Lecture 6 Flashcards
Factors to consider in pricing product
- Customers price sensitivity
- Competition
- Pricing of services
- Using analytical tools
- Legal issues
Customer price sensitivity
If price of product increases, sales for product decrease as fewer customers find it valuable
It determines how many units sold at different price levels. Can test using price experiment which shows quantity sold at different prices, profit at different prices and price elasticity.
Competition
Price below, above or same as competitors? The chosen pricing policy must be consistent with overall strategy and market position.
Pricing of services
Due to intangibility of services, it is difficult for customers to assess service quality.
Hence there is risk associated with service.
Using analytical tools to set prices
Many retailers mark up the prices to yield a profitable gross margin and adjust the price based on insights of consumer price sensitivity and competitive pricing.
Legal issues
3 Cs
- Competition and consumer commission of Singapore
- Guidelines of price transparenct
- Prevent supplies in Singapore from engaging in unfair practices
Initial markup
Difference between the retail selling price and the cost of merchandise
Initial markup must be high enough so that after reductions, still earn profit and breakeven.
Maintained markup
Actual sales for the merchandise less its cost.
Calculate Markup percentage
Retail - Cost / Retail
Difference between initial markup and maintained markup
Difference due to various reductions:
Markdowns, discounts to employees and customers, inventory shrinkages due to shoplifting or breakage.
Retailers rarely sell at initial price and often reduce price to get rid of inventory
Calculate Initial Markup percentage
Planned retail operating expenses + Planned profit + planned retail reduction / planned net sales (100%) + planned retail reduction
