The initial markup percentage is 21.6% as calculated in the example.

1. MKTG 1058:
DISTRIBUTION
CHANNELS
8-1

2. Distribution Channels MKTG 1058
LECTURE EIGHT
Merchandise Pricing
(Dunne Chapter Ten)
8-2
2

3. Learning Objectives
1. Discuss the factors a retailer should
consider when establishing pricing
objectives and policies.
2. Describe the differences between the
various pricing strategies available to the
retailer.
3. Describe how retailers calculate the various
markups
4. Discuss why markdown management is so
important in retailing and describe some of
the errors that cause markdowns. 8-3

4. Pricing Objectives & Policies
Interactive Pricing
Decisions
Legal Constraints
Pricing Objectives
Pricing Policies
8-4

5. Why is Pricing Important?
Pricing decisions is important because
customers have alternatives to choose
from and are better informed
Customers are in a position to seek
good value
Value = perceived benefits
price
So, retailers can increase value and stimulate
sales by increasing benefits or reducing price 8-5

6. Pricing in the marketing/retailing
mix
 Price is the only variable that
generates revenues; all other
aspects of the retail marketing mix
generate costs
 The key issue to examine is the
extent to which the retailer has
control over pricing being the final
link in the distribution channel
8-6

7. Some quotes about pricing…
8-7
Source: Kotler, Armstrong and da Silva

8. Pricing problems faced by retailers
 How to manage price
 Specifically markups and markdowns
 Often incorrect and/ outdated
 Pricing decisions should be linked to strategic
operations of the retailer
 But in reality many pricing decisions are ad
hoc or reactively (to price competition)
 Too many retailers believe the only to
attract customers is to run a sale
8-8

9. How price sensitive are our
customers and what is the impact of
“Sales?”
How does a retailer know when, how long
and how frequently sales should be run?
What is the purpose of the sale? What is the
customer responses to such sales?
8-9

10. Recent pricing strategy used by
Courts
8-10

11. Considerations in Setting Retail Prices
8-11

12. Three Approaches to Setting Prices
Source: Kotler, Armstrong and da Silva
8-12

13. Interaction: A Retailer’s Pricing Objectives
& Other Decisions
Exhibit 10.1 8-13

14. Key factors considered by the Retailer when
setting Prices
1. Merchandise attributes, which depends
on the market the retailer is serving.
2. Location, specifically the store's distance
from competitors and customers.
3. Promotion, which is crucial in generating
demand, is not independent of price.
4. Credit and/or Check Cashing availability
can also generate demand and affect
pricing levels.
8-14

15. Key factors considered by the Retailer when
setting Prices
5. Customer Service levels affect
expenses, which in turn affect price.
6. Store Image is affected by the way a
retailer chooses to price its products.
7. Legal Constraints, both state and
federal, must be considered when
determining prices.
8-15

16. Pricing objectives and policies
 Pricing Objectives - A retailer's pricing
objectives should be in agreement with
its mission statement and
merchandising policies. These include:
 Profit oriented objectives
 Sales oriented objectives
 Status quo objectives
8-16

17. Pricing Objectives & Policies
 EDLP (everyday low prices):
Is when a retailer charges the same low
price every day throughout the year
and seldom runs the product on sale.
8-17

18. Profit oriented pricing objectives
 Target return objective:
Is a pricing objective that states a
specific level of profit, such as
percentage of sales or return on capital
invested, as an objective.
 Profit maximization:
Is a pricing objective that seeks to
obtain as much profit as possible.
8-18

19. Profit oriented pricing objectives
 Skimming:
Is a pricing objective in which price is
initially set high on merchandise to
skim the cream of demand before
selling at more competitive prices
 Penetration:
Is a pricing objective in which price is
set at a low level in order to penetrate
the market and establish a loyal
customer base.
8-19

20. The concept of Skimming versus
Penetration Pricing
8-20
Source: Kotler, Armstrong and da Silva

21. Other types of pricing objectives
 Sales-Oriented Objectives - Seek some level
of unit sales, dollar sales, or market share.
The achievement of such objectives does not
necessarily guarantee that profits will also
increase.
 Status Quo Objectives - Seek to maintain the
retailer's current market share position or
level of profits or to compete on grounds
other than price.
8-21

22. Examples of Pricing Objectives
(Berman & Evans)
8-22

23. Pricing policies
 Pricing Policies - Pricing policies are
rules of action that ensure uniformity
of pricing decisions within a retail
operation. A retailer's pricing policies
should reflect the expectations of its
target market
8-23

24. Pricing Policies
Pricing above
the market
Pricing at
market
levels
Pricing
below the
market
8-24

25. Pricing policies
 Pricing Below the Market – Retailers with such a
policy rely on a high volume, generated by low
prices, to produce satisfactory profits.
 Pricing at Market Levels - Most merchants want to
be competitive with one another. Competitive
pricing is based on:
a. Pricing zones, a range of prices for a
certain merchandise line that appeals to customers
in a particular demographic group.
b. The size of a retail store affects its
ability to compete on a price basis.
8-25

26. 3. Pricing Above the Market - Certain market sectors
are receptive to high prices because non-price factors
are more important to them than price.
 Merchandise Offerings - Some consumers are willing to
pay higher prices for specialty items, an exclusive line, or
unusual merchandise.
 Services Provided - Service-oriented merchants may be
able to develop a loyal group of customers by providing
anything from wardrobe counseling to delivery.
 Convenient Locations - The convenient location of some
retailers allows them to charge higher prices since
consumers’ value time.
 Extended Hours of Operation - By remaining open while
competitors are closed, some merchants are able to
charge above-average prices
Note: this is how retailers are able to compete on a non-price basis
through differentiation
8-26

27. Price and Non-Price Competition
Source: Kotler, Armstrong and da Silva 8-27

28. Interactive Pricing Decisions
 LV has set its prices to be consistent
with its store image and design and
promotion, which all communicate
prestige and exclusivity.
8-28

29. Interactive Pricing Decisions
 Factory outlets are known for their low
prices. However, the typical consumer
will incur high travel costs to reach
these outlets.
8-29

30. Interactive Pricing Decisions
 When retailers offer free delivery, the
cost of providing this service must be
factored into the prices the retailer
charges.
8-30

31. Specific Pricing Strategies
 Customary  Multiple-Unit
Pricing Pricing
 Variable Pricing  Bundle Pricing
 Flexible Pricing  Leader Pricing
 One-Price Policy  Bait-and-Switch
 Price Lining Pricing
 Odd Pricing  Private Label
Brand Pricing
8-31

32. Specific Pricing Strategies
 Customary pricing:
Is a policy in which the retailer sets
prices for goods and services and seeks
to maintain those prices over an
extended period of time.
8-32

33. Specific Pricing Strategies
 Variable pricing:
Is a policy that recognizes that
differences in demand and cost
necessitate that the retailer change
prices in a fairly predictable manner.
8-33

34. Specific Pricing Strategies
 Flexible pricing:
Is a policy that encourages offering the
same products and quantities to
different customers at different
prices.
8-34

35. Specific Pricing Strategies
 One-price policy:
Is a policy that establishes that the
retailer will charge all customers the
same price for an item.
8-35

36. Specific Pricing Strategies
 Price lining:
Is a pricing policy that is established to
help customers make merchandise
comparisons and involves establishing a
specified number of price points for
each merchandise classification.
8-36

37. Specific Pricing Strategies
 Trading up:
Occurs when a retailer uses price lining
and a salesperson moves a customer
from a lower-priced line to a higher
one.
8-37

38. Specific Pricing Strategies
 Trading down:
Occurs when a retailer uses price
lining, and a customer initially exposed
to higher-priced lines expresses the
desire to purchase a lower-priced line.
8-38

39. Specific Pricing Strategies
 Odd pricing:
Is the practice of setting retail prices
that end in the digits 5, 8, 9 – such as
$29.95, $49.98, or $9.99.
8-39

40. Specific Pricing Strategies
 Multiple-unit pricing:
Occurs when the price of each unit in a
multiple-unit package is less than the
price of each unit if it were sold
individually.
8-40

41. Specific Pricing Strategies
 Bundling:
Occurs when distinct multiple items,
generally from different merchandise
lines, are offered at a special price.
8-41

42. Specific Pricing Strategies
 Leader pricing:
Is when a high-demand item is priced
low and is heavily advertised in order
to attract customers into the store.
8-42

43. Specific Pricing Strategies
 Loss leader:
Is an extreme form of leader pricing
where an item is sold below a retailer’s
cost.
8-43

44. Specific Pricing Strategies
 High-low pricing:
Involves the use of high everyday prices
and low leader “specials” on items
typically featured in weekly ads.
8-44

45. ELDP
• EDLP (everyday
low prices)
is when a retailer
charges the same
low price
everyday
throughout the
year and seldom
runs the product
on sale.
8-45

46. ELDP and Hi-Lo Pricing Strategies
Compared:
EDLP
 Builds loyalty –
Hi-Lo
guarantees low prices
 Higher profits – price
to customers
discrimination
 Lower advertising
 More excitement
costs
 Build short-term sales
 Better supply chain
management and generates traffic
 Fewer stock-outs
 Higher inventory turns
8-46

47. Specific Pricing Strategies (cont’d)
• Bait-and-Switch Pricing is a practice where a
low-priced model of a shopping good, such as
an automobile or refrigerator, is used to lure
shoppers into a store and then the
salesperson attempts to persuade them to
purchase a higher-priced model.
• Private Label Brand Pricing occurs when a
retailer can purchase an item at a cheaper
price, have a higher markup percentage, and
still be priced lower than a comparable
national brand.
8-47

48. Determining Mark-Ups/
Markdowns
Note: this is a fairly technical part of the
chapter. You will need practice of the
questions to understand this topic well.
8-48

49. Using Markups
 Calculating Markup
 Markup Methods
 Using Markup Formulas When
Purchasing Merchandise
 Initial Versus Maintained Markup
 Planning Initial Markups
8-49

50. Calculating Markups
• Markup is the selling price of the
merchandise less its cost, which is equivalent
to gross margin.
• To calculate the selling price (or retail
price), the retailer should begin with the
following basic markup equation:
SP = C + M
where C is the dollar cost of merchandise per
unit, M is the dollar markup per unit and SP
is the selling price per unit.
8-50

51. Markup Conversion Table
Exhibit 10.2 8-51

52. Relationship of Markups Expressed on Selling
Price and Cost
Exhibit 10.3
8-52

53. Exhibit 10.4
Basic Markup Formulas
8-53

54. Basic Markup Formulas
Exhibit 10.4
• The equation for expressing markup as a
percentage of selling price is:
Percentage of Markup on Selling Price =
(SP – C)/SP = M/SP
• When expressing markup as a percentage of
cost the equation is:
Percentage of Markup on Cost =
(SP – C)/C = M/C
8-54

55. Exhibit 10.4
Basic Markup Formulas
• The equation to find markup on selling when
we know markup on cost is:
Percentage of Markup on Selling Price =
Percentage of Markup on Cost/ (100% +
Percentage of Markup on Cost)
• When we know markup on selling price we
can easily find markup on cost:
Percentage of Markup on Cost = Percentage
of Markup on Selling Price/ (100% -
Percentage of Markup on Selling Price)
8-55

56. Exhibit 10.4
Basic Markup Formulas
• Finding the Selling Price when Cost and
Percentage of Markup on Cost are known:
Selling Price =
Cost + % Markup on Cost (Cost)
• Finding Selling Price when Cost and
Percentage Markup on Selling Price is
known:
Selling Price =
Cost/(1 - % Markup on Selling Price)
8-56

57. Using Markup Formulas when
Purchasing Merchandise
• If you know that a particular item could
be sold for $8 per unit and that you need
a 40% markup on selling price to meet
your profit objective, how much would
you be willing to pay for the item?
% of Markup on selling price =
(SP – C)/SP
40% = ($8 –C)/$8
C= $4.80
8-57

58. Using Markup Formulas when
Purchasing Merchandise
• If a retailer purchases an item for $12 and wants a
40% markup on selling price, how would a retailer
determine the selling price?
(SP = C + M), we know that SP = C + .40P since
markup is 40% of selling price. If markup is 40% of
selling price, cost must be 60% since cost and
markup rate complement each other and must total
100%. Thus, if
60% SP = $12 (divide both sides by 60%) then
SP = $20
8-58

59. Initial versus Maintained Markups
 It is not always possible for retailers to sell
all their merchandise at the price initially set
by the retailer.
1. Initial Markup - The markup placed on
the merchandise when the store received it.
Initial markup = (Original selling price -
Cost)/Original selling price.
2. Maintained markup = (Actual retail price
- Cost)/Actual retail price. Maintained
markup, or achieved markup, is usually lower
than the initial markup by the amount of
reductions realized.
8-59

60. Initial Versus Maintained Markup
• Maintained markup differs from initial
markup by the amount of reductions:
Initial markup = (Original retail price –
Cost)/Original retail price
Maintained markup = (Actual retail
price – Cost)/Actual retail price
8-60

61. Differences Between Initial and
Maintained Markups
•The need to balance demand with
supply.
•Stock shortages
•Employee and customer discounts
•Cost of alterations
•Cash discounts
8-61

62. Initial versus Maintained Markup
A retailer wants a profit for the period of $10,000. Expected sales
are to be $200,000; operating costs are $30,000 and reductions
are $4,000. Therefore, the retailer’s initial markup must be 21.6%
[IM% = (Profit + Operating Expenses + Reductions) / (Sale +
Reductions)]
Original Cost of Goods Sold 78.4%
Retail $160,000 Initial Cost %
Selling Price
Operating Expenses 21.6%
$204,000
$30,000 Initial Markup %
Profit
$10,000
Reduction
$4,000
21.6%= (204,000-160,000) / 204,000 8-62

63. Initial versus Maintained Markup
After taking the $4,000 in reductions, the retailer had a
maintained markup % of 20%. [MM% = IM% - ((Reduction %) x
(100% - IM%))] [21.6% - (.2% x 78.4%)] = 20%
Actual Cost of Goods Sold 80%
Retail $160,000 Maintained
Selling Price Cost %
Operating Expenses
$200,000 20%
$30,000
Profit Maintained
$10,000 Markup %
Reduction
$4,000
20%= (200,000-160,000) / 200,000 8-63

64. Planning Initial Markups
 To determine the Initial Markup, use
the following formula:
Initial markup percentage =
(operating expenses + Net Profit +
Markdowns + Stock shortages +
Employee and customer discounts +
Alteration costs – Cash discounts)/(Net
sales + Markdowns + Stock shortages
+ Employee and customer discounts)
8-64

65. Planning Initial Markups
 To simplify the equation, remember that
markdowns. Stock shortages, and employee
and customer discounts are all retail
reductions from stock levels. Likewise, gross
margin is the sum of operating expenses and
net profit. A simpler formula:
Initial markup percentage = (Gross margin +
Alteration costs – Cash discounts +
Reductions)/(Net sales + Reductions)
8-65

66. Planning Initial Markups
 Some retailers record cash discounts as
other income and not as a cost
reduction in determining the initial
markup, the formula can be simplified
one more time:
Initial markup percentage = (Gross
margin + Alteration costs +
Reductions)/(Net sales + Reductions)
8-66

67. Markup Determinants
 As goods are sold through more retail outlets,
the markup percentage decreases.
 The higher the handling and storage costs of
the goods, the higher the markup should be.
 The greater risk of a price reduction due to
the seasonality of the goods, the greater the
magnitude of the markup percentage early in
the season.
 The higher the demand in elasticity of price
for the goods, the greater the markup
percentage. 8-67

68. Markdown Management
 Markdown is any reduction in
the price of an item from its
initially established price.
 Markdown percentage:
Markdown percentage =
Amount of reduction/Original
selling price
8-68

69. Reasons for Taking Markdowns
 Get rid of slow-moving, obsolete,
uncompetitive priced merchandise
 Increase sales and promote merchandise
 Generate cash to buy additional
merchandise
 Increase traffic flow and sale of
complementary products generate
excitement through a sale
8-69

70. Markdown Management
 Buying Errors
 Pricing Errors
 Merchandising Errors
 Promotion Errors
8-70

71. Merchandising errors resulting in
markdowns
1. Buying errors, which include
buying the wrong merchandise,
quantities, sizes, styles, colors,
patterns, or price ranges.
2. Pricing errors occur when the price
of the item is too high to move the
product at the speed and quantity
desired.
8-71

72. Merchandising errors resulting in
markdowns
3. Merchandising errors include failure on the
buyer's part to: relate new merchandise to
old or tie it to the store's image; inform the
sales staff on how the new merchandise
meets the store's target market needs;
excite the sales force about new
merchandise; or improper handling of
merchandise by the sales staff
4. Promotion errors occur when the consumer
has not been properly informed or
prompted to purchase the merchandise.
8-72

73. Markdown policies
 Markdown Policy - Retailers will find it advantageous
to develop a markdown timing policy to guide two
crucial decisions: when and how much of a
markdown to take. In theory, there are two
extremes to a markdown timing policy:
1. Early markdown policy is used to speed
the movement of merchandise and enable
the retailer to take less of a markdown per
unit.
 2. Late markdown policy is used to avoid
disrupting the sale of regular merchandise by
too frequently marking goods down.
8-73


74. Markdown policy
 Amount of markdown: Another issue to
be considered is the amount of the
markdown, which is tied to the timing.
a. Early markdowns should be
smaller - just enough to stimulate
sales.
b. Late markdowns should be
larger to move the remaining
merchandise
8-74

75. Markdown policy
 One rule of thumb for markdowns is
that "prices should be marked down at
least 25% in order for the consumer to
notice." However, the markdown
percentage should vary with the type
of good, time of season, and
competition.
8-75

76. Markdown Policy
Advantages of Early Markdown Policy:
 Secure a more rapid or higher rate of inventory
turnover
 Speed the movement of merchandise by making
it more attractive; therefore, markdown
percent will be lower
 Improve cash flow position by providing money
for new merchandise and outstanding buys
 Provide space for merchandise
Disadvantages of Early Markdown Policy:
 Possible damage to store image
 Possible loss in customer confidence in store
(the customer could begin to think, if I wait a
week, the merchandise will cost less) 8-76

77. Markdown Policy
Advantages of Late Markdown Policy:
 Avoids disrupting sales of regular merchandise
(bargain hunters are in store only twice a year)
 Gives store a longer time to secure a higher
markup
 Customers look forward to “BIG SALES”
 Customer confidence is retained
Disadvantages of Late Markdown Policy:
 The retailer may need the space or money that
a quicker markdown policy could provide
 It could make inventory turnover too low
8-77

78. Maintained Markup Percentage
The following formula can also be used to
determine the maintained markup
percentage:
Maintained markup percentage =
Initial markup percentage - [(Reduction
percentage)(100% - Initial markup
percentage)]
Where
Reduction percentage = Amount of
reductions/Net sales
8-78

79. Exercises on Merchandise
Pricing
Dunne Chapter 10
8-79

80. Question 8:
• Compute the markup on selling price for
an item that retails for $59.95 and costs
$36.20.
8-80

81. Question 8: Answer:
Percentage of markup on selling
price = (SP - C)/SP
= ($59.95-36.20)/$59.95
= $23.75/$59.95 = 39.6%
8-81

82. Question 9:
Complete the following:
Dress Shirt Sport Shirt Belt
Selling Price $45.00 $49.99 $25.00
Cost $24.00 $27.35 $13.50
Markup in Dollars
Markup Percentage
on Cost
Markup Percentage on
Selling Price
8-82

83. Question 9: Solution:
Dress Shirt Sport Shirt Belt
Selling Price $45.00 $49.99 $25.00
Cost $24.00 $27.35 $13.50
Markup in Dollars $21.00 $22.64 $11.50
Markup Percentage
on Cost 87.5% 82.8% 85.2%
Markup Percentage on
Selling Price 46.7% 45.3% 46.0%
8-83

84. Question 10:
• A buyer tells you that he realized a markup
of $60 on a set of tires. You know that his
markup is 25 percent based on the retail
price. What did he pay for that set of
tires?
8-84

85. Question 10 Solution:
• First, solve for the selling price.
% Markup on Selling Price = (Selling Price
– Cost) / Selling Price
= 25% = 60/ Selling Price.
Selling Price = $240.
• Second, solve for the cost. 25% = ($240 –
Cost)/$240. Cost = $180.
• The set of tires cost the buyer $180.
8-85

86. Question 14:
Intimate Apparel wants to produce a 9 percent
operating profit this year on sales of
$1,200,000. Based on past experiences the
owner made the following estimates:
Net Alteration Expenses $ 8,100
Employee Discount $ 15,400
Markdowns $141,000
Operating Expense $375,000
Stock Shortages $43,200
Cash Discounts Earned $ 4,500
Given these estimates, what average initial markup
should be asked for the upcoming year? 8-86

87. Question 14 Solution:
• Initial Markup Percentage = (Operating Expense
+ Profit + Markdowns + Employee Discounts
Alteration Expense + Stock Shortages-Cash
Discounts) / (Sales + Markdowns + Stock
Shortages + Employee Discounts)
= ($375,000 + $108,000 + $141,000 + $15,400 +
$8,100 + $43,200-$4,500) / ($1,200,000 +
$141,000 + $43,200 + $15,400)
= $686,200/$1,399,600 = 49.03 percent
8-87

88. QUESTIONS FROM THE CASE
STUDY IN CHAPTER 10
8-88

89. PART A: The buyer for the
women’s sweater department
has purchased wool sweaters
for $47.69. She uses an odd
pricing policy and wants to sell
them at 47 percent markup on
selling price. At what price
should each sweater be sold?
8-89

90. Answer to Part A:
Sales Price = Cost/(1 - %
Markup) = $47.69/(1-.47) =
$89.98
[Sales Price = $89.98]
8-90

91. PART B: The buyer for men’s
shirts has a price point of $45
and requires a markup of 40
percent. What would be the
highest price he should pay for
a shirt to sell at this price point?
8-91

92. Suggested Answer: % Markup
= (Sales price – Cost)/ Sales
Price
.40 = (45 – C)/ 45;
[Cost = $27.00]
8-92

93. PART C: The Men’s Department buyer
hopes to achieve net sales of
$1,500,000 for the upcoming season.
Operating expenses are expected to be
$560,000 and retail reductions are
$180,000. Management has set a
profit goal of $110,000. What should
the initial markup percentage be?
8-93

94. Suggested Answer:
Initial Markup Percentage =
(Operating Expenses + Net Profit +
Retail Reductions)/(Net Sales + Retail
Reductions)=
($560,000 + $180,000 + $110,000)/
($1,500,000 + $180,000)
= $850,000 / $1,680,000 = 50.6%;
[Initial Markup Percentage = 50.6%]
8-94

95. PART D: A buyer submits the following
plans to his general merchandise
managers: Planned sales = $85,000;
planned initial markup = 40%; planned
reductions = $31,000. Based on these
projections, what is the planned
maintained markup percentage?
8-95

96. Suggested Answer:
Maintained markup percentage = Initial
markup percentage – [(Reduction
percentage)(100% - Initial markup
percentage)]
= 0.40 – [($31,000/$85,000)(1-.40)] =
18.1%
8-96