Week 8-A: Retail Pricing Decisions - II: Price Setting Methods

do high markups mean high profits?

not necessarily

prestige pricing

prestige pricing -Setting a high price to suggest high quality or prestigious status. -(all of rational decision making is thrown out the window) -e.g., jewelry, perfume

percent markup formula

% markup = ((retail price - cost of merchandise)/ (Retail price)) X 100% -Percentage markup is the unit markup divided by the selling price**** -Example: A retailer buys a product at $3 per unit and sets a target markup of 25%. What is her selling price of this product? 3/(1-.25)=4

individualized pricing

-Charging each individual customer a different price based on their willingness to pay. This is also called first-degree price discrimination. -Ideally, retailers would maximize their profits by first-degree price discrimination. Common approaches: -->Auctions -->Haggling -->The Internet presents new opportunities

common forms/methods of price discounts

-markdowns -coupons -rebates -price bundling -quantity discounts

psychological pricing

-odd-even pricing -price lining -(loss) leader pricing -prestige pricing

advantages of profit maximizing pricing

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disadvantages of profit maximizing pricing

?

what is cost merchandise

Cost merchandise is usually the wholesale price that the retailer pays

odd even pricing

Influences buyers' perception of price or product by ending the price with certain numbers. odd pricing: ending the price with an odd number, typically a nine, to create a sense of deal. even pricing: ending the price with an even number, to generate a wholesome, upscale image.

profit-maximizing pricing -be able to apply the formula for a log-log demand function

Suppose that a retailer is able to estimate the following demand function for a product: log(sales volume) = a + b*log(price) It can be shown that the price elasticity under this demand function is the coefficient b. Let C = cost of the merchandise. Then the profit maximizing price for the product is: Retail Price = ((b)/(1 + b)) X C -Note that b has to be less than -1 for this formula to be valid. In other words, the product has to be price-elastic. -example in study guide

markup pricing (Understand this price setting method and be able to apply the formulas of markup pricing)

The most commonly used pricing method by retailers (and wholesalers) is markup pricing: the selling price is determined by adding a fixed percentage markup to the cost of merchandise. -Most widely used because very easy to implement ex: Suppose the retailer buys a product at 2 dollars per unit and sells it at 3 dollars per unit. Her markup=1 dollar per unit Percentage markup is 33.3%

(loss) leader pricing

pricing certain items at lower than normal level (usually near the cost) in order to increase store traffic or boost sales of complementary products. -ex: milk, butter, eggs, bread, small appliances -problem: cherry pickers (People who shop at a place for the best deals. They do so without purchasing any regular items - considered undesirable, typically, by the store management.)

markdowns

reductions in the initial/regular retail price -markdowns for fashion products usually stay permanently. -markdowns for consumer packaged goods usually are temporarily sales promotions, called temporary price reductions (TPRs) or cents-off discounts

retail price formula

retail price=(cost of merchandise)/(1-% markup)

price lining

setting a few price levels for a product line and then marking all items at these prices. Assumption: demand is inelastic within a given price range advantages: simplicity -> examples: neckties, shoes

what is markup interchangeable with?

what is markup interchangeable with? -margin -unit markup