Retail Pricing Strategies - UMass

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What Affects Pricing? Retail Pricing StrategiesConsumer Factors Price Elasticity of Demand Pricing Strategies Cost-oriented Competition-orientedSensitivity of buyers toprice changesGovt. Factors – FTC Competition Strategy Variables Target audience ProfitsDemand-Oriented Demand-orientedMfrs., Wholesalers,Suppliers Supply/Demand Estimate how much customers will buy at variousprice levels Set prices to achieve sales goals Determine prices acceptable to target market Demand ceiling Demand floor Psychological Pricing Price/quality relationship Odd pricingCost-OrientedZone Pricing:“Refining companies actually map outareas and charge dealers differentwholesale prices based on secretformulas that often factor in location, thearea’s affluence or simply what themarket will bear.” Takes into account the cost ofmerchandise, retail operating expenses,and desired profitsWholesale Prices:Ct.: BerlinGreenwichNY: AlbanyNYC 0.95 1.01 0.981.12Northern CA: PleasantonPalo Alto 1.20Markup covers operating expenses andprofits Markup Selling price (retail price) – Cost ofGoods1.351

Entrée EconomicsPinot Bistro, Los Angeles 300% solution: Many independently ownedrestaurants aim for an overall food markup of300% or 4X the cost of the raw ingredientsBut, you might see a 500% markup on a grilledvegetable plate (and pay 9) and only a 200%markup on a tenderloin meal (and pay 25)Le Francais,Wheeling, IllinoisGrilled Pork Chop withwhite beans, pancetta,escarole, and assortedolivesTotal Cost toRestaurant: 5.67Menu Price: 19.95Pinot Bistro, Los AngelesTrio of Lamb(mustard-crustedrack, cumin-dustedloin and braisedshoulder with theirown jus)Persimmon Salad with grilledradicchio, crisp cress, and a redwine-cranberry vinaigretteTotal Cost toRestaurant: 16.81Menu Price: 8.50Total Cost to Restaurant: 2.42Menu Price: 32.50Charlie Palmer Steak, Las VegasNew York bone-in shellTotal Cost to Restaurant: 8.33Menu Price: 27.002

Cost ExampleMarkup Markup in : 300-Markup % (at cost) Retail Selling Price – Merchandise CostMerchandise Cost200 100 Markup % on Retail 100/300 33%Markup% (at retail) Retail Selling Price – Merchandise CostRetail Selling PriceRetailer buys a TV for 200 andwants to sell if for 300 Merchandise cost What the retailer pays the mfr. (unit costs,freight costs, less discounts) Markup % on Cost 100/200 50%Initial Markup Initial value of merchandise less the cost of themerchandiseMaintained Markup Ex. A bike retails for 100 and costs the retailer 60- initial markup is 40 (100-60)Based on the actual price received for themerchandise less the cost of themerchandiseEx. If the bike sells for 80, maintained markup is 20 (original retail price was 100)- 40% of retail (40/100)Maintained markup on retail is 20% (20/100)- 66% of cost (40/60)How do you determine theinitial markup? Initial Markup % (at Retail)expenses profits reductionsplanned sales reductionsEx. A florist plans sales of 200,000, has operatingexpenses of 45,000, desires a profit of 35,000, and isexpecting reductions of 20% of sales (or 40,000)Initial markup 45,000 35,000 40,000Maintained Markup % Expenses ProfitsNet Sales X 100Florist:45,000 35,000200,000(100) 40%200,000 40,000 50%3

Florist Ex. (cont.)If flowers cost 8.00/dozen, what should theflorist charge for the flowers (retail selling price)?Assume a 50% markup on retail Retail Selling Price merchandise cost1- markupSo: 8.001-.5 16.00Retail Selling Price Cost of Merchandise MarkupConverting Markup from Retail to Cost Ex. If markup on retail is 18%, what is theequivalent markup on cost?Answer: .181-.18 Converting Markup from Cost to Retail Markup % on Retail Markup on Cost100% Markup % on CostEx. If markup on cost is 36%, what is theequivalent markup on retail?Answer: .361.36 .26A buyer for men’s clothing is seeking sportcoats to retail for 125. The markupobjective on retail is 48%. What is themost a buyer can pay a supplier for thejackets? 125 (100%) X (48%)X 52%52% of 125 65.00.219What Should you Pay for Merchandise?You are considering vendors for private label shirts. Youwould like the retail price of the shirts to be 25.00. Yourmarkup objective is 45% on retail. What is the highestprice you can pay to meet this objective?Retail Selling Price Cost of Merchandise Markup 25 X 11.25100% 55% 45%So: 55% of 25 13.75Determining the Most you Can Pay Markup % on Cost Markup % on Retail100% - Markup on RetailSetting the Retail Price A gift shop owner must pay a vendor 6.00 for a photo album and she wants tomaintain a 60% markup on retail. Whatshould she charge for the album?Retail Selling Price Merchandise Cost- Markup1 6.001- .6 15.004

Pricing Strategies MarkdownsEveryday Low PricingHigh/Low PricingOdd PricingLeader PricingMultiple Unit Pricing/Price BundlingPrice LiningOne-Price Policy Reduction in the initial retail priceMarkdown as % of net sales amount of markdownnet salesX 100Ex. You bought 100 sweaters and 80% sell at 50 each whilethe remainder sell at 30 eachAns.: Markdown amount – 20 sweaters were marked down 20 each so 20 X 20 400Net Sales Revenue is (80 X 50) (20 X 30) 4600Markdown % 400 4600X 100 8.69%Advertising Markdowns to ConsumersMarkdown % (of original retail value) price reduction per unitoriginal price per unitX100Ex. A sweater retails for 50 and is marked downto 30. What is the markdown %?20/50X 100 40%5

5 Pricing Strategies Everyday Low Pricing High/Low Pricing Odd Pricing Leader Pricing Multiple Unit Pricing/Price Bundling Price Lining One-Price Policy Markdowns Reduction in the initial retail price Markdown as % of net sales amount of markdown net sales X 100 Ex. You bought 100 sweaters and 80% sell at 50 each while

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