Chapter 17

Question 1

List the “3 Basic Pricing Options for a Retailer”.

Answer 1

1. Discount - low prices as a competitive advantage (e.g., off-price retailers and full-line discount stores; Example: Dollarama and Giant Tiger and Winners.)
2. At the market - retailer has average prices (e.g., traditional department stores and drugstores. Example: The BAY and Jean Coutu Pharmacy.)
3. Upscale - prestigious image = higher prices for products (e.g., upscale department stores
   and specialty stores. Example: Holt-Renfrew- Ogilvy and Harry Rosen and Birks.)

Question 2

Explain the difference between “price elastic demand” and “price inelastic demand”

Answer 2

1） Price Elastic Demand – Small percentage changes in price lead to big percentage changes
in the number of units bought.

2） Price Inelastic Demand – Large percentage changes in price lead to small percentage changes in
the number of units bought.

Question 3

Price Elasticity of Demand:

Answer 3

The sensitivity of customers to price changes in terms of the quantities they will buy:

Question 4

List and discuss the 5 identified Market Segments by Price Sensitivity

Answer 4

1) Economic consumers shop around for the lowest prices.

2) Status-oriented consumers are more interested in prestige brands and strong customer services than in
price.

3) Assortment-oriented consumers seek retailers with a strong selection of brands and products and want fair
prices.

4) Personalizing consumers shop where they are known and will pay slightly above-average prices.

5) Convenience-oriented consumers look for nearby stores with long hours and may use catalogs or the Web.
They will pay higher prices for convenience

Question 5

Explain the difference between “Market Penetration Pricing” and “Market Skimming Pricing”.

Answer 5

1) Market Penetration pricing A firm introduces a new product at a very low price to encourage more customers to purchase it. A market penetration strategy is used when customers are price sensitive, low prices discourage actual and potential competition, and total retail costs do not rise much with
volume.

2) Market Skimming pricing:
Charge an initial high price for a newly introduced product. As when APPLE does with each new I-Phone that is introduced. With a market skimming pricing strategy, a firm sets premium prices and attracts customers less concerned with price than service, assortment, and prestige. This
strategy is proper if the targeted segment is price insensitive, new competitors are unlikely to
enter the market, and if added sales will greatly increase retail cost.

Question 6

1) Demand-oriented pricing

Answer 6

A retailer sets prices based on consumer desires. It determines the range of prices acceptable to the target market. The top of this range is the demand ceiling, the most that people will pay for a good or service.

Question 7

2) Cost-oriented pricing

Answer 7

A method of setting prices in which the seller totals all the unit costs for the product and then ADDS the desired profit per unit. With Cost-Oriented pricing, the desired profit is typically expressed in a dollar amount.

Example: Selling Price = Cost of Product + Desired Profit per unit = Cost of a product is $100 +
$40 desired profit = $140 will be the Retail Selling Price per Unit.

Question 8

3) Competition-oriented pricing

Answer 8

A retailer sets its price in accordance with competitors’ pricing in order to be competitive in its market segment

Question 9

4) Prestige pricing

Answer 9

Pricing products at a high price to appeal to a select target market who believe that high prices reflect high quality

Question 10

5) Markup Pricing:

Answer 10

A method of setting prices in which the seller totals all the unit costs associated to the product and then adds the desired profit per unit. This desired profit is the mark-up. The Mark-up Amount is often expressed as a percentage. Example: Cost of Product + mark-up = $150 + $75 = $225 is the Retail Selling Price of the product.

Question 11

6) Everyday low pricing + pros and cons

Answer 11

A retailer strives to sell its goods and services at consistently low prices throughout the selling season. Examples are DOLLARAMA and WALMART since both retailers sell their products at consistently low prices.

Pros:
Reduced advertising expense
More predictable sales levels
Fewer peaks and drops (ebbs) of sales distribution

Cons:
Decreased excitement
Potentially less store traffic due to not having specials
Reduces the number of consumers who come to a store only to purchase when sales and specials are
advertised.

Question 12

7) Variable Pricing

Answer 12

The retailer alters its prices to coincide with fluctuations in costs or consumer demand.

o Cost fluctuations can be seasonal, or trend related.
o Demand fluctuations can be place-or-time-based.

Question 13

8) Yield management pricing

Answer 13

Charge different prices to different customers for the SAME product or service in order to manage
capacity

Is a computerized, demand based, variable pricing technique whereby a retailer

Commonly used by airlines and hotels

Question 14

9) One price policy

Answer 14

A retailer charges the same price to all customers buying an item under similar conditions.

The one-price policy is easy to manage, does not require skilled salespeople, makes shopping
quicker, permits self-service, puts consumers under less pressure, and is tied to the retailer’s price goals.

Question 15

10) Flexible pricing

Answer 15

Flexible pricing lets consumers bargain over prices; those who are good at it obtain lower prices.

Flexible pricing is used by many jewelry stores and car dealers. It requires high initial prices and good salespeople.

Question 16

11) Odd pricing

Answer 16

Retail prices are set at levels below even dollar values, such as $0.49, $4.98, and $199.

The assumption is that people feel these prices represent discounts or that the amounts are beneath
consumer price ceilings.

It is a form of psychological pricing.

Question 17

12) Leader pricing

Answer 17

a retailer advertises and sells selected items in its goods/service
assortment at less than the usual profit margins.

The goal is to increase customer traffic for the retailer so that it can sell regularly priced goods and services in addition to the specially priced items.

It is used most often with frequently purchased, nationally branded, high turnover goods and services.

Question 18

13) Bundled pricing and unbundled pricing

Answer 18

A retailer combines several elements (products) in one basic price.

For example, a digital camera bundle could include a camera, batteries, a telephoto lens, a case, and a tripod.

Question 19

14) Price lining + pros and cons

Answer 19

Rather than stock merchandise at all different price levels, retailers often employ price lining and sell merchandise at a limited range of price points, with each point representing a distinct level of quality.

Pros:
- Customer confusion is reduced.

• It aids merchandise planning.
• It aids in the selection of suppliers.

Cons:

• It may leave excessive gaps between price points.
• Inflation can make it tough to keep price points and price ranges.
• Markdowns may disrupt the balance in a price line.

Explanation:
Think of price lining like organizing toys by size. Instead of having toys of all different sizes mixed together, you group them into small, medium, and large sizes.

Retailers do something similar with prices. Instead of having products at all different prices, they organize them into a few price categories. Each category represents a different level of quality, just like each toy size represents a different size.

This helps customers because they can easily understand the options and pick what they want without getting confused. It also helps the store plan what to sell and how much to buy. Plus, it makes it easier to work with suppliers and manage inventory.

But sometimes, there can be problems. There might be big gaps between the prices, or it can be hard to keep prices consistent if things get more expensive over time. Also, when stores put things on sale, it can mess up the balance of prices. And they have to make sure that prices match up well for different types of products.

Question 20

Explain the common “markdown timing perspectives” practiced by retailers.

Answer 20

A markdown is used to meet the lower price of another retailer, adapt to inventory overstocking, clear out
shopworn old merchandise, reduce assortments of odds and ends, and increase customer traffic.

Question 21

Early markdown

Answer 21

An early markdown policy offers merchandise at reduced prices while demand is still fairly active. It frees selling space for new merchandise and can improve cash flow.

Question 22

Late markdown

Answer 22

A late markdown policy gives a retailer every opportunity to sell merchandise at original prices.

Question 23

Staggered markdown

Answer 23

Prices are marked down throughout the selling season.

A type of
staggered policy is the automatic markdown plan, in which the amount and timing of markdowns are
controlled by the length of time merchandise remains in stock.

Question 24

Storewide clearance

Answer 24

Usually held once or twice a year to clean out merchandise before taking a
physical inventory and beginning the next season.

Question 25

Pros and cons of a storewide clearance

Answer 25

The length of the period during which original prices are charged.

The absence of frequent markdowns that can destroy a customer’s confidence in regular
prices.

The limiting of bargain hunting to once or twice a year.

Okay, imagine you have a big box of toys. When you have a storewide clearance, it means you’re trying to sell all the toys in the box really quickly.

Pros:
1. People feel happier buying toys because they know they’re getting a good deal.
2. The regular prices stay the same, so people trust them more.
3. You only have big sales like this once or twice a year, so it’s special.

Cons:
1. You might not make as much money because you’re selling things cheaper.
2. It only happens for a short time, so some people might miss it.
3. People might wait for the big sales instead of buying things regularly.

Question 26

Unbundled pricing

Answer 26

Retailers charge separate prices for each item sold. Unbundled pricing may be
harder to manage and may lead to people buying fewer related items.