Malls or large departmental stores have even reached 3 tier cities. The competition is increasing in FMCG and pricing has become a critical factor between malls and large stores. So pricing of the goods displayed must be done in accordance with a strategy so that the foot falls do not decrease and the stocks are sold out.
The pricing strategy adopted by a retailer can be cost oriented, demand or competition oriented.
In Cost oriented pricing a basic markup is added to the cost of the merchandise to arrive at the price. Here, retail price is considered to be a function of cost markup.
Thus, Retail Price = Cost + Markup
If this formula is rearranged, we get
Cost = Retail Price – Markup and,
Mark up = Retail Price – Cost
The difference between the selling price and the cost is considered as markup and should cover for operating expenses and transportation etc. Mark up percentages may be calculated on the retail price or on the cost. They are calculated as under:
Markup% (at retail) = (Retail Selling Price – Merchandise cost) / Retail Selling Price
Markup% (at cost) = (Retail Selling Price – Merchandise Cost) / Merchandise Cost
For seasonal products like fruits and vegetables the pricing factor evolves on a daily basis. The same logic applies to some Agro Products but the pricing evolution may be on a weekly basis.
Demand oriented pricing focuses on the quantities that the customers would buy at various prices. Sometimes, a high priced product is perceived as being of low quality.
When the prices adopted by the competitors play a key role in determining the price of the product, it is said that competition oriented pricing is being followed. Here, the retailer may keep the price of the product at par with the competition, above the competitor’s price or below the price.
The main objective of employing a price skimming strategy is, to benefit from high short term profits (due to the newness of the product) and from effective market segmentation. Such a strategy for pricing of products works well when the products are considered to be prestige goods or luxury items.
This aims to capture a large share by charging low prices. The low prices charged increases purchase and can discourages competitors from entering the market, as the profit margin per item is low. Retailers who wish to enter a new market or build on a relatively small market share often use this strategy. New buyers will be attracted or existing buyers will buy more of the product as a result of the low price.
Companies attempting to enter new or international markets for their products may use different pricing strategies. A low cost variety of a product may be offered at a very low price to gain recognition and acceptance by consumers. Once acceptance has been achieved, more expensive models can be made available at higher prices.
Growth in retail at one point in time was possible through the opening of new stores and simply getting the product to the stores. However, with the increase in the scale of competition, the focus is now on making store space and product mix work as hard as possible to maximize returns from every square foot and every promotion. Budgets are constantly tightened and decisions at each level need evaluation. The retailer today has little choice but has to ensure that every product in the store is on sale at a price that increases profit, preserves market share and builds customer loyalty.
It calls for a balancing act on the part of the person responsible for fixing the price. Price is the value placed on what is exchanged. It is the point at which the exchange between the buyer and seller takes place. Pricing is an integral part of the retail strategy and again cannot work in isolation. Costs and operating expenses also need to be considered while establishing the retail price.
Price is an integral element of the retail marketing mix. It is the factor, which is the source of revenue for the retailer. The price of the merchandiser also communicates the image of the retail store to the customers. The primary factor that is to be considered while arriving at the pricing strategy is the business model that the retailer has chosen to follow. The decisions on the pricing of the products will have to follow what the retailer has chosen to be the market price.
The next factor to be taken into consideration is the demand for the product. In some cases, the price of the product is linked to the quality. This is generally in case of products like electronics where a high priced product is perceived to be of good quality. On the other hand, for products like designer clothing a certain section of the population may be willing to pay a premium price.
Retailers who want to create a prestige image may opt for a higher pricing policy while a retailer who wants to penetrate the market may decide to offer a value for money proposition.
Competition for the product and the competitor’s price for a similar product in the market also need to be taken into consideration. In case the product is unique and does not have any competition it can command a premium price, on the other hand, in case there is a fair amount of similar products in the market, the prices of such products need to be taken into consideration before fixing the price.