Retail Pricing

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Retail Pricing

• Price is a measure of value and the only element
  of the marketing mix that represents revenue

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Importance of price in retailing
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Price as key competitive factor
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Consumer spending on groceries
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Food price inflation
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Influences on pricing
Buyer perceptions
Marketing objectives
Production, Operational costs
PRICE DECISIONS
Competition
Laws, regulations, Directives, compliance
Marketing channel, Distribution costs
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Main retailer pricing strategies

• Premium (superior products, service and store
  interiors but at a higher price)
• Discount (low prices with sacrifices in other
  areas)
• Every Day Low Price (reliable prices with few or
  no promotions)
• Hi-Lo (higher prices on most items but offset by
  special promotions)

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Pricing strategies for leading UK retailers
Discount
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Elements of retailer strategies

• Overall quality proposition (range and service)
• Average retail prices
• Promotional strategy (number of promotions
  available)

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Pricing mechanisms preferred by shoppers
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Reasons for low price/promotion preference
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Price elasticity of demand

• Price elasticity of demand
• Percentage change in quantity demanded
• Percentage change in price

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Price elastic demand

• If price is lowered from 10 to 9 and demand is
  elastic sales increase from 100 to 140
• Increase in revenue from increased demand more
  than compensates for price decrease.
• If price is increased from 10 to 11 demand
  falls to 75
• Higher price does not compensate for reduced
  demand
• DEMAND IS SENSITIVE TO CHANGE IN PRICE

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Price inelastic demand

• Reducing the price from 10 to 9 increases sales
  from 100 to 108 which is insufficient to
  compensate for the lost revenue from the lower
  price
• Increasing the price from 10 to 11 reduces
  demand from 100 to 95 but the higher price more
  than compensates for the fall in demand
• DEMAND IS RELATIVELY INSENSITIVE TO PRICE CHANGES

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Implications for marketers

• Where demand is elastic price reductions can
  increase total revenues (Easyjet, RyanAir)
• Where demand is inelastic price increases can
  increase total revenues (Chanel, Rolex)
• Factors contributing to inelastic demand
• - few or no substitute products
• - buyers are relatively insensitive to higher
  price
• - brand loyalty is strong
• - buyers believe higher price is justified by
  quality

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Buyer perceptions psychological aspects

• Consider dual role of price as indicator of cost
  and quality
• Reference price indicates likely quality based on
  past experience
• Consider reference price plus as increased
  indicator of quality
• Reference price minus as indicator of lower
  quality

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Retail pricing terms

• Cost of goods invoice costs, carriage inwards,
  depreciation on unsold goods
• Gross margin sales minus cost of goods sold
• gross margin gross margin as of sales
• Mark up amount added to cost of goods to give
  required selling price (can be expressed as of
  cost)
• Net profit sales less cost of goods less
  operating expenses
• Mark down total reduction on normal RSP for all
  items sold
• Margin levels high on slow moving lines
  (furniture), low on fast moving lines (grocery)

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Open Book Costing

• Retailers and suppliers work in collaboration to
  understand costs and develop ways to reduce them
  through initiatives such as joint logistical
  planning
• Provides transparency in overall cost
  negotiations
• Easy comparison of supply chain cost structures
• Establishes stability and supply capacity of
  suppliers

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Factory Gate Pricing

• A supply chain initiative which aims to remove
  unnecessary transportation costs and improve
  efficiency of the supply chain
• Provides efficient transportation suppliers for
  whom transportation is not core can transfer cost
  and responsibility to retailer
• Improved availability more product available on
  shelf
• Lower prices for consumers through lower
  transport costs
• Environmental benefits

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Product price and transport price
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FGP efficiencies
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Strategic pricing decisions

• What value are we providing for customers
• Customer perception of our product
• Perception relative to competitors
• Product costs
• Margin required
• Sales/marketing objectives
• Pricing objectives

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Pricing and positioning

• Price is a strong determinant of position
• Competitive strategy determines pricing strategy
  and pricing policy
• Possible pricing strategies
• Low cost
• Premium
• Prestige

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Dimensions of prestige pricing

• Creaming a permanently high price reflecting
  quality and psycho-social meaning (ceiling price)
• Skimming ceiling price minus, to stimulate demand

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Premium pricing strategies

• Perceived value going rate for branded
  article
• Price surcharge going rate plus based on
  differential advantage
• Price offer going rate minus

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Low cost pricing

• Penetration cost plus very low margin
• Expansion sell at cost
• Stay out cost minus
• Put out cost minus minus (predatory pricing)

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Setting retail prices cost oriented pricing

• Apply necessary mark-up to cost price to achieve
  profit objectives
• Cost price to include purchase ,transport,
  storage, selling etc
• Must not exceed ceiling above which price is
  expensive relative to competitors
• Weaknesses lie in price/demand/marketplace/competi
  tor considerations

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Demand oriented retail pricing

• Based on demand rather than supply factors
• Use price tactically according to market demand
• Knowledge of consumers
• Respond to competitive pressure
• Stimulate demand for other/related items
• Achieve market presence
• Discrimination, backward, skimming, leader,
  competitive, penetration, EDLP

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Discrimination pricing

• Multiple prices for same product according to
  time, loyalty, purchase volumes, fads
• Based on market segments where price differential
  has major impact

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Backward pricing

• Determine the price the customer is willing to
  pay and work backwards
• Source merchandise to fit into price lines 25,
  35, 45
• Price lines must reflect clear value difference
  for consumer
• Wide assortment can be concentrated into narrow
  price lines thus simplifying consumer choice
  process and creating defined store image
• Improved buying through focus on retail price
  point

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Leader pricing

• Stimulate overall demand selling selected lines
  (widely and frequently purchased) at or below
  cost
• Increase store visits, build brand image and
  perception of value
• Can lead to consumer selectivity in lines
  purchased

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Everyday low pricing (EDLP)

• A low price position which remains stable
  relative to discounters and mark-down strategies
• Perception of fairness
• Reduced advertising
• Improved customer service
• Improved inventory management
• Increased margins

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Mark-downs tactical price adjustments

• Reductions in price to reflect current value
• Correctional mark-downs stimulate interest in a
  line
• Operational mark-downs shopworn, out of date,
  end of season
• Promotional mark-down stimulate demand through
  lower prices

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Use mark-downs in response to

• Competitor activity
• Poor original price setting
• Economic/seasonal change
• Poor quality
• New competitor product better matched to consumer
  needs
• Free display space on slow selling lines
• Improve customer goodwill through larger mark-down