Chapter 7 - Pricing

Question 1

Predatory pricing

Answer 1

Retailer drops its prices below cost to force another competitor out of the market

Question 2

Price sensitivity

Answer 2

Products price increases sales will decrease because less customers feel it offers good value.

Question 3

3 broad categories of objectives

Answer 3

Profit orientated objectives
-maximising profit, satisfactory profit or achieving a target return on investment

Sales orientated objectives
-expressed in terms of market share, rand value or sale units .

Status Quo objectives
- maintain current retail prices or meet competitors prices

Question 4

Implementation Pricing strategies

Everyday low pricing 
High/low pricing 
Price bundling 
Price lining
Odd pricing 
Leader pricing

Answer 4

• Everyday low pricing
• price their merchandise to offer customers value @ reasonable prices on a continuous basis. Eg Dischem
• High/low pricing
• Fashion retailers usually price their latest fashion high then place them on promotion soon after to encourage other customers to buy on-trend fashion. This technique creates excitement and increases profits. Disadvantage is that customers wait for items to go on sale.
• Price bundling
  When retailers offer more than one product for a set price or different products for a single price. Customers feel like it’s value because the individual prices of the products are higher than bundle price. Grocery store offers carrots in a bag.
• Price lining
• retailers determine set price points for a specific merchandise category. Eg. Edgar’s price ladies pants at 100,150 or 200 as casual, smart and formal or differing qualities. This simplifies pricing for the retailer that carries thousands of stock items.
• Odd pricing
• common pricing strategy to make customers feel like they are paying less. Pricing items at 9,95 as apposed to 10. Although customers round to 10.
• Leader pricing
• aimed at increasing traffic flow into an outlet by pricing popular products at or below cost price and hopefully selling other products at full mark up. Limited to prevent other retailers taking advantage. Encourages “cherry pickers”

Question 5

Horizontal price fixing

Answer 5

Retailers that are in direct competition are not allowed to enter into agreements to set prices at the same level. Aimed at reducing competition.

Question 6

Factors that influence price sensitivity

Answer 6

Type of product - weather it’s a necessity or a luxury

Availability of substitutes

Customers knowledge on historical data

Customers brand loyalty

Customers income level

Question 7

Price elasticity

Answer 7

This measures price sensitivity by calculating percentage change in number of units sold compared to the percentage change in price.

Higher -1 not price sensitive
Lower -1 is price sensitive

Question 7

The Consumer protection act

Answer 7

Protects against asking different prices to different consumers

Allows consumers to chose between bundle pricing and individual pricing of products

Retailer has provided estimate then can’t increase unless informed and agreed upon with customer

Retailer may not display goods without price

Retailer may not charge a customer a higher price than advertised

Retailer may not mislead customers regarding price

No bait marketing - advertising a product but then not having stock of that product and selling another in place of that product

Question 8

Mark up pricing

Answer 8

Retailers use mark up pricing instead of cost to decide selling price, because mark up pricing looks at the cost price brought from a producer rather than production cost.

Question 9

Objectives of retail pricing

M
A
D
A
M
R
S
S

Answer 9

Reaching a desired profit margin

Achieving a target return on investment

Making a certain amount of profit and improving cash flow

Avoiding criticism from consumers and politicians

Discouraging competition from lowing prices

Stabilising prices and profit margin

Skimming the market for early profits and liquidity

Maximising sales income

Question 11

Forms of price adjustments

Mark downs
Limiting the amount of mark downs
Clearing out marked down merchandise
Promotional mark downs

Answer 11

Mark downs
- retailers often buy too much merchandise to curb the risk of a stock shortage.

Limiting the amount of mark downs
- retailers and vendors work together, mutually beneficial, retailers don’t want to store too much stock so they use just in time inventory.

Question 12

Recommended selling price

Answer 12

This is where suppliers advise retailers of a recommended selling price where they offer retailers special benefits if the adhere to these prices. They may not enforce them though.

These benefits include

Advertising allowances
Trade discounts
Promotional discounts