowns to promote merchandise to
increase sales. Markdown sales generate cash flow to pay
See PPT 13–31
Ask students why retailers take
for new merchandise.
• Markdowns are also taken to increase customers’ traffic
flow.
• Markdowns may also increase the sale of complementary
products.
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
limiting because it does not consider the demand for the
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.
• When customers believe that a particular retailer offers
them a good value, they will be less likely to wait for
markdowns. An everyday low-price strategy implies that a
retailer’s products are already at low prices and therefore
will not be further discounted.
Ask students how retailers can
reduce the amount of markdowns.
Ask students under what
circumstances markdown money
3. Liquidate Markdown Merchandise
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.
• Finally, markdown merchandise can be shipped to a
distribution center or a rented space such as a convention
center for final sale.
6. Sell on the Internet
• The Internet is increasingly useful for liquidating unsold
merchandise.
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
to the next season—is used with relatively high-priced
nonfashion merchandise, such as traditional men’s clothing
and furniture
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
• Ideally, retailers would maximize their profits if they
charged each customer as much as the customer was
willing to pay.
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
D. Coupons
• Coupons offer a discount on the price of specific items
when they’re purchased at a store.
Ask students if they, or anyone they
know, use coupons regularly. Why
or why not? This is a way of
getting to the advantages and
E. Price Bundling
Ask students to identify retailers
that use price bundling, and what
Chapter 13 – Retail Pricing
• 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,
rather than different.
G. Zone Pricing
• Zone pricing is the practice of charging different prices in
different stores, markets, regions, or zones.
• This practice is generally used by retailers to address
different competitive situations in their various markets.
H. Leader Pricing
• In a strict sense, loss leaders are sold below cost and would
therefore be considered predatory pricing, which is
discussed in the next section.
See PPT 13–40
I. Price Lining
• Retailers frequently offer a limited number of
See PPT 13–41
Ask students to identify retailers
predetermined price points within a merchandise category,
a practice known as price lining.
that use price lining. Then ask if a
price lining strategy helps them in
making their shopping decisions.
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.
• Odd pricing was also used to keep track of how many times
an item had been marked down. After an initial price of
$20, the first markdown would be $17.99, the second
markdown $15.98, and so on.
See PPT 13–42
Ask students if they think an odd
pricing strategy works. For
example, if they bought a pair of
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
labels the reference price as the “regular price” or “original
price.”
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
reduce price competition among retailers, eliminate free
riding, and stimulate retailers to provide complementary
services.
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
lower-than-normal price (the bait) and then, once they are
in the store, induces them to purchase a higher-priced
model (the switch).
Ask students if they have ever
experienced bait–and–switch.
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.
• 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.