Transcript PRICING STRATEGIES EVERYDAY LOW PRICING ( EDLP )

PRICING STRATEGIES
•
•
•
•
•
•
•
•
•
EVERYDAY LOW PRICING ( EDLP )
This Strategy stresses continuity of retail prices at a level
between the regular non sale price and the deep discount
price of the retailer’s competitors. This is not the lowest price
but is stable price.
Some retailers adopt low price guarantee policy and make
refunds for the extra amount collected.
Advantages Reduced price wars
Increased and frequent buying
Reduced advertising cost
Improved and focussed customer service
Stable demand resulting in reduced stock outs and improved
inventory management
Increased profit margins as no markdowns
PRICING STRATEGIES
•
•
•
•
•
•
•
•
HIGH / LOW PRICING
The retailers offer prices that are sometimes above
their competition’s EDLP, but they use advertisement
to promote frequent sales.
They offer low prices during the sale.
Advantages Same merchandise to attract multiple markets.
It creates excitement
It moves merchandise.
Emphasis is on quality or service
It’s hard to maintain EDLP
GUIDELINES FOR PRICING STRATEGY
• EDLP may be used for Brands that enjoy high consumer
loyalty and have a high market share in a category with
relatively few players. For them it is difficult to increase
their market share through promotions. (Huggies Diapers )
• Shampoos on the other hand with lots of highly competitive
products would have good response to advertisement.
• Some retailers reduce the number of items to make believe
that items are becoming scarce inducing customers to buy
more at full price instead of waiting for sale.
• The retailers adopt strategy of increasing the perception in
the customer’s mind.
• The sales cannot be avoided altogether.
PRICING STRATEGIES
• Discount Coupons - Important sales promotional toll as they
induce customers to try new products, convert first time users
to regular users, encourage increased usage and large
purchases and protect market share against competition.
• Rebate - Useful when sales value is high as compared to
administration cost. For retailer this is more advantage as
they don’t have to incur the cost as the manufacturer incurs
the cost. This allows the manufacturer to control the
inventories without actually cutting the prices. The benefit is
passed directly to consumers. Customer data base can be
build based on forms filled by them.
• Leader pricing - Certain items ( purchased frequently ) are
priced lower than normal to increase customers’ traffic flow
and increase sale of complementary products.
PRICING STRATEGIES
• Price Bundling - It is a practice of offering 2 or more different
products or services for sale at one price. The strategy is used
to move less desirable merchandise by including it in package
with merchandise in high demand.
• Multiple-unit Pricing - The similar products are offered by
bundling them together.
• Price Lining - Retailers offer a limited number of
predetermined price points within a classification ( 49 & 99 ).
Simplifies the merchandising. Customers can be induced to
buy more expensive models.
• Odd Pricing - Price that is just under a round number or
which ends in odd number. This was initially used to reduce
thefts and also to track markdowns. Used for impulse
purchases.
COST - ORIENTED PRICING
• Under the cost-oriented pricing, the retail price is determined
by adding fixed percentage to the cost of merchandise.
• The retailer’s financial goals are governed by gross margin
hence the retailer’s set the price under this method based on
Gross margin goal.
• Maintained Markup Percentage - It is the amount of profit a
retailer plans to maintain on a particular category of
merchandise after providing for markdowns and alteration
costs.
• Initial markup
= Retail selling price initially placed
- Cost of Goods Sold.
• Maintained Markup = Actual sales
- Cost of Goods Sold
• Initial Markup = ( Maintained Markup + Reductions )
/ ( Net sales + Reductions )
• Retail = Cost + Markup
COST - ORIENTED PRICING
Adjustments to the Initial Retail Price
• Markdowns - Can be done for clearance ( slow moving, end of
season, obsolete, priced higher than competitors’ goods ) If
markdown planned is too low, the retailer prices the
merchandise too low or not taking enough risk.
• Markdown may increase customers’ traffic flow and also sale
of complementary product. The optimal markdown can be
ensured by proper budgeting.
• Timely deliveries should be ensured to reduce markdowns.
( Neither early nor too late )
• Past data for sell through analysis helps reduce markdowns.
• With Early markdowns, price reductions need not be deep and
traffic improvement and better cash flow can be seen with
increase in space.
• With late markdown ( end of season ) the discounts are high
but the merchandise can be sold at regular price for longer
time.
• Highly perishable merchandise require more substantial
markdowns than staple merchandise.
COST - ORIENTED PRICING
Adjustments to the Initial Retail Price
• The items remaining unsold even after markdown can be
liquidated in following ways :
• “job-out” the remaining merchandise to another retailer - this
gives relatively smaller markdown period and eliminates the
unappealing sale atmosphere but the effective markdown will
be very low.
• Consolidate the marked-down merchandise into one or few of
the retailer’s regular locations or into another retail chain or
store under the same ownership or can be sent to a rented
space or convention center.
• Internet auction site
• Give the merchandise to charity
• Carry the merchandise over to the next season.
COST - ORIENTED PRICING
•
•
•
•
•
•
Profit Impact of adjustments to Retail Pricing
Break-Even Point : Quantity where the Fixed cost is equal to
the gross margin.
BEQ = Fixed cost / ( Unit Price - Unit variable Cost )
Break- Even sales : Change in sale quantity if the price is
reduced.
% Break-Even sales change = % Price change
/ ( % CM + % Price change )
CM = Contribution Margin = Gross margin - Direct costs.
Unit Break-Even Sales Change = % Break-even sales change
X Sale Quantity
COMPETITION ORIENTED PRICING
• Prices are based on competitors prices. Retailers can price
either above,below or at parity with competition based on
their overall strategy and image of premium, low cost ,
reasonable price provider.
• They can distinguish themselves with their brand equity, ,
high quality, better service, elegant locations, unique
merchandise etc.
• Bigger stores can afford to price higher than competition but
for smaller stores it becomes essential to keep prices at par
with larger stores or below them. This will hit their gross
margin as bigger stores would be getting benefits of scale.
The smaller retailers then would have to price the items
which are price sensitive and more visible at prices on par
with market leaders and keep more margins on items that
cannot be easily compared.
DEMAND ORIENTED PRICING
• In this method, retailers not only consider their profit
structure but also consider the impact of price change on
sales. For price sensitive items , demand increases with price
cut and decreases with price increase.
• If customers are insensitive to price then increase in price
increases profit.
• Factors affecting the customers’ sensitivity to price :
• Substitute Awareness effect
• Total expenditure effect ( High value / low value products )
• Difficult comparison effect
• Benefits/ Price effect
• Customer perception
• Situation effect
• For determining the effect of change in price, many retailers
conduct experiments to measure the effect on sales volume.
ISSUES IN RETAIL PRICING
• Price discrimination - Vendor sells the same product to two or
more retailers at different prices. This is done as a result of
difference in the cost of manufacture, sale or delivery
resulting from the differing methods or quantities in which
the merchandise are sold or delivered.
• This could occur in terms of quantity discount , functional
discount (wholesalers / retailers )
• The price discrimination may also be done to meet
competitor’s low price.
• The price discrimination can be done in response to changing
market conditions.
• The level of negotiation also results in price discrimination.
• Vertical Price Fixing - This involves agreements to fix prices
between parties at different levels of the same marketing
channel.
ISSUES IN RETAIL PRICING
• Horizontal Price Fixing - This involves agreements between
retailers that are in direct competition to have the same
prices. This suppresses competition while often raising the
cost to the consumer.
• Predatory Pricing - This is the price used to drive
competition out from the market place.
• Comparative Price advertising - This method compares the
offer price for sale with higher regular price or
manufacturer’s list price.
• Bait-and-Switch tactics - This is a deceptive practice that
lures customers into a store by advertising a product at a
lower than usual price and then induces the customer to
switch to a higher-priced model.
• This can happen in two ways - The retailer doesn’t stock
sufficient and the merchandise is out of stock when customer
wants to buy or the retailer starts to point out the
disadvantages of the model.