Chapter 17 Pricing in Retailing RETAIL MANAGEMENT A

Chapter 17 Pricing in Retailing RETAIL MANAGEMENT: A STRATEGIC APPROACH 11 th Edition BERMAN Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall EVANS 17 -1

Chapter Objectives þ To describe the role of pricing in a retail strategy and to show that pricing decisions must be made in an integrated and adaptive manner þ To examine the impact that consumers, government, manufacturers, wholesalers and other suppliers, current/potential competitors have on pricing decisions þ To present a framework for developing a retail price strategy: objectives, broad policy, basic strategy, implementation, and adjustments Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -2

Pricing Options for Retailers Discount orientation At-the-market orientation Upscale orientation Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -3

Figure 17 -1: Barnes & Noble – A Huge Selection and Discounts Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -4

Figure 17 -2: Comparison Shopping Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -5

Figure 17 -3: Factors Affecting Retail Price Strategy Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -6

Price Elasticity of Demand The sensitivity of customers to price changes in terms of the quantities they will buy: Ø Elastic – Small percentage changes in price lead to substantial percentage changes in the number of units bought. Ø Inelastic – Large percentage changes in price lead to small percentage changes in the number of units bought. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -7

Table 17 -1: A Movie Theater’s Elasticity of Demand Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -8

Market Segments by Price Sensitivity Economic consumers Status-oriented consumers Assortment-oriented consumers Personalizing consumers Convenience-oriented consumers Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -9

The Government and Retail Pricing Horizontal Price Fixing Vertical Pricing Fixing Price Discrimination (Robinson-Patman Act) Minimum Price Laws Unit Pricing Item Price Removal Price Advertising Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -10

Justifiable Price Discrimination Under the Robinson-Patman Act ♦ Products are physically different. ♦ The retailers paying different prices are not competitors. ♦ Competition is not injured. ♦ Price differences are due to differences in supplier costs. ♦ Market conditions change – costs rise or fall or competing suppliers shift prices. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -11

Competition and Retail Pricing Market pricing – Retailers often price similarly to each other and have less control over price because consumers can easily shop around. Administered pricing – Firms seek to attract consumers on the basis of distinctive retailing mixes. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -12

Figure 17 -4: A Framework for Developing a Retail Price Strategy Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -13

Objectives and Pricing Market Skimming Market Penetration Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -14

Figure 17 -6: Specific Pricing Objectives Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -15

Price Policy Choices No competitors will have lower prices; no competitors will have higher prices; or prices will be consistent with competitors. All items will be priced independently or the prices for all items will be interrelated to maintain image and ensure proper markups. Price leadership will be exerted; competitors will be price leaders and set prices first; or prices will be set independent of competitors. Prices will be constant over a year or season; or prices will change if costs change. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -16

Price Strategy Demand-oriented pricing Cost-oriented pricing Competition-oriented pricing Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -17

Demand-Oriented Pricing Psychological pricing Price-quality association Prestige pricing Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -18

Table 17 -4: Markup Equivalents Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -19

Figure 17 -7: How to Determine Direct Product Profitability Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -20

Integration of Approaches to Price Strategy If prices are reduced, will revenues increase greatly? (Demand orientation) Should different prices be charged for a product based on negotiations with customers, seasonality, and so on? (Demand orientation) Will a given price level allow a traditional markup to be attained? (Cost orientation) What price level is necessary for a product requiring special costs? (Cost orientation) What price levels are competitors setting? (Competitive orientation) Can above-market prices be set due to a superior image? (Competitive orientation) Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -21

Figure 17 -8: Specific Pricing Decisions Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -22

Price Strategy Concepts Customary Pricing Ø Everyday Low Pricing Variable Pricing Ø Yield Management Pricing One-Price Policy Flexible Pricing Ø Contingency Pricing Odd Pricing Leader Pricing Multiple-Unit Pricing Price Lining Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -23

Figure 17 -9: Wal-Mart and Everyday Low Pricing Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -24

Figure 17 -10: Odd Pricing Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -25

Reasons to Use Multiple-Unit Pricing A firm could seek to have shoppers increase their total purchases of an item. This approach can help sell slow-moving and end-of-season merchandise. Price bundling may increase sales of related items. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -26

Price Adjustments Adaptive mechanism Ø Markdown Ø Additional markup Ø Employee discount Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -27

Figure 17 -11: Price Change Authorization Form Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -28

Timing Markdowns Early markdown policy Late markdown policy Staggered markdown policy Automatic markdown plan Storewide clearance Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -29

Figure 17 -12: Giant Eagle – Going Beyond Everyday Low Pricing Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -30

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Retail Mgt. 11 e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 17 -31