Transcript How do you compute prices?

Pricing
Your Products or Services
Pricing Considerations
Product/service costs (!)
 Target customers
 Market demand & price sensitivity
 Sales volume
 Competitors’ pricing
 Your company’s competitive advantage
 Product differentiation
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Pricing Considerations
Economic conditions
 Location
 Seasonal fluctuations
 Customer psychology
 Terms and discounts
 Image / brand
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Cost Factors Often Ignored
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Owner's earnings
Family employees' earnings
The portion of rent for stockroom
Equipment and store repairs
The costs of credit-card transactions
The costs of business services
(such as accounting and legal services)
Advertising costs, insurance premiums, etc.
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Types of Customers
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Economic consumers
– They view competing retailers as similar and want low
prices. This segment has grown in recent years.
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Status-oriented consumers
– They see competing stores as dissimilar from each other.
They are lured by prestige brands and customer services
more than price.
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Assortment-oriented consumers
– They seek retailers with big assortments and want fair
prices.
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Types of Customers
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Personalizing consumers
– They go where they are known and are personally attached
to employees and the store. They'll pay slightly aboveaverage prices.
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Convenience-oriented consumers
– They shop if they must. They like nearby sites, long hours,
and catalogs, and pay above-average prices.
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Demand Elasticity
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Elastic demand: Change price = Change demand
– Shoppers perceive retailers in the same category (such as gas
stations, supermarkets, or pharmacies) to be rather similar.
These retailers must always be sure that their prices are
competitive or they will lose business.
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Inelastic demand: Change price = Same demand
– Shoppers perceive retailers in the same category to be
dissimilar, due to their locations, product assortments,
customer service, etc. These retailers can set premium prices
since their unique characteristics encourage many customers
to be store loyal.
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“Fair” Pricing
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“Fair" reflects the value a retailer offers.
– From a consumer perspective: this means a
discounter's prices have to be low enough to
make it worthwhile for a person to give up some
customer services and brand choices; at an
upscale store, the level of services and brand
choices must be worth the premium prices.
– From a retailer perspective: "fair" means prices
reflect a firm's operating structure in a way that
enables it to earn a satisfactory profit.
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Competitive Pricing
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Absolute prices are the actual prices
set by a given retailer; they should be
tied to costs and desired profit.
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Relative prices reflect a firm's prices
compared to competitors; variances
between absolute and relative prices
must be based on value.
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Pricing Objectives
for New Products
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Getting the product accepted
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Capturing/maintaining market share
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Earning a profit
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Pricing Strategies
for New Products
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Penetration – go for high volume
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Skimming – make money fast
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Sliding-down-the-demand-curve Start high, then adjust over time
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Pricing Techniques
for Established Products
Odd pricing – e.g. $12.99
 Price lining – good, better, best
 Leader pricing (not loss leaders!)
 Geographical pricing
 Opportunistic pricing
 Discounts
 Suggested retail pricing (SRP)
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Pricing for Retailers
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Goal: move merchandise
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Markup = selling price – cost
– Initial markup – average based on estimates
– Percentage of retail price – 20% margin
– Standard markup – keystoning: 100%
– Flexible markup
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Whatever the market will bare!
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Pricing for Manufacturers
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Critical: accurate cost accounting
– Cost-plus pricing
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Know the break-even price!
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Include contribution
to general overhead
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Understand “markup” and “margin”
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Setting Your Markups
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Initial markups need to be higher than maintained markups if a
retailer is to meet revenue and profit goals. Thus, an initial
markup for an item must reflect the fact that during a selling
season there will be shrinkage, breakage, employee discounts,
and end-of-season markdowns.
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A maintained markup represents the weighted average markup
for an item, which is computed as: (total actual revenues
received - the cost of goods sold) / total actual revenues
received.
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A retailer will make a serious mistake if beginning-of-season
prices represent the average prices sought for the entire selling
season.
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Dollar Markup
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Dollar Markup =
Retail Price – Product Cost
Markup = $10 - $6 = $4
$4
Markup
$6
Cost
Price = $10
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Percentage Markup: Price
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Percentage Markup (Retail Price) =
Dollar Markup / Retail Price
$4 / $10 = 40%
$4
= 40% Markup
Price = $10
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Percentage Markup: Cost
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Percentage Markup (Cost) =
Dollar Markup / Unit Cost
$4 / $6 = 66.7%
Markup = 66.7% of Cost
$6
$4
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Scenario
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Expenses: $140,000
Inventory = 10,000 x $14 = $140,000
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Goal: to make a profit of $38,000 (10% Net Sales)
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Net Sales:
(XQty1 @ $XP1) + (XQty2 @ $XP2) = $380K
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Reductions: $24,000 (some sold at less)
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Average Markup
Expenses + Reductions + Profit
-----------------Net Sales + Reductions
$140K + $24K + $38K
= $202K
-----------------$380K + $24K = $404K
= 50%
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Pricing Questions
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When you take a physical inventory, how do you compute the value of the merchandise
remaining in stock?
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Do you understand the difference between an initial markup and a maintained markup?
Do you use these concepts in setting your prices?
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How are prices displayed in your store? (shelf labels, price tags on individual items, etc.)
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What payment method(s) do you accept? (cash, check, store charge, bank card)
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Do you understand both of these terms: Elastic demand? Inelastic demand?
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What do you think about everyday low pricing?
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Credit Options
 Credit
cards
– Merchant accounts and fees
– Gateways
 Installment
 Trade
credit
credit (charge accounts)
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Price Visibility
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Exterior Price Visibility – e.g. exterior store windows can show prices
for selected sale items and/or highlight a store's orientation.
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A small firm can compete by featuring selected sale items; but these prices must be
promoted to shoppers so that they are aware of the good values at local stores.
Interior Price Visibility – e.g. Interior store displays can emphasize or
de-emphasize prices.
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To emphasize prices, a retailer can use large in-store signs that show prices of given
items, promote a particular color price tag to indicate particularly good bargains, leave
items in cartons, and have plain displays (such as dump bins) and fixtures.
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To de-emphasize prices, a retailer can use only small price tags that are attached
directly to merchandise or have salespeople responsible for communicating prices (as
done in upscale apparel stores and jewelry stores); there would be no overt references
to prices in the store and the atmosphere would be stylish.
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Pricing for Service Firms
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Factors:
– Cost of materials used
– Labor involved
– Overhead
– Profit
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Price (Fee)
= total cost of providing a unit of service
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Pricing Questions
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Do you have an overall pricing philosophy? What is it? (high end, medium, or low end)
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What are the characteristics of the people who shop at your store? For what reasons do
they shop at your store? (for low prices, for convenience, for service, etc.) Is this consistent
with your pricing philosophy?
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How do you compute prices?
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When setting prices, do you take all of your operating costs into account? (including your
own salary)
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How does your store use manufacturer suggested list prices?
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Are your prices "fair" to the customers who shop at your store? What does the term "fair"
mean to you?
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Do you or one of your employees visit competing retailers to check on their prices? Do you
check competitors' ads for prices? If you do check competitors' prices, how does your firm
react to what you learn?
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How often do you change prices? Does this vary by product category?
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Pricing Questions
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How often do you run sales? Does this vary by product category?
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Do you plan for stock shortages (due to shrinkage and clerical errors)
when setting prices? How?
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Do you use price lining? (whereby you sell items at a range of prices,
such $12, $17, and $25 dollar ties)
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Do you advertise prices? Where?
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Do you let customers bargain over the prices of any items?
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How do you use prices in competing with larger retailers?
(such as Wal-Mart, Home Depot, Toys "R" Us, etc.)
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Have you formed a buying group (cooperative) with other small retailers
to get better terms on your purchases?
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Do you use odd prices ($4.95, $59.95) rather than even prices ($5.00, $60)?
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Go For It!