The pricing strategy adopted by a retailer can be cost oriented, demand or competition oriented pricing.
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
When the buyer is aware of the markup percentage required and the selling price, he can also work out the price to which he actually needs to procure the product.
While it may not be possible to adopt policy can be followed. This allows the buyer to procure goods at varying prices but at the same time, maintain the margins than need to be earned, as some products may earn a higher margin while others a lower.
Demand oriented pricing focuses on the quantities that the customers would buy at various prices. It largely depends on the perceived value attached to the product by the customer. Sometimes, a high priced product is perceived as being of low quality. An understanding of the target market and the value proposition that they would look is the key to demand oriented pricing.
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 price the product on par with the competition above the competitor’s price or below the price.
Price lining is a term used by retailers when they sell their merchandise only at given prices. A price zone or price range is a range of prices for a particular merchandise line. A price point is a specific price in that range.
A Price range on the other hand, refers to the Width of the price range i.e. the number of price points that a retailer chooses to offer the range of products at.
The pricing strategies that may be adopted by a retailer include:
The strategy is to charge high prices initially and when reduce them gradually, if at all. A skimming price policy is a form of price discrimination over time and for it to be effective, several conditions must be met. The success of a price skimming strategy is largely dependent on the inelasticity of demand for the product, either by the market as a whole or by certain market segments. 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 strategy is the opposite of market skimming and aims to capture a large share by charging low prices. The low prices charged stimulate purchases and can discourage competitors from entering the market, as the profit margins per item are low. Retailers who wish to enter a new market or build on a relatively small market share often use this strategy. This will only be possible where demand for the product is believed to be highly elastic i.e. demand is price sensitive and either new buyers will be attracted or existing buyers will buy more of the product as a result of low price.
Expansionistic pricing is another form of penetration pricing. Under this strategy, the product enjoys a high price elasticity of demand, so that the adoption of a low price leads to significant increase in sales volumes. Companies attempting to enter new or international markets for their products may use expansionistic pricing strategies. A low cost version 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 versions or models of the offering can be made available at higher prices.