Chapter 7 - Pricing Flashcards
Predatory pricing
Retailer drops its prices below cost to force another competitor out of the market
Price sensitivity
Products price increases sales will decrease because less customers feel it offers good value.
3 broad categories of objectives
Profit orientated objectives
-maximising profit, satisfactory profit or achieving a target return on investment
Sales orientated objectives
-expressed in terms of market share, rand value or sale units .
Status Quo objectives
- maintain current retail prices or meet competitors prices
Implementation Pricing strategies
Everyday low pricing High/low pricing Price bundling Price lining Odd pricing Leader pricing
- Everyday low pricing
- price their merchandise to offer customers value @ reasonable prices on a continuous basis. Eg Dischem
- High/low pricing
- Fashion retailers usually price their latest fashion high then place them on promotion soon after to encourage other customers to buy on-trend fashion. This technique creates excitement and increases profits. Disadvantage is that customers wait for items to go on sale.
- Price bundling
When retailers offer more than one product for a set price or different products for a single price. Customers feel like it’s value because the individual prices of the products are higher than bundle price. Grocery store offers carrots in a bag. - Price lining
- retailers determine set price points for a specific merchandise category. Eg. Edgar’s price ladies pants at 100,150 or 200 as casual, smart and formal or differing qualities. This simplifies pricing for the retailer that carries thousands of stock items.
- Odd pricing
- common pricing strategy to make customers feel like they are paying less. Pricing items at 9,95 as apposed to 10. Although customers round to 10.
- Leader pricing
- aimed at increasing traffic flow into an outlet by pricing popular products at or below cost price and hopefully selling other products at full mark up. Limited to prevent other retailers taking advantage. Encourages “cherry pickers”
Horizontal price fixing
Retailers that are in direct competition are not allowed to enter into agreements to set prices at the same level. Aimed at reducing competition.
Factors that influence price sensitivity
Type of product - weather it’s a necessity or a luxury
Availability of substitutes
Customers knowledge on historical data
Customers brand loyalty
Customers income level
Price elasticity
This measures price sensitivity by calculating percentage change in number of units sold compared to the percentage change in price.
Higher -1 not price sensitive
Lower -1 is price sensitive
The Consumer protection act
Protects against asking different prices to different consumers
Allows consumers to chose between bundle pricing and individual pricing of products
Retailer has provided estimate then can’t increase unless informed and agreed upon with customer
Retailer may not display goods without price
Retailer may not charge a customer a higher price than advertised
Retailer may not mislead customers regarding price
No bait marketing - advertising a product but then not having stock of that product and selling another in place of that product
Mark up pricing
Retailers use mark up pricing instead of cost to decide selling price, because mark up pricing looks at the cost price brought from a producer rather than production cost.
Objectives of retail pricing
M A D A M R S S
Reaching a desired profit margin
Achieving a target return on investment
Making a certain amount of profit and improving cash flow
Avoiding criticism from consumers and politicians
Discouraging competition from lowing prices
Stabilising prices and profit margin
Skimming the market for early profits and liquidity
Maximising sales income
Forms of price adjustments
Mark downs
Limiting the amount of mark downs
Clearing out marked down merchandise
Promotional mark downs
Mark downs
- retailers often buy too much merchandise to curb the risk of a stock shortage.
Limiting the amount of mark downs
- retailers and vendors work together, mutually beneficial, retailers don’t want to store too much stock so they use just in time inventory.
Recommended selling price
This is where suppliers advise retailers of a recommended selling price where they offer retailers special benefits if the adhere to these prices. They may not enforce them though.
These benefits include
Advertising allowances
Trade discounts
Promotional discounts