Chapter 14 – Retail Pricing
14-1
CHAPTER 14
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.
pricing.
See PPT 14-3
Query students on what is a good value for them
when buying a specific product, such as jeans or
sneakers. Different conceptions of value would
emerge, including the lowest price, good quality for
IV. Pricing Strategies
• Retailers use two basic retail pricing
strategies: high-low pricing and everyday
low pricing (EDLP).
See PPT 14-6
A. High/Low Pricing
• With this strategy, retailers frequently –
Ask students to name retailers using a
High/Low Pricing strategy from the following:
women’s shoes, men’s suits, home electronics,
Chapter 14 – Retail Pricing
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value-conscious consumers.
B. Everyday Low Pricing
• This strategy stresses continuity of retail
prices at a level somewhere between the
regular non-sale 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 guarantee usually promises to match
See PPT 14-5
Name retailers using EDLP strategies from the
following: grocery store chain, and building
supplies. Customers comparison shop now
more than ever before. It is becoming
C. Advantages of the Pricing Strategies
• Advantages of High/Low Pricing:
• Increases profits through price
discrimination
• Sales create excitement
See PPT 14-6
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?
I. Considerations in Setting Retail Prices
See PPT 14-7
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* Retailers consider four factors when setting
retail prices.
A. Customer Price Sensitivity and Cost
• As the price of a product increases, the
sales for the product will decrease because
See PPT 14-08, 14-9
1. Price Elasticity
• A commonly used measure of price
sensitivity is price elasticity. Price
• The target market for a product is
considered price sensitive (elastic) when its
price elasticity is less than -1.
• A number of factors affect the price
sensitivity for a product.
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 competition. The chosen
pricing policy must be consistent with the
Ask students for examples of retailers using
each of these pricing strategies relative to
competing retailers.
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retailer’s overall strategy and its relative
market position.
1. Collecting and Using Competitive Price
Data
• Most retailers routinely collect price data
about their competitors to see if they need
to adjust their prices to remain competitive.
2. Reducing Price Competition
• Retailers attempt to reduce price
competition by utilizing some of the
See PPT 14-12
II. Setting Retail Prices
* Many retailers have to set prices for over
50,000 SKUs and make thousands of
pricing decisions each month. From a
See PPT 14-15
A. Setting Prices Based on Costs
• Most retailers either use the MSRP
(manufacturer’s suggested retail price) or
set prices by marking up the item’s cost to
1. Retail Price and Markup
Setting prices is primarily dependent on the
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* When setting prices based on merchandise
cost, retailers start with the following
equation:
Retail price = Cost of merchandise + Markup
Markup percent =
(Retail price – Cost of merchandise)/Retail price
• The retail price based on the cost and
markup percentage is:
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.
2. 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.
See PPT 14-19 and 14-20
Instructors may wish to stress the difference
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loss).
* Initial markup must be high enough so that
after reductions are taken out, the
maintained markup is left.
B. Merchandising Optimization Software
• A relatively new approach to setting retail
prices takes a more comprehensive
approach using merchandising
optimization software. These software
programs use a set of algorithms that
PPT 14-31
C. Profit Impact of Setting a Retail Price: The
Use of Break-Even
Analysis
* Break-even analysis determines how
much merchandise is required to be sold to
See PPT 14-27, 14-28, and 14-29
1. Calculating Break-Even for a New
Product
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* The break-even point (BEP) is the quantity
at which total revenues are equal to total
cost, and beyond which profit occurs.
* BEP quantity= Fixed costs/(Actual unit
sales price – Unit variable cost)
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
2. Calculating Break-Even Sales
* The retailer can calculate how much sales
would have to increase to profit from a
price cut.
III. Price Adjustments
See PPT 14-30
A. Markdowns
* Markdowns are a reduction in the initial
retail price. Markdowns are a type of
second-degree price discrimination because
the lower price induces price-sensitive
customers to buy more merchandise.
1. Reasons for Taking Markdowns
* Markdowns can be classified as either
clearance (to get rid of merchandise) or
promotional (to generate sales).
See PPT 14-31
Ask students why retailers take markdowns.
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other reductions are taken, the planned
maintained markup is achieved.
2. Optimizing 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.
See PPT 14-32 and 14-33
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 retailers on a
3. Reducing 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.
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* As discussed in Chapter 10, 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.
4. Liquidating Markdown Merchandise
* Retailers can use one of five strategies to
liquidate merchandise:
d. Give the merchandise to charity.
e. Carry the merchandise over to the next
season.
• Marked-down merchandise can be
consolidated in a number of ways.
• First, the consolidation can be made into
one or a few of the retailer’s regular
locations.
See PPT 14-34
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• The final liquidation strategy – to carry
merchandise over to the next season – is
used with relatively high priced nonfashion
merchandise, such as traditional men’s
clothing and furniture.
B. Variable Pricing and Price Discrimination
See PPT 14-35, 14-36, 14-37
1. Individualized Variable Pricing
• Ideally, retailers would maximize their
profits if they charged each customer as
much as the customer was willing to pay.
Ask students to identify retail categories that
frequently implement first-degree price
discrimination.
2. Self-Selected Variable Pricing
• Markdowns and other widely used retail
adjustment practices are known as second-
degree price discrimination – charging
different prices to different people on the
basis of the nature of the offering.
3. Clearance Markdowns for Fashion
Merchandise
• Clearance markdowns result in higher
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season.
4. Coupons
• Coupons offer a discount on the price of
specific items when they’re purchased at a
store.
• Some risks to the retailer are associated
with the use of coupons. Like all temporary
promotions, coupon promotions may be
stealing sales from a future period without
any net increase in sales. Also coupons
may alienate, annoy or confuse consumers
and therefore do little to increase store
loyalty.
5. Rebates
• Rebates provide another form of discounts
for consumers off the final selling price. In
this case, the manufacturer issues the
refund as a portion of the purchase price
returned to the buyer in the form of cash.
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6. Price Bundling
* Price bundling is the practice of offering
two or more different products or services
for sale at one price.
Ask students to identify retailers that use price
bundling, and what products they use. (It is used a lot
with travel — cruises, tours)
7. Multiple-unit Pricing
* 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.
8. Variable Pricing by Market Segment
• Retailers often charge different prices to
different demographic market segments, a
practice referred to as third-degree price
discrimination.
V. Pricing Services
A. Matching Supply and Demand
• As services are intangible, they cannot be
inventoried. When a services retailer’s
Ask students for examples of services retailers
utilizing yield management.
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realize as many sales as consumers are
willing to make.
B. Determining Service Quality
• Due to the intangibility of services, it is
often difficult for customers to assess the
quality of services. Customers are likely to
use price as an indicator of service quality.
VI. Pricing Techniques for Increasing Sales
* There are three strategies that could be
used to increase retail sales without
resorting to price discrimination.
See PPT 14-39
A. Leader Pricing
* In leader pricing, certain items are priced
lower than normal to increase customers’
traffic flow or to boost sales of
complementary products.
See PPT 14-40
Ask students what retailers typically use a
leader pricing strategy, and what products they
use.
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retailer hopes consumers will also purchase
other products while buying loss leaders.
B. Price Lining
* In price lining, retailers offer a limited
number of predetermined price points
within a classification.
* Both customers and retailers can benefit
from such a strategy in the following ways:
See PPT 14-41
Ask students to identify retailers that use price
lining. Then ask if a price lining strategy helps
them in making their shopping decisions.
C. Odd Pricing
* Odd pricing refers to a price ending in an
odd number, typically a nine.
* While odd pricing originally had loss
prevention and accounting functions, some
retailers believe odd pricing can increase
profits.
See PPT 14-42
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?
VII. The Internet and Price Competition
• Retailers are concerned that the growth of
electronic retailing will intensify price
competition. Using the Internet, consumers
can search for merchandise across the
globe to find the lowest prices.
PPT 14-43
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C. 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.
These issues are summarized in PPT 14-44.
1. Price Discrimination
2. Predatory Pricing
• Predatory pricing is a particular form of
price discrimination where a market-
dominating firm charges below-cost prices
for some goods or in some areas in order to
drive out or discipline one or more rival
firms. Eventually, the predator hopes to
raise prices and earn back enough profits to
compensate for the losses during the period
of predation.
3. Resale Price Maintenance
• Vendors often encourage retailers to sell
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their merchandise at a specific price, the
manufacturer’s suggested retail price
(MSRP) in order to reduce price
competition among retailers, eliminate free
4. Horizontal Price Fixing
* Horizontal price fixing involves
agreements between retailers that are in
direct competition with each other to have
the same prices.
Retailers can, however, offer different prices to
different customers as long as the pricing
policies aren’t discriminatory.
5. 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 usual
price (the bait) and then induces the
customers to switch to a higher-priced
model (the switch).
Ask students if they have ever experienced bait-
and-switch.
6. Scanned Versus Posted Prices
• Many states and localities have specific
laws regarding accurate pricing. FTC-led
studies of the accuracy of price scanning
versus posted or advertised prices have
generally found a high level of accuracy,
Chapter 14 – Retail Pricing
but mistakes are made in one out of 30
scans. Generally, retailers lose money
because the scanned price is below the
recommended price.
VIII. Summary
• Setting prices is a critical decision in
implementing a retail strategy, because
price is a critical component in customers’
perceived value.