Pricing in general, and price promotions in particular,
have always been an important marketing instrument
in retailing and, up to the present, price has played a
very important role in retail marketing.
However, it is precisely this focus on price reductions,
often based more on belief and intuition on the part of
the retailer than on facts and knowledge about its
effects, that makes pricing a field of considerable
strategic importance today.
Methods of Price Setting
There are three major methods for setting product
prices in retailing: cost-oriented, competition-oriented
The most commonly used method for determining
retail prices is the cost-oriented method, also called
Here, a mark-up is added to the cost of products to
determine the final retail price.
The mark-up percentage is usually calculated as a
percentage of the retail price:
Markup in %(at retail price)=(retail price –
merchandise cost) / retail price
Usually, the cost used in the formula is the purchasing
price for the retailer, while other variable and fixed
costs are estimated in order to calculate the mark-up
necessary to cover them.
The mark-up percentage also includes the planned
profit per unit.
In competition-oriented pricing, the retailer identifies its main competitors and sets its prices accordingly.
Many retailers systematically monitor prices in their
competitors’ out-lets. Depending on the pricing
strategy, prices for certain products are then
established at or below competitors’ prices.
It has even become a common marketing instrument
in different retail sectors to give price guarantees, i.e.
to guarantee to the customer that he not find the
same product cheaper in a competitor’s store within a
Competition must be considered in many retailing
industries because retailing is often characterised by
oligopolistic competition. In many countries, a few
large retailers account for a very high market share. In
this situation, a company has to anticipate the potential
reaction of a competitor to its own moves before
setting or changing prices.
With demand-oriented pricing, the retailer bases its
prices on consumer demand. The sensitivity of
consumers to price changes is an important coefficient
for setting a demand oriented price.
The price elasticity of demand is a measure of
consumer sensitivity to price. It measures the
responsiveness of quantity demanded to a change in
Price Elasticity= %change in quantity demanded of A /
%change in price of product A
4)Manufacturer’s Suggested Retail Price
Whatever price setting method is being used, it is
important to note (also when analysing consumer
goods marketing) that it is ultimately the retailer who
sets the price, not the manufacturer.
While manufacturers are often interested in resale
price maintenance, i.e. to make sure that a retailer
does not sell an item for less than a specific price, this
is prohibited in many countries.
For example, book prices in Germany or prices for
pharmaceuticals, which are, however, often fixed by
governments. In the USA, vertical price fixing used to
be prohibited but a recent court ruling argued that
resale price maintenance is not per se a violation but
only if it exerts anti-competitive effects.
Price Positioning and Price Structure
The price image of a retailer is the result of a
generalisation process, in which separate price-value
impressions created by the different products,
departments, and stores of a retailer are aggregated
into a total impression of the price level of that retailer
in the mind of the consumer. Price images are the
result of the fact that consumers are unable and often
unwilling to carry out a...
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