Lecture 8 – Retail Pricing and Loyalty (CRM)
o Relationship of what a customer gets (goods/services) to what he or she has to
pay for it.
o Value = perceived benefits/price
o Different for consumers and can be based on quality, price, service,
Considerations in Setting Price:
o Price sensitivity, competition, legal constraint, cost.
Methods in Setting Price:
1. Cost-Oriented – set price at a fixed percent over cost of merchandise (keystone
o Retail price = cost of merchandise + markup
o An appropriate markup is needed to cover all of the retailer’s operating expenses
(labour costs, rent, etc.).
Initial markup = retail selling price initially placed on the merchandise –
cost of goods sold.
Maintained markup = actual sales that you get for the merchandise – cost
of goods sold.
2. Demand-Oriented – charge as much as customers are willing to pay.
o Seeks to determine the price that customers are willing to pay and that will
o Price Tests – setting different prices in a number of markets for the same
o Pricing Experiments – changing the price in a systematic manner to observe
changes in purchases or intentions. 3. Competitor-Oriented – set price in relation to competitor’s prices.
o Everyday Low Prices (EDLP):
Charge the same price all the time.
Set prices between regular non-sale price and deep discount sale prices.
May consider it as “Everyday Stable Prices”.
o High/Low Pricing:
Regular prices are higher than EDLP competitors, but merchandise
frequently on sale at lower prices.
Makes the consumer’s purchase decision time-dependent.
o A technique that evaluates the relationship between total revenue and total cost
to determine profitability at various sales levels (new product launches).
o BEP quantity = fixed cost/unit price – unit variable cost.
A price reduction from the initial retail price.
It gets rid of slow-moving, obsolete merchandise.
Increases sales and/or profits through price discrimination.
Generate cash to buy better selling merchandise.
Increase traffic flow and sale of complementary products Generate excitement through a sale.
Documents that entitle the holder to a reduced price or X cent off a
product or service.
It reduces price to price sensitive customers who will spend the effort to
Induce customer to try products for the first time.
Convert first time users to regulars.
Encourage large purchases.
Protect market share, track promotion effectiveness.
Money returned to the customer based on a portion of the purchase price.
Retailers’ perspective: more advantageous than coupons since hey
increase demand, but retailer has no handling costs.
Manufacturers like rebates because:
Many customers don’t redeem (50%)
They can offer price cuts to customers directly.
o Price Bundling
Practice of offering two or more different products or services at on price.
DSLR body = $1000, Lens = $1500, Together = $1500 $989
o Multiple-Unit Pricing
Similar to price bundling except products or services are similar rather
2 for 1 Philadelphia cheese products.
o Variable Pricing
Application of price discrimination:
By location – zone pricing.
Early bird special/time discount.