MODULE 9: RETAIL PRICING AND SALES STRATEGY

• Value

  • For customers, it is a perceived monetary worth of the combination of product, service, and utility.
  • For retailers, it can take on even more meaning.
• Value Proposition => is a term used to describe an innovation, service, or feature intended to make a company or product attractive to customers.
• Pricing and the Retail Mix:

  • Product
  • Promotion
  • Physical Evidence
  • People
  • Place
  • Pricing
  • Process
• Three External Factors of Retail Pricing:

  • Competition
  • Channel
  • Geography
• Growing Revenue is a common business objective to all retail companies
• Increasing Profit: raising margins through premium pricing and less aggressive promotion.
• Penetration into a New Market Area: distribute existing product assortment, adding temporary ”loss leaders”.
• Price Elasticity

  • Classic economic principle that helps us understand how much a change in price will affect market behaviors.
  • Important to pricing decisions as it helps understand whether raising or lowering prices will be better.
  • Denotes large impact on demand due to changes in price.
• Price Elasticity Results:

  • Perfectly Elastic
  • Relatively Elastic
  • Unit Elastic
  • Relatively Inelastic
  • Perfectly Inelastic
• Perfectly Elastic => where any very small change in price results in a very large change in the quantity demanded. Products that fall in this category are mostly “pure commodities.” There’s no brand, no product differentiation, and customers have no meaningful attachment to the product.
• Relatively Elastic => where small changes in price cause large changes in quantity demanded. The result of the formula is greater than 1.
• Unit Elastic => where any change in price is matched by an equal change in quantity (where the number is equal to 1).
• Relatively Inelastic => where large changes in price cause small changes in demand (the number is less than 1).
• Perfectly Inelastic => where the quantity demanded does not change when the price changes. Products in this category are things consumers absolutely need and there are no other options from which to obtain them. We tend to see this only in cases where a firm has a monopoly on the demand. Even if they change their price, you still have to buy from them.
• PRODUCT PRICING METHODS:

  • Markup Retail Price
  • Keystone Pricing
  • Manufacturer Suggested Retail Price
  • Multiple Pricing (Bundle Pricing)
  • Penetration Pricing
  • Loss-Leader Pricing
  • Psychological Pricing
  • Competitive Pricing
  • Premium Pricing
  • Anchor Pricing
  • Price Skimming
  • Cost-plus Pricing
  • Economy Pricing
• Markup Retail Price

  • The formula in calculating your retail price is?

  Retail Price = [Cost of Item / (100 - markup percentage) ]
• Keystone Pricing

  • A pricing strategy that retailers use as an easy rule of thumb.
  • Essentially, it’s when a retailer determines a retail price by simply doubling the wholesale cost they paid for a product.
  • Pro: Works as a quick-and-easy rule of thumb that ensures an ample profit margin.
  • Con: Depending on the availability and the demand for a particular product, it might be unreasonable for a retailer to mark up a product that high.
• Manufacturer Suggested Retail Price

  • It is the price a manufacturer recommends retailers use when selling a product.
  • Often used for highly standardized products.
  • Pro: As a retailer, you can save yourself some time simply by using the MSRP when pricing your products.
  • Con: Retailers that use the MSRP aren’t able to compete on price. With MSRPs, most retailers in a given industry will sell that product for the same price. You need to take into consideration your profit margins and cost.
• Multiple Pricing

  • Retailers sell more than one product for a single price, a tactic alternatively known as product bundle pricing.
  • Pro: Retailers use this strategy to create a higher perceived value for a lower cost, which ultimately can lead to driving larger volume purchases. Another benefit is that you can sell items separately for more profit.
  • Con: Bundling reduces profits. If the bundle itself doesn’t increase sales volume, then you may come up short on profits.
• Penetration Pricing

  • The more apparent ones include increasing foot traffic to your store, offloading unsold inventory, and attracting a more price-conscious group of customers.
  • Pros: The discount pricing strategy is effective for attracting a larger amount of foot traffic to your store and getting rid of out-of-season or old inventory.
  • Cons: If used too often, it could give you a reputation of being a bargain retailer and could hinder consumers from purchasing your products at regular price. It also creates a negative psychological impact toward the consumer’s perception of quality.
• Loss-Leader Pricing

  • Retailers attract customers with a desirable discounted product and then encourage them to buy additional items.
  • Pros: Encouraging shoppers to buy multiple items in a single transaction not only boosts overall sales per customer but can cover any profit loss from cutting the price on the original product.
  • Cons: When you overuse loss-leading prices, customers come to expect bargains and will be hesitant to pay the full retail price. You could also cannibalize revenues if you're discounting something that doesn’t increase cart size or average order size.
• Psychological Pricing

  • It’s up to retailers to help minimize this pain, which can increase the likelihood that customers will make a purchase.
  • Pro: Charm pricing allows retailers to trigger impulse purchasing. Ending prices with an odd number gives shoppers the perception that they’re getting a deal—and that can be tough to resist.
  • Con: At times, charm pricing can seem gimmicky to merchants decreasing trust, while a simple whole-dollar price is clean and perceived as transparent.
• Competitive Pricing:

  • It refers to using competitors’ pricing data as a benchmark and consciously pricing your products below theirs. It is usually driven by the product value.
  • Pro: This strategy can be effective if you can negotiate a lower cost per unit from your suppliers, while cutting costs and actively promoting your special pricing.
  • Cons: This strategy can be difficult to sustain when you’re a smaller retailer. Lower prices mean lower profit margins, and so you’ll have to sell higher volume than competitors.
• Premium Pricing

  • Brands benchmark their competition but consciously price products above their own to make themselves seem more luxurious, prestigious, or exclusive.
  • Pro: This pricing strategy can work its halo effect on your business and products: consumers perceive that your products are better quality and more premium compared to your competitors due to the higher price.
  • Cons: This pricing strategy can be difficult to implement, depending on your stores’ physical locations and target customers.
• Anchor Pricing

  • It is another product pricing strategy retailers have used to create a favorable comparison.
  • Pro: If you list your original price as being much higher than the sale price, it can influence a customer to make a purchase based on the perceived deal.
  • Con: If your anchor price is unrealistic, it can lead to a breakdown of trust in your brand. Customers can easily price-check products online against your competitors with a price comparison engine—so ensure your listed prices are reasonable.
• Price Skimming

  • It refers to when an ecommerce business charges the highest initial price that customers will pay, then lowers it over time.
  • The goal is to drive more revenue while demand is high and competition is low.
  • It also works when there is product scarcity.
  • However, it isn’t the best strategy in crowded markets unless you have some truly incredible features no other brand can mimic. It also attracts competition and can bother early adopters if you slash the price too soon or too much after launch.
• Cost-plus Pricing

  • Also known as mark-up pricing strategy.
  • It is the easiest way to price a product or service. You make the product, add a fixed percentage on top of the costs, and sell it for the final price.
  • However, it doesn’t take into account market conditions such as competitor pricing or perceived customer value.
• Economy Pricing

  • This is where you price products low and gain revenue based on the sales volume.
  • It’s typically used for commodity goods, such as groceries or drugs, where the company doesn't have a big brand to support its marketing.
  • The business model relies on selling a lot of products to new customers on a consistent basis.
  • The margins are typically lower, you need a steady flow of new customers all the time, and consumers may not perceive the products to be high-quality.