This activity stands for a set of broad guidelines, which are used by a retail chain in making pricing decisions of merchandise on an ongoing basis. This activity reflects the retailer’s position regarding factors such as competing stores, costs, promotional expenditures, etc.
The entire Price Management activity consists of five main activities as described below:
Establishing price objectives
While deciding the final price of merchandise, every retailer establishes its objectives. There are three broad categories on the basis of which a retail organization can set its price objectives. These are:
Sales Objectives: Here the main objective is to increase the sales through increasing the Sales Volume (sales quantity) or through increasing the Market Share as a %age of the total market, vis`a`vis` its competitors.
Profit Objectives: Here the objective while deciding the pricing strategy is the Profit Maximization (where increasing the total profit figures of the company are aimed at) or Target Returns policy (here, a certain amount of target profit percentage on the total sales is fixed)
Competitive Objectives: Here, while deciding the pricing objectives, the organization might have some objectives, which are relative to the competition. The various examples of such objectives are Price Leadership (cheapest as compared to competition), Competitive parity (equal to the competition), or Non Price Competition objectives like better products, quality of service, etc.
Examining price determinant
While deciding the final price of merchandise, every retailer tries to establish a selling price that will both sell the merchandise and offer a profitable return. The various determinants are as follows:
Demand: Before setting the prices of merchandise, retailers consider the demand for the products and services. Retailers use the Price Elasticity of Demand principle while setting price according to the demand. According to this principle, Consumers will buy more products at lower prices than they would at higher prices. Elastic demand is a condition in which a change in price strongly influences consumer demand. Retailers analyse how much will the demand of a product change if the price is changed, before setting the final price.
Customer: This consideration takes consumer perception about the value before setting the price. Here, the customer’s feelings and beliefs are taken into account while setting the final price of the product.
Competitive: Most of the retailers consider the price offered by the competitor while setting the price. Usually the competition price and the trends therein are tracked on a regular basis while doing this activity.
Cost: A major determinant in any price setting decision is the cost the retailer must pay for the merchandise. In defining merchandise cost, retailer not only considers the actual cost of the merchandise but also all related costs incurred in getting the merchandise into the store and preparing it for sale.
Profit: Most retailers use the concept of Direct product Profit, where the retailer is able to calculate the profitability of a merchandise category as well as a specific SKU. As the cost of the merchandise varies, the retailer sets the profit accordingly.
Product: Product consideration assumes that different products can command different prices at different times and in different locations. This is applicable more in the case of perishable, seasonal and fashion items.
Legal: There are legal issues as well for the retailers to determine the price at which the merchandise can be sold to the market.
Utilizing price methods
Price setting activities are both an art as well as a science. A policy of setting low prices might produce high sales volumes but inadequate profit margins. High prices on the other hand usually allow for excellent profit margins, but the merchandise must be sold before the profits are actually realized.
There are three general pricing methods used by the retailers. These are explained as under:
Markup pricing: Markup means the difference between the cost of the merchandise and its retail price. Retailers employ either the dollar markup or the percentage markup as the method for price setting. Here, Initial markup is the difference in the merchandise cost and the original retail price. The Maintained markup is the difference between the gross merchandise cost and final retail selling price. The Gross Margin is the difference between net sales and total merchandise costs.
Competitive pricing: The Competitive pricing means the retailer sets the prices in relation to the competitor’s prices. The prices set can be below the competition, with the competition or above the competition prices.
Vendor pricing: This method allows the manufacturer or supplier to determine the retail price. This is mainly used where the supplier or the manufacturer own the merchandise till the final sale is made to the end user.
Applying price policies
On the basis of the price objectives, price considerations and price methods, retailers finally arrive at defining the policies for selling the merchandise. These policies are finally controlled by the retail organization and serve as the guide for the store owners/ in-charge to define the actual prices in a particular retail store. Some of the main pricing policies are explained as follows:
- Single pricing: This policy stands for charging all customers the same price for the same sku under similar circumstances.
- Flexible pricing: Here the customer is allowed to negotiate the final selling price. This pricing policy is mainly used in selling merchandise which has a high extent of personal selling; the products are unstandardized or specialized.
- Multiple pricing: This policy attempts to increase both the unit and dollar sales volume. This policy allows the customers to avail discount on making quantity purchases.
- Price bundling: This is the practice of selling more than one product and/or service together as a package deal.
- Captive pricing: Here, the customer is locked by the retailer by selling the basic product at a reduced price, while the add on product or services are sold at a premium.
- Concept selling: This policy establishes a higher price for a product or service and justifies that price by convincing the customer the total set of benefits for the extra cost.
- Odd pricing: This is the strategy of setting prices which end in odd numbers. This policy relies on the psychological ploy that consumers perceive odd prices at substantially below even prices. (e.g. $ 2.95 is perceived as considerably below $3).
- Unit pricing: This is the retailing practice of posting prices on a per-unit measurement basis. This helps the customer compare the product across various sizes, shapes and quantities.
- Price Lining: This policy is used to direct retail prices at a targeted consumer group. The idea behind this policy is to identify and offer an acceptable range of prices for a specific group of consumers. (e.g. less than $100 suits)
- Bridge pricing: This policy spans or connects two distinctively different price lines or The most common form of bridge pricing is used in the fashion industry where retailers sell fashion products which are quite below the prices of high fashion items, yet a lot above the prices of the mass fashion labels.
- Trail pricing: A trial price is a low price for buying a limited amount of the product or a low price for trying the service for a limited time.
- Leader pricing: This policy allows the stores to sell some products below the normal markup or in some case even below the retailer’s merchandise cost. This is done in the hope that when customers come to the store, they will buy a lot other merchandise than plainly this product.
- Everyday Low pricing: This is the pricing policy of maintaining price points at the same low level year-round. This policy is widely used across the retail chains, especially among the most successful ones like Wal-Mart, Toys R Us etc.
- High-Low pricing: High-Low pricing: here, the retail chain buys in bulk from the manufactures at lower prices. This is done for quantities which are way forward of the sales for the next few weeks. Then, the merchandise is sold at low prices in special sales and at higher prices during the non-sale period.
- Reference pricing: This is the policy of marking products with the retailer’s selling price together with one or more of the following comparative prices: (1) The retailer’s normal selling price. (2) The vendor’s suggested price. (3) The competitor’s selling price. (4) Market’s average selling price.
- Price matching: This is a promise to match the lowest advertised price a customer can find anywhere
Employing price adjustments
All retailers have to adjust price after setting the initial price of the merchandise. This is because around 20% of the merchandise carried across the retail chains is excess and obsolete, whereas another 20% sells very slow. Therefore, retail stores are under enormous pressure to sell whatever can be sold off to maintain good inventory turnover & reduce working capital.
These are means for the retailer to adapt to changing external and internal environment conditions. There are three basic types of adjustments in prices called discounts, mark-ons and markdowns. These are explained below:
- Discounts: These are defined as the reductions in the original retail price. These can be granted to store employees as special benefits, to special customers, to everyone in special times, etc.
- Mark-on Adjustments: Mark-on refers to the markups taken after the initial selling price has been established. This represents an additional markup and an upward adjustment in the initial selling prices.
- Markdown Adjustments: A markdown is a downward adjustment in the original selling price of a merchandise item. These can be absolute value markdown or percentage markdowns.
In addition to this, the price adjustment activity is an ongoing one, both at the corporate level and at the store level. This activity considers the Cause of Markdowns, Timing of Markdowns, Size of Markdowns, Forms of Markdowns and Controls on Markdowns.
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