Setting the Right
Price
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Marketing Primer
Summary
Setting the right price can influence
the quantities of various items that consumers will buy, which in
turn affects the total revenue and the profit in the store. In the
end, the right price for the product is the price that the consumer
is prepared to pay for the product. Hence, correct pricing decisions
are a key to successful retail management. Systematic and informed
decisions regarding pricing strategies must be made while
considering a wide range of issues.
A major step toward making a profit in retailing is selling
merchandise for more than it has cost you. The difference between
the cost of the merchandise and the retail price is called the
mark-up and these are the dollars that are now available to pay the
operating expenses of the business. When establishing the markup on
a product, two points should be noted:
1) The cost of the merchandise used in calculating markup consists
of the base invoice price for the merchandise plus any
transportation charges minus any quantity and cash discounts given
by the seller.
2) Retail price, rather than cost, is ordinarily used in calculating
percentage markup. The reason for this is that when other operating
figures such as wages, advertising, and profits, are expressed as a
percentage, all are based on retail price rather than on the cost of
the merchandise being sold.
The following points will highlight issues that should be
considered:
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Target Consumers and the Retailing Mix
In this section, your attention is directed to price as it relates
to your potential customers.
Is the price of this item very important to your target consumers
(?), i.e., you need to know your customers' desires for different
products and is price an important issue in their purchasing
decision?
Have you established a price range that people will pay for the
product (?), i.e., what is the high and low price that the
merchandise will have to fall within for someone to buy?
Have you considered what price strategies would be compatible with
your store's total retailing mix that includes merchandise,
location, promotion, and services?
Will trade-ins be accepted as part of the purchase price on items
such as appliances and television sets?
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Competitor Considerations
This set of questions looks outside your firm to the competitive
factors that you cannot directly control.
Do you know what your direct competitors are doing price wise?
Do you regularly review competitors' ads to obtain information on
their prices?
Do you do comparison shopping of competitors to obtain information
on their pricing strategy?
Have you considered how your competition will react when you enter
the market place, and how will you react to this?
A Price Level Strategy
Selecting a general level of prices, while considering the
competition is a key strategic decision, perhaps the most important.
Should your overall strategy be to sell at the prevailing market
prices (?) or do you want to work at an above-the-market or
below-the-market strategy?
Should competitors' temporary price reductions ever be matched?
Could private-brand merchandise be obtained in order to avoid direct
price competition?
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Calculating Planned Initial Markup
In this section you will have to look inside your business, taking
into account sales, expenses, and profits before setting prices. The
initial markup must be large enough to cover anticipated expenses
and reductions and still produce a satisfactory profit.
Have you estimated sales, operating expenses, and reductions for the
next selling season?
Have you established a profit objective for the next selling season?
Given your estimated sales, expenses, and reductions, have you
planned initial markup? The Initial Markup Percentage is calculated
by adding the operating expenses, planned reductions (markdowns,
stock shortages, and employee/customer discounts) and profits
together and then dividing this total by net sales and planned
reductions.
Different initial mark-up figures may have to be used for various
lines of merchandise or services, particularly when different lines
have different characteristics than others.
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Store Policies
In this section, overall store policy and the message that you want
to convey will be considered.
Setting the price must be compatible with your established store
policies and your theme.
Will a one-price system, under which the same price is charged to
every purchaser of a particular item, be used on all items(?) or is
the price negotiable with the customer?
Will odd-ending prices such as $1.98 and $44.95, be more appealing
to your customers than even-ending prices?
Will consumers buy more if multiple pricing, i.e., such as 2 for
$8.50 is used?
Should any loss leader product pricing be used?
Will price lining, the practice of setting up distinct price points
and then marking all related merchandise at these points, be used?
Would price lining by means of zones be more appropriate than price
points?
Will cent-off coupons be used in newspaper ads or mailed to selected
consumers on any occasion?
Would periodic special sales, combining reduced prices and heavier
advertising, be consistent with the store image you are seeking?
Has the impact of various sale items on profit been considered?
Will "rain-checks" be issued to consumers who come in for special
sale merchandise that is temporarily out of stock?
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Nature of the Merchandise
In this section you will consider how selected characteristics of
particular merchandise affect planned initial markup.
Did you get "good deal" on the wholesale price of the merchandise?
Is this item at the peak of its popularity?
Are handling and selling costs relatively great due to the product
being bulky, having a low turnover rate, and requiring much personal
selling, installation, or alterations?
Are relatively large levels of reductions expected due to markdowns,
spoilage, breakage, or theft?
Will customer services such as delivery, alterations, gift wrapping,
and installation be free of charge to customers?
Other Considerations
Are additional markups called for because wholesale prices have
increased or because the item's low price causes consumers to
question its quality?
Should purchase discounts to special groups be given?
When markdowns appear necessary, have other alternatives been
considered first, i.e., merchandising out of the problem?
Has an attempt been made to identify the cause of markdowns?
Has the relationship between timing and size of markdowns been taken
into account?
Would a schedule of automatic markdowns after merchandise has been
in the stock for specified intervals be appropriate?
Is the size of the markdown "just enough" to stimulate purchases?
How is the seasonality of products allowed for?
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MARKUP AND MARGIN
What is the difference?
Markup is a percentage of the cost.
Margin is the same dollar amount expressed as a percentage of
the selling price.
Example
Item costs $1.00 Items sells for $1.50.
Markup is .50 or 50 percent of the cost.
Margin is .50 or 33 a percent of the selling price.
Margin vs. Markup Comparison Chart
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