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Midterm

Midterm 2 Notes (ch 5,6,12,13).docx

27 Pages
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Department
Retail Management
Course Code
RMG 200
Professor
Brent Barr

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Description
Ch 12: Retail Pricing Value: relationship of what a customer gets (goods/services) to what he or she has to pay for it Retailers can increase value and stimulate more sales by either increasing the perceived benefits offered or reduce pricing Cost cutting issues might include: o Buying merchandise offshore to maintain higher profit potential due to higher Canadian dollar o Cutting packaging costs by including three languages English, French, Spanish to serve all North American markets o Retailers and suppliers partnering to maintain competitive prices o Using price optimization software technology to sell as much inventory as possible at the highest possible price APPROACHES FOR SETTING PRICES Retailers must consider the following in order to set prices that will maximize long-term profits: Cost of the merchandise and services Demand, the price sensitivity of consumers Competition because customers shop around and compare prices Legal considerations Three approaches for setting retail prices Cost-oriented Determining the retail price by adding a Quick, mechanical, method fixed percentage to the cost of the simple to use merchandise (aka cost-plus pricing) Demand- Prices are based on what customers expect Allows retailers to oriented or are willing to pay determine which method price will give them the greatest profit. But it is hard to implement, especially in retailing environment with thousands of SKUs Competition- Prices are based on competitors prices, Considers what oriented rather than demand or cost considerations competition is method as guides doing in marketplace 1. The Cost-Oriented Method of Setting Retail Prices Markup Markup: the increase in the retail price of an item after the initial markup percentage has been applied but before the item is placed on the selling floor Retail price = Cost of merchandise + Markup Markup is determined to cover all of the retailers operating expenses (labour costs, rent utilities, advertising) Calculating Markup Percent Markup percentage: the markup as a percent of retail price Eg. If a buyer for an office supply category spcialist purchases calculators at $14 and needs a 30% markup to meet financial goals for the category, the retail price needs to be = = $20 = = 48% Markup % = $Markup $Retail $Retail = $Cost Cost % $Cost = $Retail Cost % 2. The Demand-Oriented Method Setting Retail Prices Pricing experiment Take two stores that are similar in size and customer characteristics and sell product at different prices Any retailers can utilize the data warehouses derived from their loyalty programs in conjunction with sales and price data to run equipments or buy from private firms 3. The Competition-Oriented Method of Setting Retail Prices Priced either above, below or at par with competition PRICE ADJUSTMENTS 1. Markdowns Markdown: the percentage reduction in the initial retail price Reasons for taking markdowns a. Clearance to dispose of merchandise b. Promotional to generate sales Optimizing Markdown Decisions Retailers like to set rules for taking markdowns, but these rules based approach are limited in several ways o Assumes that all the items within a category exhibit the same, consistent behaviour o Follows a fixed schedule and down not factor in holidays o Fails to take gross margin into consideration; its only goal is to clear inventory Merchandising optimization software: set of algorithms (computer programs) that monitors merchandise sales, promotions, competitors actions, and other factors to determine the optimal (most profitable) price and timing for merchandising activities, especially markdowns Reducing the Amount of Markdowns by Working with Vendors Quick response inventory systems reduce the lead time for receiving merchandise so that retailers can more closely monitor changes in trends and customer demand, thus reducing markdowns Markdown money: funds provided by a vendor to retailer to cover decreased gross margin from markdowns and other merchandising issues According to the Competition Act, markdown money should be provided to all retailers on a proportionally equal basis, typically as a percentage of purchases Determining Markdown Percent Markdown $ = Previous price New, reduced price Markdown % = Markdown $ Net Sales $ Eg 1. A sporting goods retailer received six Burton snowboards that retailed for $800. All six snowboards were reduced to $580 for a weekend Winter Wonderland Sale. What was the markdown percent on its snowboard? Markdown % = (previous price new, reduced price) Net sales $ = 6(800 580) (6580) = 0.3793 37.93% Eg 2. If December markdowns for the womens accessory department totalled $24 360 and net sales for the same month were $98 245, what was the markdown percent? Markdown % = Markdown $ in December Net Sales in December = 24 360 98 245 = 24.8% Eg 3. Calculate net sales for the produce department if markdowns for boxed strawberries were 59.6% of net sales and the markdown dollar amount was $37.25 Net Sales = Markdown $ Markdown % = $37.25 59.6% = $62.50 Liquidating Markdown Merchandise Strategies to liquidate merchandise: a. job-out, sell the remaining merchandise to another retailer Enables the retailer to have a relatively short markdown period, provides space for new merchandise, and at the same time eliminates the often unappealing sale atmosphere The retailer can only recoup a small percentage of the merchandises cost often 10% b. Consolidate the unsold merchandise Practice encourages a successful yet relatively short markdown period Consolidation sales can be complex and expensive due to the extra transportation and recordkeeping involved Can be done in a number of ways: i. Consolidation can be made into one or few of the retailers regular locations ii. Marked down merchandise can be consolidated into another retail chain or an outlet store under te same ownership (Eg. Holt Renfrew Last Call) iii. Marked down merchandise can be shipped to a distribution centre or rented space such as convention centre for final sale c. Place the remaining merchandise on an Internet auction site such as eBay, or have a special clearance location on the retailers Web site d. Give the merchandise to charity good corporate practice ad the cost value of the merchandise can be deducted from income e. Carry the merchandise over to the next season used for high priced non fashion merchandise, such as furniture Markdowns and Price Discrimination First degree price discrimination: charging customers different prices based on their willingness to pay (eg. If wealthy customer wants to uy something, the retailer charges more. If price sensitive customer comes in, the retailer charges less) Second degree price discrimination: chagrining different prices to different people on the basis of the nature of the offering (eg. Early ird specials at the restaurant offer lower priced meals before 6 am) 2. Coupons Coupons: documents that entitle the holder to a reduced price of some number of cents off the actual price of a product or service Second degree price discrimination because they provide an incentive for price-sensitive customers to purchase more merchandise Coupons are used because they are thought t induce customers to try products for the first time, convert those first time users to regular users, encourage large purchases, increase usage, and protect market share against competition 3. Rebates Rebate: money returned to the buyer in the form of cash based on a portion of the purchase price Most useful when the dollar amount is relatively large or else its not worth customers time and postage to redeem the rebate Rebates are often offered on cars, major and portable appliance, computers, and electronic products Rebates are advantageous more than coupons to retailers because they increae demand without handling costs Manufacturers like rebates because: o Consumers never bother to redeem them o Advertisements proclaim low prices, noting requirement to send in rebates o Let them offer price cuts to consumers directly o Rebates can be rolled out and shut off quickly o Buyers are required to fill out forms with names, addresses, and other data rebates become a great way to build a customer data warehouse 4. Price Bundling: offering two or more different products or services for sale at one price Form of second degree discrimination Increase both unit and dollar sales by bringing traffic into the store 5. Multiple Unit Pricing: (aka. Quality discounts) offering two or more similar products or services for same at one price Eg. Three litres of fruit drink for $2.39 6. Variable pricing (aka zone pricin
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