The purpose of the business is to maximize profits and therefore, pricing of products would have to be done carefully to ensure that the same can be achieved. Other pricing objectives could be to help achieve the targeted sales, to maintain or enhance market share or to meet or prevent competition.
Prices could be set at a level that reflects the average industry price, with small adjustments made for unique features of the company’s specific product(s). Firms that adopt this objective must work backwards from price and tailor cost to enable the desired margin to be delivered.
It is interesting to note that the perception of price is different for a retailer and the consumer. For the retailer, it is a key element of the retail mix, while for the consumer, it is a measure of the value of the total bundle of satisfactions they are offered. It is also a measure of the alternatives foregone; either directly, competitive products or substitutes or indirectly i.e. alternative uses for the money to be spent and a measure for quality.
Elements of retail Price:
In order to arrive at the retail price, one needs to first consider the elements that go into the making of the price. The first element to be considered is the Cost of Goods, which s the cost of the merchandise and various there expenses, which are involved in the movement of the goods from the manufacturer to the actual store. These expenses may be Fixed or variable.
Fixed costs sometimes referred to as overhead, are expenses that don’t vary according to production amounts – such as rent or office space (and storage space if you store inventory), office equipment (telephones, faxes, computers etc) insurance, utilities etc.
Variable costs are expenses that do vary with the amount of service provided or goods produced. They include cost such as hourly pay for a contractor on a specific project, raw material etc. Some available costs don’t depend specifically on the number of product but are still variable such as advertising or promotion expenses.
The cost of a product is the total of the fixed and variable expenses to manufacturer or offers your product or service. Price on the other hand is the selling price per unit customers pay or your product or service.
The price of a product may be seen as financial expression of the value of that product. For a consumer price is the monetary expression of the value to be enjoyed / benefits of purchasing product, as compared with other available items. For consumers the price of a product is the most obvious indicator of cost hence the need to get product pricing right.
The profit to be earned from the merchandise must be planned before fixing the retail price. The profit figure arrived at can also be expressed as the markup percentage as:
Retail Price = Cost + Mark Up or
Cost = Retail Price – Mark up and
Mark up = Retail Price — Cost
The components of this formula can be expressed in rupee terms or as a percentage. The markup percentage can be expressed as a percentage of the retail price or as a percentage of the cost price. Thus, the following formulae would apply:
Mark up Percent (Based on Retail Price) = Markup in Rupees / Retail Price
Mark Up Per cent (Based on Cost)=Mark Up in Rupees / Cost
Let us understand these concepts with the help of the following illustration.
Assume that the cost of merchandise of an item is Rs 200 and the markup is Rs 150. The markup percentage based on the retail price would work out to 37.5%.
The retail price has been calculated as 200+150 = 350
Markup percentage on retail = 150 / 350 = 42.86%
Based on cost price, the markup percentage can be calculated as under:
Markup percentage on cost = 150 / 200 = 75%
The markup thus fixed is termed as the Initial Markup. Rarely are all products completely at the fixed price. Reduction in prices are often made and may be due to markdowns employee discounts customers discounts or shrinkage.