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5. Explain why Markdowns are a necessary part of a Retail Business?

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5. Explain why Markdowns are a necessary part of a Retail Business?

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There are numerous types of markdowns that business can use for different purposes:
- Promotional: Drive store traffic, stimulate sales, clear stocks at the end of a season
- Seasonal/Obsolete: Dispose of seasonal product, broken assortments, discontinued lines.
- Competitive: Matching competitor prices on same or similar product.
-> Keeping an eye on rival's pricing strategies
eg) Coles and Woolworths
- Shrinkage: Dispose of damaged/soiled stock.
eg) Products being sold in Outlets
- Discount -> Employees, volume customer purchase.
6. Calculate Gross Profit $ and % if the Cost is $6.50 and the Sell is $14.95
- Gross Profit($) = Sell - Cost = $14.95 - $6.5 = $8.45
- Gross Profit (%) = 8.45/14.95 = 56.52%

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1)    Pricing Strategies

- Customary and variable pricing
Customer pricing: Retailer seeks to set prices and maintain them for an extended period. Version of Everyday low pricing. E.g. McDonalds
Variable pricing: Retail prices vary depending on season and/or demand E.g.   Hotels

- One-price policy and flexible pricing
One Price: Retailer charges the same to all customers
Flexible price: Allows customers to bargain over price. E.g. Car Dealer

- Odd pricing:
Psychological pricing, setting prices a few cents or dollars below the next milestone. E.g. $9.99 or $895

- Leader Pricing:
- Setting prices much lower than the competition (Even if it is below cost) in order to get customers into the store with the hope they will purchase full priced items.

- Multiple unit pricing:
- Offering discounts to customers who buy in bulk, e.g. 2 for $50

- Price Lining:
- Sell products at a limited range of price points where price ranges are reflective of quality

2)    Pros and Cons of Leader Pricing
Pros: Increased customer traffic, increased sales, opportunity to gain new customers, sell exclusive/high margin brands on top of leader priced items.

Cons: Customers will take advantage and only buy the leader priced item. Loss can be more than gain.

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Q3: What are the factors that influence retail price strategy?
A3:
- Company/store/brand image
- Target customer profile
- Service model
- Type of merchandise
- Competition
- Manufacturer's policies
- Selling costs
- Demand and supply
- Handling costs
- Vulnerability to shrinkage

Q4: What is the price elasticity of demand? Why is it important for retailers to understand this concept?

A4: It reflects the change in quantity demanded based on the sensitivity of customers to changes in price.

Price elasticity means that a small percentage change in price leads to a substantial percentage change in number of units bought.

Price inelasticity means that a large percentage change in price leads to a small percentage change in number of units bought.

It is important for retailers to understand the price elasticity of their products so as to be able to set an optimum price that customers are happy to pay for and at the same time is profitable for the retailer.

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-company/store/brand image
-target customer profile
-service model
-type of merchandise
-competition
-manufacturers policies
-selling costs
-demand and supply
-handling costs
-vulnerability to shrinkage

Question 4:
-Sensitivity of customers to price changes
- elastic = small changes create substantial changes in demand
inelastic = changes in price create small changes in demand
- It is important for retailers to know the difference in order to appropriately set and change their prices in order to keep up demand
- necessities are more inelastic as regardless of price, they still need that item
- Wants and material goods are more elastic as price will greatly affect their willingness to buy an item \\

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Question 3

-        Cost of the goods

-        Demand

-        Competitors pricing

-        Volume of goods sold
Question 4

It is the measure of a change in quantity demanded or purchased of a product in relation to its price change. It is important for retailers to understand how much they can change the price before customers will not purchase the product. For example, a small change in price (e.g. $1) will not lead to consumers not purchasing the product.

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Q5 markdowns can help retail businesses to
1.meet the lower price of another retailer,

2.adapt to inventory overstocking,
3.clear out shopworn merchandise,
4.reduce assortments of odds and ends,
5.and increase customer traffic

Q6 gross profit $=14.95-6.50=$8.45
Gross profit %=8.45/14.95=56.52%

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Question 5
Explain why markdowns are a necessary part of a retail business.

Main reasons to markdown and their purpose:
-Promotional: Drive store traffic, stimulate sales
-Seasonal: disposing seasonal products. Eg broken assortments, discontinued products etc.
-Competitive: Price matching with competitors
-Shrinkage: Disposing of damaged/soiled stock
-Discount: Staff discounts, customers who purchase in larger volume

Question 6
Gross profit($)= $14.95-$6.50=$8.45
Gross profit(%)= ($14.95-$6.50)/$14.95= 56.52%

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There are 6 pricing strategies according to 3 types: demand-, cost-, competition-oriented pricing,
1:presige or above market pricing
2.competition-oriented or market pricing
3.volume pricing
4. everday low pricing
5.high/low pricing
6. cost plus or margin pricing
Q2:
Everday low pricing:
•Aim high sales volume & margin
•Prices sit between lowest discount price and
regular non sale competitors
•‘Stable pricing’ as prices do not vary

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There are three different types of price strategies, each consisting of various tactics.
Demand-oriented pricing is when a retailer sets a price based on consumer desires.
Cost-oriented pricing is when a retailer sets a price floor and bases their pricing around that.
Competition-oriented pricing defines when a retailer sets its price in accordance with those of their competitors.

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What are the factors that influence retail price strategy?
- Company/store/brand image
- Target customer profile
- Service model - has to be covered by the profits of the business i.e. in a luxury store with personal shopping, the profit generated from the sale needs to be sufficient enough to cover the customer service efforts. e.g. if spending an hour with them, it needs to cover the salespersons pay and more.
- Type of merchandise, which considers factors like quality, perishability, exclusivity and markdown risk. e.g. if a product is perishable and is going out of date prices may need to be dropped to turnover the stock.
- Competition - price of identical or similar merchandise as competitors
- Manufacturers' policies and suggested prices- manufacturers often recommend prices (which don't legally need to be followed) to the companies they supply to, to give them an idea of what kind of prices they should be selling for.
- Selling costs - selling staff, commissions, store selling costs
- Demand and supply - availability of goods. Availability of goods and their demand causes changes to prices. e.g. a few years ago when a cyclone in Queensland wiped out banana plantations, bananas were selling for prices around $11/kg.
- Handling costs - warehousing, assembly, delivery
- Vulnerability to shrinkage - are items particularly vulnerable to theft, or damage? e.g. working in a chocolate shop, products were often stolen or damaged due to fragility and ability to be hidden in clothing, or taken off shelves as they weren't tagged. May require the addition of security and tagging, but this increases costs to the retailer and therefore increases the selling prices of goods.

What is price elasticity of demand? Why is it important for retailers to understand this concept?
Price elasticity refers to the sensitivity of customers to price changes.

If a small percentage change in price leads to substantial percentage changes in the number of units bought, demand is elastic. This generally occurs when there is low urgency to buy, or if there are acceptable substitutes. If large percentage changes in price lead to small percentage changes in the number of units bought, price is inelastic. An example of an inelastic product is petrol - people will still purchase petrol even if prices are high as it is a necessity i.e. they have to buy petrol in order to drive their car. An elastic product is juice - there are lots of substitutes, lots of competitor brands, and people are sensitive to the price. People may also wait until the price is reduced again before purchasing, as it it not a necessary purchase.

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1. Describe all of the pricing strategies. 2. Choose one and evaluate the pros and cons. 

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1. Describe all of the pricing strategies. 2. Choose one and evaluate the pros and cons. 

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There are three types of pricing strategies.
1. Demand Oriented Pricing - a retailer sets prices of goods and services based on consumer desires. It determines the willingness to buy at particular prices and sets the price ceiling (or the maximum) consumers are willing to pay. This approach studies the psychological implications of pricing. According to the price-quality association, a higher price is perceived to represent a higher quality and low prices connate low quality. Prestige pricing assumes that consumers will not buy goods and services at prices that are deemed too low.
2. Cost Oriented Pricing - a retailer sets prices in accordance with the costs associated with providing the products/services. This strategy sets the price floor, the minimum acceptable price to allow the firm to reach the profit goals. This may include mark-up pricing in which a set mark-up is applied by adding the per unit merchandise cost, retail operating expenses and desired profit.
3. Competition Oriented Pricing - a retailer sets prices in accordance with the prices of its competitors. The retailer must analyse the prices and change in prices of competitors to inform their own pricing decisions.
Pros of Competition Oriented Pricing -
- Consistent price guideline
- Does not require analysis of demand curves or price elasticity
- The average market price is perceived as fair for both the consumer and the retailer
- A firm with a strong image, strong location, superior service and good/exclusive brand assortments can successfully set prices higher than consumers.
Cons of Competition Oriented Pricing
- If a retailer is reactive to competitor pricing, they may lower prices in response to a decrease in competitor pricing. Often competitors are able to lower prices because of other factors, for instance a decrease in costs. A retailer may react and lower prices, but maintain the same costs, then they will experience decreased margins.
- Above market pricing is not favourable for a retailer with an inconvenient location, self-service, lack of innovation, and offers no real product distinctiveness.

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1.Â Â  Describe all the Pricing Strategies

2.Â Â  Choose one and outline the pros and cons.

3.Â Â  What are the factors that influence retail price strategy?

4.Â Â  What is the price elasticity of demand? Why is it important for retailers to understand this concept?

5.Â Â  Explain why Markdowns are a necessary part of a Retail Business

6.Â Â  Calculate Gross Profit $ and % if the Cost is $6.50 and the Sell is $14.95