St.

Mary University

Retail Marketing

Retail Mix Management

Chapter Five
5.2. Price Strategy:-Establishing The Retail Price
 Introduction
 Price has always been one of the most important variables
in retail buying decision.
 It is the factor which makes or breaks a retail organization.
 It is also the easiest and quickest element to change.

In this unit, you will learn about

 Techniques of pricing of products
 How pricing helps an organization to achieve its
objectives.(Especially for new entrants)
 The implications of the pricing decision which a retailer
should consider while deciding the pricing for the retail
sales.(For existing retailers)
5.2.1. Objective Of Pricing

 While setting the price, the firm may aim at one or more of the following objectives:
1. Maximization of profits for the entire product line.
 Firms set a price, which would enhance the sale of the entire product line rather than
yield a profit for one product only

2. Promotion of the long-range welfare of the firm can also influence the pricing decision
 The firm may decide to set a price, which looks unattractive to competitors, and hence,
the entry of competitors can be discouraged for a long period of time.
Example:-

3. Adaptation of prices to fit the diverse competitive situations

 The company will try to maximize the profit from a market where it has cash cows and
invest in other markets where it has to stay put for long term benefits.
Example:-

4. Flexibility to vary prices in response to changing market condition: One cannot decide
about prices in isolation, as the firm is only a member of the market. it has to decide on
prices in response to changing economic conditions. Example:- Inflation
5. Stabilization of prices and margins:
 The firm may decide to stabilize the prices and margins for long
term goals and price the products in a different way than they
would have done with a profit maximization objective.

6. Market Penetration:
 The firm may decide in favor of a lower price to penetrate
deeper into the market and to stimulate market growth and
capture a large market share.

7. Market Skimming:
 The firm may decide to charge high initial price to take
advantage of the fact that some buyers are willing to pay a much
higher price than others as the product is of high value to them.
5.2.2. Factors Influencing Pricing

 Price is the source of revenue, which the firm

seeks to maximize
 It is the most important device a firm can use
to expand its market share.
 If the price is set too high, a seller may price
himself out. If it is too low, his income may not
cover costs, or at best, fall short of what it
could have been.
 Considerations for formulating pricing strategy

1. Objectives of Business
 Pricing is not an end in itself but a means to an end. The fundamental
guide to pricing, therefore, is the firm’s overall goals
 Survival or assured continued existence
 Specifically, objectives relate to rate of growth, market share, maintenance
of control or ownership and finally profit.
2. The Competitive Environment

 An effective solution to the pricing problem requires an understanding of

the competitive environment.
 Under the present competitive conditions, it is more important for the firm
to offer the product which best satisfies the wants and desires of the
consumers than the one which sells at the lowest possible price.
 As a result, pricing policy should be governed more by the relative than by
the absolute height of prices.
3. Product and Promotional Policies of the Firm
 Pricing is only one aspect of marketing strategy and a firm must consider it
together with its product and promotional policies.
 Thus, before making a price change, one must consider the sales
promotion and product policies of the firm.

4. Nature of Price Sensitivity

 Businessmen often tend to exaggerate the importance of price sensitivity
and ignore many identifiable factors at work that tend to minimize its role.
 The various factors which may generate insensitivity to price changes are
-variability in consumer behavior
-variation in the effectiveness of marketing effort,
-nature of the product,
- importance of after sales service,
-the existence of highly differentiated products which are difficult to compare
and multiple dimensions of product quality.
5. Conflicting Interests Between Manufacturer and
Intermediaries
 The interests of manufacturers and middlemen (through
whom the former often sell) are sometimes in conflict. This
is called vertical conflict

6. Active Entry of Non-business Groups in Pricing Decisions

 The government, acting on behalf of the public, seeks to

prevent the abuse of monopolistic power and collusion
among businessmen
 The entry of the government into the pricing process, in
alliance with farmers and labor interests, tends to inject
policies in price determination
7. Cost Factors in Pricing
 Costs have to be taken into consideration like many other
important factors.
 In fact, in the long run, prices must cover costs. If, in the
long run, costs are not covered, manufacturers will
withdraw from the market and supply will be reduced
which, in turn, may lead to higher prices.
 Point that needs emphasis here is that Cost is not the
only factor in setting prices. Cost must be regarded only
as an indicator of the price, which ought to be set after
taking into consideration the demand and the
competitive situation.
 Costs determine the profit consequences of the various
pricing alternatives.
 Cost calculations also help in determining whether the product whose price is
determined by its demand is to be included in the product line or not.
 What cost determines is not the price but whether the product in question can
be profitably produced or not
 If factors of demand and/or competition prevent a firm from setting a price for
one of its products that will cover direct costs, there may be no alternative but
to discontinue the product.
8. Demand Factors in Pricing

 Where cost factors are internal in nature, demand-based factors are external
factors and emerge out of marketing factors.
 The pricing policy of a firm would depend upon the elasticity of demand as well.
 If the demand is inelastic, it would not be profitable for the firm to reduce its
prices. (ex-like cement,steel,etc.. In [Link])
 On the other hand, a policy of price increase would prove profitable if the
demand is inelastic.
 Conversely, if the demand is elastic, it is a policy of price reduction rather than a
policy of price increase, which would be profitable for a firm to adopt.(ex-price
of soap/detergent…)
5.2.3. Pricing Strategies
 Price is a highly sensitive and visible part of retail marketing mix and has a bearing on the
retailer’s overall profitability. Further, pricing itself is an essential part of marketing mix and
has its own place in the strategic decision-making process.
1. Demand-oriented Pricing

 In demand-oriented pricing, prices are based on what customers

expect or may be willing to pay. It determines the range of prices
affordable to the target market.
 Demand-oriented Pricing focuses on the quantities that the
consumer would buy at various prices.
 It largely depends on the preceded value attached to the product by
the consumer.
 An understanding of the target market and the value proposition that
they intend to seek is the base to this form of pricing.
 The main advantage of demand-oriented pricing strategy is to set the
merchandise price per customer response towards the product
2. Cost-oriented Pricing

 In this form of pricing policy method, a retailer decides a floor price of the
merchandise–a minimum price suitable to the organization to achieve its
financial goals.
 A retailer under this method sets the price to cover production cost,
operating cost and a predetermined percentage of profit.

 The Markup Criterion

-The retailer’s markup percentage or cost-plus percentage depends on
following considerations: 1. Product’s traditional markup policy 2.
Competition in the market 3. Supplier’s guidelines regarding selling price(sell
at 5% increase on the purchase price)4. Operating expenses of store 5.
Rented or own retail store 6. Inventory turnover(If turnover is high low mark
up,if turnover is low high mark up to get some profit) 7. Level of customers
service offered(If high service, high mark up and vice versa)
Ex-20% mark up on cost of goods sold-
3. Psychological Pricing
 Psychological pricing is used when prices are set to a certain
level where the consumer perceives the price to be fair.
 The most common method is odd-pricing using figures that
end in 5, 7 or 9. It is believed that consumers tend to round
down a price of $9.95 to $9, rather than $10.
4. Competition-oriented Pricing
 Under this pricing policy, retailers set the prices of
merchandise after considering competitor’s price rather
than demand or cost considerations(ex-If competitor
increases, follow suit)
 A company following this policy may not react to changes in
demand or costs till competitors are forced to alter their
merchandise price despite no change in demand and sale.
(Ex- experience in cement/steel factories now in Eth)
The various competition-oriented
pricing alternatives include:
1. Competitive pricing below the market rate
 It means setting the merchandise prices simply to
beat the competitor price by charging a price
that is below the prevalent market rate.
 This policy is advisable only when the retailer
follows an optimum inventory plan, procure
merchandise at the right time and at the right
price to gain the benefits of cash payment, trade
discount, bulk buying etc.
2. Competitive pricing above the market rate
 This policy allows a retailer to set the merchandise price
above the current market rate.
 This policy seems to be straightforward and simple but
must be applied carefully.
 This policy is suggested to those retailers who have some
competitive advantages such as:
(a) Excellent consumer service
(b) High level of personal selling, delivery and exchanged
facilities
(c) A stock of well-known brands that are not available to its
competitors in the nearby location
(d) Attractive, huge and modern retail infrastructure to offer
merchandise
5.3. Place strategy: Selecting Retail Sites

 Retail stores should be located where market opportunities are

best. After a country, region city or trade area, and neighborhood
have been identified as satisfactory; a specific site must be chosen
that will best serve the desired target market
 A through study of customers and their shopping behavior should
be made before a location is chosen.
 The finest store in the world will not live up to it potential if it is
located where customers cannot or will not travel to shop
 The primary role of the retail store or center is to attract the
shopper to the location. Alternatively, retailers must take the store
to where the people are, either at home or in crowds. Examples of
taking the store to where the crowds are including airport location,
theme parks and vending machines.
 In short, location and site selection are one of the most important
decisions made by a retail owner. We need to look for ways to
optimize this process.
5.3.1. Retailing Strategy and Location

 A retailer should first begin with a mission statement.

 This helps retailer, its employees, and its customers
understand the purpose of the business.
 The core concepts and culture that come from a mission
statement flow from the choice of the strategies selected
in an attempt to achieve a competitive advantage.
 Owners or managers who wish to emphasize merchandise
quality will require an entirely different location than
managers of a low-margin discount house.
 5.3.2. Issues considered in Location
Analysis
• The several factors used in location analysis are:
• Demographics,
• Economic,
• Cultural,
• Demand,
• Competition, and
• Infrastructure
 5.3.3. Site Evaluation and Selection
 Types of Locations
There are three major types of location that we
will discuss in this section are:
1. The Shopping center
2. The business district, and
3. The free-standing location
5.3.4. Assessing Site Evaluation Criteria
 Putting all of the different ideas together and coming to a
decision is the trick.
 There is no such thing as a “Perfect site.” Retailers must decide
which attributes are the most important to their business.

 Let us summarize the key criteria critical to the site selection

decision;
1. Sales potential for the site:
 the demographic, economic, and competition factors and
strategies by which management hopes to create a competitive
advantage determine the estimate of sales for a site.
 Growth potential should be a basic consideration in the
evaluation of the sales potential.
2. Accessibility to the site:
 Automobile and public transportation access to
the site and adequate parking may well be
defining criteria
3. Pedestrian accessibility at the site
 The site must provide reasonable actual and
perceived access to the store.
4. Synergies from nearby stores
 There is cumulative attraction when business
can draw more customers together than they
could individually.
5. Site Economics, Leasing and Occupancy
terms: The terms of the lease or purchase
contracts have critical implications for the
retailers.
 Furthermore, even if the vacant space but low
occupancy may signal poor economic viability
in the market, too much vacancy can be an
open door to a competitor.
 In fact, if the vacant space is sufficient, a
competitor that you did not anticipate can
quickly occupy it.
6. Legal and political environment:

 Increasingly, the legal and political environment is an important

consideration in site location decisions.
 Changes in zoning laws, taxing districts, and road maintenance
projects can threaten the long run viability of a specific site.

7. Physical features:
 The physical features of the site and neighboring area must not be
overlooked.
 Whether it is raw land or an existing building, the physical dimensions
of the site must fit your needs.
• The size and shape of a site, visibility of a site for signs, age of
surrounding buildings, traffic flows by time of day, traffic turning
patterns, and number of traffic lanes has critical implications to
factors such as access, number of cars that can be parked or room for
5.3.5. Store Design and Layout
Thank You