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Midterm

RMG 200 Study Guide - Midterm Guide: Burton Snowboards, Markdown, Holt Renfrew


Department
Retail Management
Course Code
RMG 200
Professor
Brent Barr
Study Guide
Midterm

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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
method
Determining the retail price by adding a
fixed percentage to the cost of the
merchandise (aka cost-plus pricing)
Quick, mechanical,
simple to use
Demand-
oriented
method
Prices are based on what customers expect
or are willing to pay
Allows retailers to
determine which
price will give
them the greatest
profit. But it is hard
to implement,
especially in
retailing
environment with
thousands of SKUs
Competition-
oriented
method
Prices are based on competitors’ prices,
rather than demand or cost considerations
as guides
Considers what
competition is
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 retailer’s operating expenses (labour costs, rent utilities,
advertising)
Calculating Markup Percent
Markup percentage: the markup as a percent of retail price
  


Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

  

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, competitor’s 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

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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) ÷ (6×580)
= 0.3793 37.93%
Eg 2. If December markdowns for the women’s 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 merchandise’s 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 retailer’s 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 retailer’s 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)
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