Retail Pricing

Retail Pricing:

The sale of goods from fixed points (malls, department stores, supermarkets and so on) to the consumer in small quantities for his own consumption is called as retail. According to the concept of retailing, a retailer doesn’t sell products in bulk; instead sells the merchandise in small units to the end-users.

Factors influencing retail pricing :

Internal factors:

Internal factors that influence retail prices include the following:

• Manufacturing Cost:

The retail company considers both, fixed and variable costs of manufacturing the product. The fixed costs do not vary depending upon the production volume. For example, property tax. The variable costs include varying costs of raw material and costs depending upon the volume of production. For example, labour.

• The Predetermined Objectives:

The objective of the retail company varies with time and market situations. If the objective is to increase return on investment, then the company may charge a higher price. If the objective is to increase market share, then it may charge a lower price.

• Image of the Firm:

 The retail company may consider its own image in the market. For example, companies with large goodwill such as Procter & Gamble can demand a higher price for their products.

• Product Status:

 The stage at which the product is in its product life cycle determines its price. At the time of introducing the product in the market, the company may charge a lower price for it to attract new customers. When the product is accepted and established in the market, the company increases the price.

• Promotional Activity:

If the company is spending high cost on advertising and sales promotion, then it keeps product price high in order to recover the cost of investments.

External Factors

External prices that influence retail prices include the following:

• Competition: In the case of high competition, the prices may be set low to face the competition effectively, and if there is less competition, the prices may be kept high.

• Buying Power of Consumers: The sensitivity of the customer towards price variation and purchasing power of the customer contribute to the setting price.

•Government Policies: Government rules and regulation about manufacturing and announcement of administered prices can increase the price of the product.

• Market Conditions: If the market is under recession, the consumers buying pattern changes. To modify their buying behavior, the product prices are set less.

• Levels of Channels Involved: The retailer has to consider a number of channels involved from manufacturing to retail and their expectations. The deeper the level of channels, the higher would be the product prices.

Different Types of Pricing strategies

1. Cost plus Pricing Mechanism

Every organization runs to earn profits and so is the retail industry.

Cost plus pricing works on the following principle:

• Cost Price of the product + Profit (Decided by the retailer) = Final price of the merchandise.

According to cost plus pricing strategy the retailer adds some extra amount to the actual cost price of the product to earn his share of profits. The final price of the merchandise includes the profit as decided by the retailer.

2. Cost plus Pricing

• Cost plus pricing strategy takes into account the profit of the retailer.
• Cost plus pricing is an easy way to calculate the price of the merchandise.
• The increase in the retailer price of the merchandise is directly proportional to the increase in the cost price.
• The customers however do not have a say in cost plus pricing.

Manufacturer Suggested Retail Price (Also called List Price or Recommended retail price)

According to manufacturer suggested retail pricing strategy the retailer sets the final price of the merchandise as suggested by the manufacturer.

3. MSRP

• The retailer sells his merchandise at a price suggested by the manufacturer.

Condition 1

• The retailer sells the product at the same price as suggested by the manufacturer.

Condition 2

• The retailer sells the merchandise at a price less than what was suggested by the manufacturer - Such a condition arises when the retailer offers “Sale” on his merchandise.

Condition 3

• Retailers initially quote an unreasonably high price and then reduce the price on the customer’s request to make him realize that a favour has been done to him. A condition of Bargain - where the customer negotiates with the retailer to reduce the price of the merchandise.

4. Competitive Pricing

The cut throat competition in the current retail scenario has prompted the retailers to guarantee excellent customer service to the buyers for them to prefer them over their competitors.

• The price of the merchandise is more or less similar to the competitor’s but the retailers add on certain attractive benefits for the customers. (Longer payment term, gifts etc.)
• The retailers ensure that the customers leave their store with a smile to have an edge over the competitors.
• He tries his level best to offer better services to the customers for a better business in future.

5. Pricing below Competition

According to pricing below competition policy

• The price of the merchandise is kept lesser than what is being offered by the competitors.

6. Prestige Pricing (Pricing above competition)

According to prestige pricing mechanism, the price of the merchandise is set slightly above the competitors.

The retailer can charge higher price than the competitors only under the following circumstances:

Ø  Exclusive Brands at the store.

Ø  Brand image of the store

Ø  Prime location of the retail store

Ø  Excellent customer service

Ø  Merchandise not available at any other store

Ø  Latest Trends

7. Psychological Pricing

• Certain price of a product at which the consumer willingly purchases it is called psychological price.
• The consumer perceives such prices to be correct.
• A retailer sets a psychological price which he feels would meet the expectations of the buyers and they would easily buy the merchandise.

8. Multiple Pricing

• According to multiple pricing, the retailer sells multiple products (more than one) for a single price.
• The retailers combine few products to be sold for a single fixed price.
• 3 Shirts for $100/- or 3 Perfumes for $20/- and so on.

9. Discount Pricing

According to discount pricing, the retailer sells his merchandise at a discounted price during off seasons or to clear out his stock.

Retail promotion strategy:

With the economy still not at peak performance, apparel retailers went to the old standby this past holiday season, discounting.  We all know that this promotions strategy just erodes margins and adds little value to the customer, especially loyal ones.  For the online channel, free shipping (the oldest promotion used in e-commerce) was still at the top of the heap this past holiday season.

Customers have come to expect free shipping, especially for orders of significant value (over $100).  If you’re like many retailers, you’d like to stop this practice of giving customers free shipping all together. Free shipping decreases margins and, in many cases, it can’t be used alongside other more attractive promotions for both the retailer and the customer. Avoid offering free shipping as a site wide promotion; it limits your options due to double-dipping on promotions that will ultimately shave your margins.

Moving forward, retailers must implement a comprehensive promotions strategy to maintain a high level of consumer satisfaction toward their brand. Savvy retailers know their promotions strategies must be innovative, creative and customized to meet the shopping habits of specific consumer segments.  When building a comprehensive Omni channel promotions strategy, it is important to create offers targeted at acquiring new customers, increasing average order size, moving excess inventory, and satisfying customers. Without a well-thought-out strategy, and the systems to deliver and measure success, it is impossible to know whether or not the promotions are generating true return on investment.

Five Actions for Successful Retail Promotions

Using today’s available tools and technology such as e-commerce platforms, mobile devices, and order management systems, omni channel retailers can create customized promotions plans that deliver offers to consumers based on the segmentation of their preferences and shopping behavior.  To execute a winning promotions strategy, retailers should follow these five essential actions:

1. Segment your customers.

Segment customers into groups, particularly if your products attract a diverse group of shoppers. By collecting customer data, merchandisers can better understand the triggers that make a consumer react to a specific type of promotion. Tracking consumers by these behavior groups allows retailers to introduce specialized promotional programs and communicate to consumers with relevant offers. Online capabilities facilitate the collection of information provided by consumers when they register on a site and by their shopping habits. Consumers can then be grouped by price sensitivity, product class, order size, number of visits and other relevant characteristics.

2. Try new types of promotions.

The goal of promotions is to cut through the noise created by the market, and ultimately inspire a consumer to make purchase through a designated call to action. For this reason, promotions must be creative, offer real value, and go beyond discounting.  New promotional concepts – such as shipping destination, shipping methods, x first customers, every nth customer, every x order, items per promotion, apply offer to nth item, returns-based, payment method, free product choice, rebates, multiple bonus products and many others – are starting to be used by some innovative apparel retailers on their e-commerce sites.  Retailers are even starting to use stock-level based promotions to move excess inventory. Although there is a lot of diversity in online promotions, a word to the wise — be sure to have rules in place for managing promotions to avoid pitfalls, such as giving away double offers or unintentionally not providing a consumer with the best available promotion.

3. Test and track promotions.

Once customers are organized into relevant groups and the lists of promotions have been created, retailers can better determine the effectiveness of specific promotions by performing A/B tests. A/B tests are a comparative form of testing that allows merchants to test several promotion types against a typical offer to determine which option will yield the best results. For example, different promotions can be offered to a single group of consumers to find out which promotion is most effective. This can be as simple as offering a 20 percent discount versus a 30 percent discount to determine discount thresholds or as complex as offering 10 unique promotion types. Since this form testing delivers real-time results, A/B is the best vehicle for gathering data on time-sensitive offers. Testing is also an import measurement tool for safeguarding against over promotion and protecting margins.

4. Synchronize omnichannel promotions through the order management system (OMS).

Over the years, consumers have been trained that they can shop through any channel, and thereby get the same promotions no matter where they shop. Synchronizing promotions across channels has been a significant issue for retailers especially between the website and store.  Order management systems that offer a diverse set of promotions can provide the unification of offers across channels.  Unfortunately, too many e-commerce platforms and order management systems do not offer the same promotion types therefore creating a disconnect and weakening creative offer-based strategies.  Review your systems to make sure these software tools offer a diverse set of promotions to maximize your ROI.

5. Go beyond Discounting to Connect with Customers.

Deep discounting across the board used to be the norm in the apparel industry. However, retailers are getting hip to the fact that offering deep discounts to all customers is serving only to lower margins and cheapen the value of the products among many customers who would probably have purchased anyway. Armed with more precise promotions technology to track effectiveness, today’s retailing strategies are moving towards loyalty-based promotions, such as a “surprise and delight” giveaway. Time has shown that customers appreciate receiving something for free, especially when they are not expecting it. Using these promotions create repeat customers. Little things can go a long way, such as sending the customer a thank-you message after the purchase has been made, and then send out a loyal customer offer for their next purchase to seal the deal.