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Final Exam Study Guide

Final Exam Study Guide - Retail Pricing Decisions I&II...

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Importance of Pricing Decisions o For the Consumer: Price is what must be given up to get the benefits of the product. It plays a direct role in shaping customer value Customer Value = Perceived Benefits/Costs (mainly price) o For the Retailer: Price affects both the sales volume and unit profit, in opposite directs. Gross Profit = Unit Margin x Sales Volume General Retail Pricing Strategies: EDLP vs. High/Low Pricing o Everyday Low Pricing (EDLP): Lower regular prices and less frequent sales promotions Advantages: Builds store loyalty by assuring consumers of reliable prices Reduces sales promotion costs Achieves higher advertising efficiency Smoothens demand Reduces stock-outs Improves inventory management efficiency o Giant is an EDLP o High/Low Pricing: Higher regular prices and more frequent sales promotions Advantages: The same assortment appeals to multiple market segments Sales promotions create excitement Uses sales promotions to move merchandise Higher regular prices enables emphasis on quality Some retailers resort to high/low pricing as a response to competition Consideration Factors in Setting Retail Prices o Costs Costs usually refer to costs of merchandise here
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Although some experts are advocating the use of Direct Product Costs (variable costs associated with selling a product, such as shipping, book keeping, and shelf stocking costs) Cost-based pricing is the most commonly used pricing method for retailers Set prices based on pre-determined markup and merchandise cost Pros: Quick, easy to implement Cons: Ignore consumer demand and competition In general, cost-based pricing is useful in setting a floor under which prices should not fall o Competition Retailers often adjust their prices relative to competitors Retailers can set their prices above, at parity with, below competition, depending on their overall strategy and market position Advantages: Relatively easy to implement for large number of products Helps maintain price image and avoid market share erosion Disadvantages: Ignores consumer demand and cost structure In general, competitive prices should be used as anchors to adjust a retailer’s own prices o Consumer Price Sensitivity A commonly used measure of price sensitivity is price elasticity: the percentage change in quantity sold for one percentage change in price A price elasticity based pricing approach takes into account consumer’s willingness-to-pay. It offers the opportunity to maximize profit of a product in the short run. Limitations: Hard to implement, especially for retailers A firm may face severe competitive reaction or market share penalty if the “optimal prices” are much lower or higher than the competition. Factors Affecting Consumer Price Sensitivity
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Final Exam Study Guide - Retail Pricing Decisions I&II...

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