RMG200 Lecture 12: Chapter 12 – Price
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Chapter 12 – Price
Lo1: Considerations in setting retail price
- cost of the merchandise/service?
- demand (price sensitivity of consumer)
- competition (many choices for consumers)
- legal considerations (taxes)
LO2: Pricing strategies:
1) everyday low prices (EDLP): charges the same price all
the time. Set prices between regular non-sale price and
deep discount sale prices of a high/low pricing
competitor. EDLP retailers typically still have some
sales. Benefit to customers (assured of low price on every visit + less out-of-stock). Benefit to retailer
(lower advertising expense and lower labour costs)
Ex. walmart, Canadian tire, staples business depot have EDLP
2) High/low pricing: regular prices are higher than EDLP competitors, but merchandise frequently on sale at
lower prices. Benefit to customer (spend time to find lowest price). Benefit to retailer (max profit – price
discrimination). Problem: trains people to buy on deals.
Ex. most department stores (The Bay, Sears).
Lo3: Method for setting price
a) Cost-oriented: set price at a fixed percent over cost of merchandise (most FMCGs)
b) Demand-oriented: charge as much as customers are willing to pay (airline ticket, hotel room)
c) Competitor-oriented: set price in relation to competitors prices (gasoline, coffee, banks)
Cost-oriented price setting method: prices are set on the basis of merchandise cost.
- An appropriate markup is needed to cover all the retailers operating expenses (labour costs, rent, utilities,
advertising, etc). Markup can be calculated based on the retail price and/or based on the cost of merchandise.
Markup can be calculated and expressed in dollar or as a percent.
Markup = retail price – cost of merchandise
Initial markup = retail selling price initially placed on merchandise – cost of goods sold
(before considering any reductions)
Maintained markup= actual sale price that you get for the merchandise – cost of goods sold
(after considering any reductions – discount/shrinkage)
Initial markup%=initial markup/initial retail price
Maintained markup%=maintained markup/net sales
Maintained markup=Initial markup–reduction
Gross margin ($)= Maintained markup + Cash discounts – Alterations
- “Cash discounts” are the $ offered by manufacturer to retailer because of early payment. “Alternation” is the
workroom cost suffered by the retailer, e.g., cost to put a table together and polish it up in a furniture store)
Ex. A department’s maintained markup is 38 percent, reductions are $560, and net sales are $28,000. What’s the initial
markup percentage? A: 39.2
Maintained markup is 39%, net sales are $52,000, alterations are $1,700, and cash discounts are 2%. What are gross
margin in dollars? A: $19,620
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