MODULE-4

MERCHANDISING AND PRODUCT ASSORTMENT

Merchandising-AMA- “the planning involved in marketing the right merchandise at the right place at the right time in the right quantities and at the right price”Merchandise management -the analysis, planning, acquisition, handling and control of the merchandise investments of a retail operation.

Analysis-of consumer behavior is essential Planning-merchandise to be sold in the future must be bought now Acquisition-merchandise needs to be procured Handling-ensuring proper condition Control-it involves spending money

Merchandising is the core of retailing

FACTORS INFLUENCING MERCHANDISING

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MERCHANDISE DECISIONS

ASSORTMENT PLANNING-it involves determining the quantities of each product that will be purchased to fit into the overall merchandise plan. Details of color, size, brand etc have to be specified.

KEY MERCHANDISING TERMSStaple/basic merchandise-which are always in demand. They may also be the basic

necessities of life like sugar ,salt, dal, stationary etcFashion merchandise -which has high demand for a relatively short period of time. Jeans

short length in kurthas etcSeasonal merchandise -like rain coats, umbrellas etcFad merchandise -usually generate a high level of sales for a short timeStyle -refers to a unique shape or form of any product

ASSORTMENT -refers to the selection of merchandise carried by a retailer.Width-no of product line carriedBreadth-no of merchandise brands in the merchandise lineDepth- brand variety (color, size, fabric etc).

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1. THE RANGE PLAN

The aim of the range plan is to create a balanced range for each category of products that the retailer chooses to offer. Good range planning should essentially take care of the following:

The number of items/options available to the customer should be sufficient at all times and should be such that it helps the customer make a choice. The range planning process should ensure that overbuying and under buying is limited. Sufficient quantities of the product are available, so that all the stores can be serviced and the product should be available at all stores across various locations.

2. THE MODEL STOCK PLANIt gives the precise items and quantities that need to be purchased for each merchandise line. To arrive at the model stock plan, the buyer needs to identify the attributes that the consumer would consider while buying the product, then decide on the levels under each attribute and finally, allocate the total money available or the units to the respective item categories. The following e.g.: illustrate the steps involved in preparing a model stock plan:A retailer has allocated Rs.1 lakh for buying of shirts. Assuming that the purchase price of each shirt is Rs.100, he will be able to stock 1000 shirts in the store.

Step 1:The first thing that is the retailer needs to do is identify which factors affect the

customers buying decision and the number of levels under each attribute.

Step 2:Identify the number of levels under each attribute. He identifies the following

attributes and the levels: Type of shirt (Dress, Casual, Formal, Sport) Size (small, medium, large, Extra large) Sleeve Length (Full Sleeves, Short Sleeves)

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Collar Type (saville, Button down) Colour (White, Blue, Cream, Grey) Fabric (Cotton, cotton blend)

Step 3:The third step is to be allocating the total units to the respective item categories. Thus the units that are recommended for each item are into direct proportion to the estimated demand patterns.

MODEL STOCK PLAN

MERCHANDISE FORECASTING

Forecasts are projections of expected retail sales for given periods. Is tomorrow’s expectation based on yesterday’s achievements and today's plan is the foundation of merchandise plans.

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TYPES OF FORECASTS include

Overall company projections Product category projections Item-by-item projection Store-by-store projections

When preparing forecasts, different types of merchandise are concerned

Staple.-basic and having sable sales. Easier to make forecast. Assortment merchandise- apparel, furniture, autos and other products for which the

retailer carry a variety of products in order to give customers a proper selection (product lines, styles, designs and colors are projected).

Fashion merchandise -for these items forecasting can be hard since styles may change from year to year.

Seasonal merchandise- forecasting is almost straightforward and easy. Fad merchandise- high sales are generated for a short time. It is hard to forecast whether

such products will reach specific sales targets and how long they will be popular.

METHODS

Statistical Method Time series analysis Regression analysis and correlation Barometric technique

Survey Method Buyers Experts Sales force

Market Study Market test method Controlled laboratory experiment

Evolutionary approach Substitute approach

One way to forecast sales for narrow categories is to project sales on a company basis and by department and then to breakdown figures judgmentally into merchandise classifications.

STEPS

1. Reviewing past sales- necessary to establish if there is any pattern or trend in the sales. It gives an indication of sales in the current and future period. 2. Analyzing the changes in the economic conditions- Economic conditions have a direct link to the consumer spending patterns. Economic slowdowns or increase in unemployment all affects business 3. Analyze the changes in the sales potential- It is necessary to relate the demographic changes in the market to the store and the products to be sold

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4. Analysing the changes in the marketing strategies of the retail organization and the competition- is there a new line of merchandise to be introduced, existing store to be remodeled. All these factors to be taken into consideration. 5. Creating the sales forecast- After taking into consideration the above mentioned points, an estimate of the projected increase in the sales is arrived at.

The external factors, internal factors and the seasonal trends must be anticipated and taken into account. External factors (consumer behavior, competition, economy and demography) Internal factors (addition and deletion of product claim, revised promotion, credit policy, changes in hours of work) and seasonality. After a yearly forecast is derived it should be broken into quarter or monthly.

BENEFITS Reduce the cost of inventory- We can avoid under stock and overstock. Helps in setting sales target. Helps in forming suitable advertisement and promotion programs. It helps in forecasting short term financial requirements and long term financial

requirements. Helps in planning man power requirement. Helps in planning of a new store or expansion of an existing store. Helps to reduce the business risk. Thus it helps to earn maximum profit.

MERCHANDISE BUYING

BUYER RESPONSIBILITIES

A) Developing the merchandising strategies for the product line or organization that he is responsible for.B) Planning and selecting merchandising- this requires a keen understanding of the current market trends and economic development and understanding the needs and wants of the target consumers.C) Vendor selection development and management-negotiations with vendors for favorable terms and services.D) Pricing the merchandise to achieve the required targets in terms of gross margin.E) Inventory management- allocation of merchandise to the various retail stores. Hence a buyer needs to control inventory which includes not only procurement but also providing the goods as per the needs of the stores. So there is never a situation where the product is not available in the retail store.

BUYING FOR A SINGLE\ INDEPENDENT STORE

In every retail endeavor, no matter what the size, the most fundamental activities are buying of merchandise and reselling to the end customers. Typically if the role of a buyer has been created in such an organization it would involve,

A) Coordinating the purchasing of various products required by the storeB) Writing orders and handling special orders as and when they ariseC) Making decisions regarding merchandise return

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D) Merchandise pricingE) Promotion and store presentation of merchandise F) Customer contact and selling

BUYING FOR A CHAIN STORE OR A CHAIN OF DEPARTMENT STORES

Merchandising in chain stores is characterized by

A) Central buying plans. And B) Central merchandising plans.

A retail chain operates in more than one region. Therefore the store has to serve the needs of a diverse consumer market. The buyer should be aware of the peculiarities of each market.

BUYING FOR NON STORE RETALIERS

The mail order buyer needs to plan well in advance as the production of the catalogue takes a long time .Buyers for an e-tail venture need to have a clear understanding of the type of products that consumers would buy on the net. It is the uniqueness of the product and a competitive price which make the difference

METHOD OF PROCURING MERCHANDISE

1. Identifying the sources of supply

2. Contacting and evaluating the sources

3. Negotiating with the sources of supply

4. Establishing vendor relation

5. Analyzing vendor performance

HANDLING

It involves seeing that the merchandise is where it is needed and in the proper condition to be

sold.

Protective packaging and insurance

Cold storage in transportation and speed in transportation etc

Use of freezers in the showroom for highly perishable items

Proper warehousing to protect goods from the unfavorable conditions such as humidity,

dust, rodents etc.

Proper packaging to avoid leakage, spoilage and breakage of goods

Proper recruitment and training of personnel to handle goods with care

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INVENTORY MANAGEMENT

A retailer uses inventory management to maintain proper merchandise assortment while ensuring that operations are efficient and effective.

SOME OPERATIONAL CONSIDERATIONS:

How much inventory should be on the sales floor versus in a ware house or store room? How often should inventory be moved from non selling areas of a store? What level of in – store merchandise breakage is acceptable? Which item requires customer delivery? When? By whom? What supplier support is expected in storing merchandise or selling up displays? What inventory function can be done during non store hours? As part of it logistics effort, a retailer utilizes inventory management to acquire and maintain a proper merchandise assortment while ordering a shipping, handling, storing, displaying and selling costs are kept in check.

1. A retailer places an order based on sales forecast or actual consumer behavior. Both of the

number of items and their variety are requested in order (ordering size & frequency depends on

quantity discounts and inventory costs).

2. A supplier fills the order and sends merchandise to a warehouse or directly to the stores.

3. Retailer receives the products and makes items available for sale (packing, pricing, & moving it

to sales floor).

4. Complete customer transaction.

5. The cycle starts a new when a retailer places another order.

DIFFERENT ASPECTS OF INVENTORY MANAGEMENT

RETAILER TASK

Due to the comprehensive nature of inventory management, and to be more cost effective some retailers now expect suppliers to perform more tasks or they outsource at least part of their inventory management activities.

In 1990’s, producers shipped products to retailers in a warehouse ready mode. Retailers then reprocessed merchandise to package and price it for sale in the store where consumers make purchase.

Today in the era of floor – ready, producers ship products that have already been packaged and prepared for immediate movement to the sales floor.

In the new millennium, there is a shift of consumer ready manufacturing where the links between producer and consumer are even more direct than traditionally

INVENTORY LEVELS

The retailer wants to be appealing and never lose a sale by being out of stock yet does not want to be “stuck” with excess merchandise. Situation is more complex or for fad merchandiser, who handle new items with no track record (types of merchandise are considered in determining

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the inventory level). Costumer demand is never completely predictable- even for staples. Shelf space allocation should be linked to current revenues, which means that allocations must be regularly reviewed and adjusted. A study reveals that, even supermarkets which carry more staples than most other retailers lose 3% of sales due to out of stock goods.

MERCHANDISE SECURITY

REVERSED LOGISTICS It encompasses all merchandise flows from the retailer back through the supply channel. It

typically involves items returned because of damages, defects or less than anticipated sales. US firms spend $40 billion per year for the handling, transportation and processing costs

associated with returns.

Decision regarding reverse Logistics Under what conditions are customer returns accepted by the retailer and by the manufacturer.Customer refund policyWhat party is responsible for this?Customer documentation needed to prove date of purchase and price To what extent are employees empowered to process customer returns.

INVENTORY ANALYSIS Inventory status and performance must be analyzed regularly to gauge success of the inventory management. Recent advances in computer software have made such analysis much more accurate and timely.

TWO IMPORTANT DECISIONS

WHEN TO REORDER

One way to control inventory investment is to systematically set stock levels at which new order must be placed. Such point is called lead reorder point, and it is based on the three factors.

Order lead time : it is the period from the date an order is placed by retailer to the date merchandise is ready for saleUsage rate: it refers to average sales per day, in units, of merchandise.Safety stock: it is the extra inventory that protects against out-of-stock conditions due to un expected demand and delays in delivery.

Reorder Point = Usage rate * Lead time

E.g. If Handy Hardware sells 10 paint brushes a day and needs 8 days to order, receive, and display them; it has a reorder point of 80 brushes. It would reorder brushes once inventory on hand reaches 80. By the time brushes from that order are placed on shelves (8 days later), stock on hand will be zero and new stock will replenish the inventory this strategy is proper only when handy has a steady customer demand of 10 paint brushes daily and it takes exactly 8 days to complete all stages in the ordering process. This does not normally occur. If customers buys 15 brushes/day

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during the month, Handy would run out of stock in 5 -1/3 (80/15) days and be with out brushes for 2-2/3 days. If an order takes 10 days to process, Handy would have no brushes for 2 days, despite correctly estimating demand.

Reorder point = (usage rate * lead time) + safety stock

Suppose Handy Hardware decides on safety stock of 30% for paint brushes; its reorder point = (10 * 8) + (.3 * 80) = 104 Handy still expects to sell an average 10 brushes per day and receives orders in an average of 8 days. The safety stock of 24 extra brushes is kept on hand to protect against unexpected demand or a late shipment.

By combining a perpetual inventory system and reorder point calculations, ordering can be computerized and an automatic reordering system can mechanically activated when stock on hand reaches the reorder point.

HOW MUCH TO REORDER

A firm planning large order generally reduces ordering cost but increases inventory holding costs. AA firm planning small orders often minimizes inventory holding costs while ordering cost may rise (unless EDI and a QR inventory system are used) E conomic O rder Q uantity

It is the quantity per order (in units) that minimize the total cost of processing order and holding inventory. Order processing cost includes computer time, order forms, labor, and holding new goods. Holding costs includes warehousing, inventory investment, insurance, taxes, depreciation, deterioration and pilferage. EOQ calculation can be done by large and small firms.

EOQ= 2DS I C

D= Annual demand (in units)S= cost to place an orderI= % of annual carrying cost to unit costC= unit cost of an item

E.g. Hardy estimate it can sell 150 powers will sets/ year. They will $90 each. Breakages, insurance, tied-up capital, and pilferage equal 10% of the cost of the sets (or $9each) order cost is $25/ order. The EOQ? I.e. EOQ = 2(150) ($25) (.10) ($90) = 29

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INVENTORY ANALYSIS AND FINANCIAL MERCHANDISING

Through financial merchandising management, a retailer specifies which products are

purchased, when products are purchased and how many products are purchased.

Dollar control -involves planning and monitoring a retailer’s financial investment in

merchandise over a stated period.

Unit control- relates to the quantities of merchandise a retailer handles during a stated period.

benefits of inventory analysis

The value and amount of inventory in each department or store unit during a given period

are delineated and stock is balanced

The amount of merchandise a buyer can purchase during a given period is

stipulated. This gives a buyer direction

Helps to improve ROI

The retailer’s space requirements are partly determined by estimating BOM and

EOM inventory level

Buyer’s performance is rated

Stock shortages are determined

Slow moving items are classified-leading to increased sales effort or markdowns

A proper balance between inventory and out-of-stock conditions is maintained

THE COST METHOD

With the cost method of accounting, the cost to the retailer of each item is recoded on an

accounting sheet/coded on a price tag or merchandise container.

One way to code merchandise cost is to use a 10 letter equivalency system, such as

M=0,N=1,O=2,P=3,Q=4,R=5,S=6,T=7,U=8 and V=9.an item coded with ST has a cost value of

67.this is helpful for retailers that allow price bargaining by customers.

1. A physical inventory system using the cost method

In PIS, ending inventory-recoded at cost-is measured by counting the merchandising in stock at

the close of a selling period.

2. A book inventory system using the cost method

By this method, end-of-month inventory values can be computed without a physical inventory,

and frequent financial statements can be prepared.

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A book inventory is kept by regularly recording purchases and adding them to existing inventory

value. The two ways to value inventory are,

FIFO and LIFO are two ways to value inventory.

The FIFO (first in first out) method logically assumes old merchandise is sold first, while

newer items remain in inventory.

The LIFO (last in first out) method assumes new merchandise is sold first, while older

stock remains in inventory. i.e., the goods sold first are the ones bought most recently.

When inventory values rise, LIFO offers retailers a tax advantages because lower profits

are shown.

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THE RETAIL METHOD -With the retail method of accounting closing inventory value is

determined by calculating the average relationship between the cost and retail values of

merchandise available for sale during a period. There are three basic steps,

1) Calculating the cost complement- beginning inventory and net purchase amounts

(purchases less returns) are recorded at both cost and retail levels. it also includes additional mark

up (increasing prices due to inflation or high demand) and transportation charges.

Cost complement = total cost valuation/total retail valuation

= $299892/$496126=.6045 i.e. on average 60.45 cents of every retail sales

dollar went to cover merchandise cost.

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2) Calculating deductions from retail value -besides sales, deductions include

markdowns (for special sales and endow season goods), employee discounts and stock shortages

(unrecorded breakage). To compute stock shortages, the retail book value of ending inventory is

compared with the actual physical ending inventory at retail> if book inventory exceeds physical

inventory, a shortage exists. In this example shortage is where $3082(at retail) and book value was

adjusted accordingly.

3)converting retail inventory value to cost

The retailer next converts the adjusted ending retail book value of inventory to cost so as to

compute gross profit. The ending inventory at cost equals the adjusted ending retail book value

multiplied by the cost complement.

Ending inventory=adjusted ending retail book value X cost complement

=$56470X.6045=$34136

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This helps to find the gross profit.

Advantages

Valuation errors are reduced because cost does not have to be decoded.

This process is simpler.

The retail method lets a firm setup a profit and loss statement based on book inventory.

And a complete record of ending book values helps determine insurance coverage and

settle insurance claims.

Limitations

It is time consuming

Book keeping burden of recording data.

The ending cost value only an approximation, because cost complement is an average so

we will not get a clear idea about each product category.

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FORECASTING

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Monthly sales index of January is 67 {($46800/70000)x100} that is

Monthly sales index=monthly sales/average monthly sales

Each monthly index shows the percentage deviation of that month’s sales from the average

month’s

A May index of 160 means May sales are 60% higher than average

INVENTORY LEVEL PLANNING

At this point retailer plans its inventory.

1) Basic stock method- a retailer carries more items than it expects to sell over a specified period.

It is best when sales are more than anticipated.

BOM (beginning of month) planned inventory=planned monthly sales+ basic stock

Basic stock=average monthly stock at retail- average monthly sales.

2) Percentage variation method-

BOM=planned average monthly stock x 1/2{1+(estimated monthly sales/estimated average

monthly sales)}

Example.

Planned average stock =20000

Planned sales for month =15000

Average monthly sales=25000

BOM=20000 x ½ x (1+15000/25000) =44000

3) Stock sales ratio- is the ratio of the amount of inventory on hand to the sales for the same

period.

S/s ratio=stock on hand EOM/sales for the same month

E.g.; stock to sales ratio=1.8

Planned sales for the month of august=80,000

Planned BOM inventory=1.8x80,000=1,44,000

4) Week’s supply method - Forecast average sales weekly

BOM=average estimated weekly sales x no of weeks to be stocked

E g: if a company forecasts average weekly sales of 10,956.92 and it wants to stock 13

weeks of merchandize then

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BOM= 10,956.92X13=1, 42,440

UNIT CONTROL SYSTEM

Deals with quantities of merchandise in units rather than in dollars.

It reveals

Items selling well and it those selling poorly.

The quantity of goods on hand .This minimizes overstocking and under stocking.

An indication of inventory age highlights need for mark down or promotion.

The optimal time to reorder merchandize.

The level of inventory and sales for each item in every store branch, this improves the

transfer of goods between branches.

Physical inventory system - This system is concerned with the number of units by item

classification. With unit control, inventory levels are monitored either by visual inspection or

actual count.

Perpetual inventory system - keeps a running total of the number of units handled by a

retailer through record keeping entries that adjust for sales, returns and other transaction.

PACKAGING

Packaging refers to the activities of wrapping or enclosing the product in a container like

bottle, tin, jar etc to facilitate transportation, storage, sales or consumption.

It is defined as “all the activities of designing and producing the container for a product.

The container is called a package”– Kotler

TYPES OF PACKAGING

1) Primary package – it relates to the products immediate container. For eg-the old spice after

shave lotion is in a bottle.

2) Secondary package- it refers to the additional layers of protection that are removed when

the product reaches to its final destination, i.e., consumer’s home the old spice after shave lotion’s

bottle is in a cardboard box.

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3) Shipping package- It is concerned with the packing arrangements used for storage of

transportation of the product.

FUNCTIONS OF PACKAGING

1) Protection- packaging protects the goods in transit from spoilage, breakage, leakage and from

dust, evaporation etc. It preserves the quality of products also.

2)Promotion- it facilitates the branding of products as the name of the brand or design can be

printed on the package and attractive packaging increases the sales and it can carry information

about product. It facilitates the labeling.

3) Convenience- It facilitates easy transportation, storage, usage and display.

4) Identification - Package gives the product individuality and it differentiates a product from

competing brands.

5) Information- The package can carry important messages regarding the quality usage etc of the

product.

FACTORS GOVERNING PACKAGING DECISION

1) Material used- Cardboard, glass, wood, metal, plastic etc. This choice is exercised after taking

into account the nature of the product objectives of the packaging and distance covered.

2) Cost-Almost 10-15% goes for packaging.

3) Size, shape, color and design of the package-All this helps to differentiate and helps to create a

good image.

4) Promotion- It is the final form of promotion the consumer sees prior to making a purchase

decision.

5) Consistency -In order to promote its overall image some companies decide to use similar

packages for its product line. This strategy is called family packaging.

6) Multiple packaging and individual packaging- It couples two or more product items in one

container.

REQUISITES OF A GOOD PACKAGE

1) Package should suit to the product.

2) Must protect the contents.

3) Meet the requirements of different segments of consumers who have different levels of income.

4) Must be attractive.

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5) Must be durable.

ADVANTAGES OF PACKAGING

1) Advantages to marketer

Protects the product from being damaged or spoiled

Promotes the product

Facilitates storage and transportation

Helps in branding

Act as a silent salesman

2) Advantages to middle man

Facilitate transportation and storage

Easy display

Keeps the product fresh and clean

3) Advantages to consumer

Convenient handling

Less possibility of adulteration

Information regarding use and products and

Easy identification

LABELLING

According top Mason and Rath “the label is an informative tag, wrapper or seal

attached to a product or products package.”

The purpose of labeling is to give the consumer information about the product.

It contains information like brand name, name and address of producer, weight, count etc,

ingredients, directions for the use, special care cautionary measures, recipes of food products date

of packaging and date of expiry and retail price etc.

KINDS OF LABELS

1. Brand label- This simply gives the brand name or mark

2 Grade label- This gives the grade or quality of the product by a number ,letter or word. For eg-

product may be classified as ‘A’ grade, ‘B’ grade etc.

3. Descriptive label- It gives details of products, its functions, price, warning, instruction etc

4. Information label- provides maximum possible information about the product. It is different

from descriptive level in the sense that it contains full instructions on the use and care of the

product.

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Advantages

1. helps to identify the product or brand and helps to differentiate from other brands 2 It announces product description ,bar code and using information 3.It contains the prices of products which can not be varied by the sellers 4. It helps in advertising and promoting the product 5.Proper design attract the customers

Disadvantages

1. It is of no use to illiterate people. 2.It increases the cost of the product 3. As it helps the customers to compare the merits and demerits of the product, the lower

quality products are sure to be discarded by them 4.Attractive labeling leads to impulsive consumption 5.It requires a lot of time and effort.

MERCHANDISE PRICINGPrice is the value placed on what is exchanged .It is the factor which is the source of revenue for the retailer. it also communicates the image of the retail store to the consumersFACTORS AFFECTING RETAIL PRICE STRATEGY

FACTORS IN DETAIL

STORE POLICIES- The image to be created, promotion effort, nature of product to be carried PRICING OBJECTIVES (maximum current profit, increasing market share rate of return on investment, meet competition, survival, establishing product quality, market skimming, penetration etc) Cost of the product, Product differentiation

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Stages in product life cycle Elasticity of demand Economic condition- business cycle, inflation Government Horizontal pricing- an agreement among manufacturers, among wholesalers, or among retailers to set price is banned Vertical price fixing- when manufacturers or wholesalers seek to control the retail prices of their goods and services i.e. retailers cannot be forced to adhere to minimum retail price Price discrimination- Robinson -Patman act bars manufacturers and wholesalers from discriminating in price or purchase terms in selling to individual retailers if these retailers are purchasing product of like quality. discounts are not illegal minimum price-laws- prevent retailers from selling certain items for less than their cost (loss-leader pricing-selling at less than cost, predatory pricing -that is large retailers reduce competition by selling at very low prices

Unit pricing -mention unit price in package. it helps to better compare the prices of products available in many sizes Price advertising- guidelines regarding advertising prices in relation to competitors, bait-and-switch pricing-in which a retailer lures a customer by advertising low prices ,once the customer contacts the retailer he is told the product is of inferior quality Manufacturers, wholesalers and other suppliers competition Consumers

DEVELOPING RETAIL PRICE STRATEGY

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OBJECTIVES- market penetration pricing, market skimming pricing, achieving a certain percent of return on investment etc. some specific pricing objectives are

BROAD PRICE POLICY

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PRICE STRATEGY

Demand oriented pricing- A retailer sets prices based on consumer desires. It determines the range of prices acceptable to the target market. This range is called the demand ceiling. Cost oriented Pricing- A retailer sets a price floor, the minimum price acceptable to the floor, so it can reach a specified profit goal Competition oriented pricing- A retailer sets its prices in accordance with its competitors.

DEMAND ORIENTED PRICING

Prestige pricing- which assumes that consumer swill not buy goods and services at prices deemed too low.It is based on the price quality association. Its premise is that consumers may feel too low a price means poor quality and status and vice versa Skimming pricing What the traffic can bear pricing Penetration pricing Perceived value pricing- It is concerned with setting the price on the basis of value perceived by the buyers of the product rather than the sellers cost. When a company develops a new product it offers some value proposition to buyers through positioning with the help of promotion techniques.

Advantages of demand oriented pricing This method takes in account the prevailing market situation, consumer’s perceived value etc Maximum current profit can be achieved

Disadvantages of demand oriented pricing Measurement of demand and perceived value is very difficult. Trial and error method may incur loss.

COMPETITION BASED PRICING METHOD It is the policy of fixing the prices mainly on the basis of prices fixed by competitors

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Premium pricing- it means pricing above the level adopted by competitors. It is profitable only when the firm’s product is distinctive or unique and possess some additional features or they enjoy a good brand image Discount Pricing- It means pricing below the level adopted by the competitors. It is profitable when the firm has low cost because of inferior quality and low price is a good method of sales promotion Parity pricing- under this method prices are maintained at par with the prices in the industry. It is desirable when a customary price level exist. (in case of some commodities the prices get fixed because they have prevailed over a long period of time and desirable when the firm sells homogeneous products.)COST BASED PRICINGThe policy of setting price on the basis of the total cost per unit. This method ensures that no product is sold at a loss since the price covers full cost incurred. 1)mark-up pricing- It refers to the pricing method in which the selling price of product is fixed by adding a margin to its cost. It covers all cost and a predetermined percentage of profit. Mark up percentage can be found out in terms of retail value and at cost. Mark up percentage (at retail)= (retail selling price-merchandise cost)/ retail selling price Mark up percentage (at cost)= (retail selling price-merchandise cost)/ merchandise cost For example a buyer pays Rs 100/- for a toy and he intends to sell at Rs175/-.Then Mark up percentage (at cost)=(175-100)/100=75% Mark up percentage (at retail)=(175-100)/175=42.86%

Mark up pricing example Variable cost per unit=10 Fixed cost=3 lakhs Expected sales=50000 Manufacturing unit cost=average variable cost+ (total fixed cost )/unit sales = 10+(300000/50000)=16 Mark up price=unit cost /(1-desired profit in percentage) =16/(1-.2)=20

Cumulative mark-up It is calculated for a group pf products For a particular month the cost of the inventory is Rs100000 and the selling price is Rs185000.If an additional inventory worth Rs20000 has been ordered to retail at Rs35000 then cumulative mark up= (total retail value-cost value)/total retail value =(220000-120000)/220000 =45.46%Maintained mark upMaintained mark ups are based on the actual prices received for merchandise sold during a time period less merchandise cost i.e. it reflects adjustments from mark downs, added mark ups ,shortages and discountsInitial mark-up is based on the original retail value assigned to merchandise less the cost of the merchandise.

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TARGET RATE OF RETURNUnder this method cost is added with a predetermined target rate of return on capital investment. For e.g.-cost per unit is 16,estimated total sales is 50000 units, and the total investment is 1000000then target return price= Unit cost +(total investment X desired return)/unit sales =16+(1000000x.2)/50000=20BREAK EVEN PRICING- With the help of break even analysis the company can determine how many units must be sold at a given price in order to cover costMARGINAL COST PRICING- Under this method the price is determined on the basis of variable cost

Implementation of Price StrategyCustomary pricing- sets prices for goods and services and seeks to maintain them for a n extended period. E g- newspapers, candy, wending machine items, restaurant etcEDL P(everyday low pricing).- strives to sell its goods and services at consistently low prices throughout the selling season. Low prices are set normally.Variable pricing- alter its prices to coincide with fluctuations in cost or consumer demand.Yield management pricing- It is a computerized demand based variable pricing technique whereby a marketer determines the combination of prices that yield the greatest total revenues for a given period. It is widely used in airlines and hotels.One price policy- charges the same price to all customers buying an item under similar conditionFlexible pricing -lets consumers bargain over prices (negotiated pricing)Contingency pricing -where by a service provider does not get paid until after the service is performed and payment is contingent on the services being satisfactory (real estate)Odd pricing -the assumption is that people feel these prices represent discounts or that the amounts are beneath consumer price ceiling. it is a type of psychological pricingeg-199,299 etcLeader pricing -a retailer advertises and sells selected items in its goods/services assortment at less than the useful profit margins .the goal is to increase customer traffic for the retailer so as to sell regularly priced goods and services in addition to this.Multiple unit price- offers discount to customers who buy in quantity or who buy a product bundle. This approach can help slow moving goods and price bundling may increase sales of related items.Bundled price- A retailer combines several elements in one basic price .A 35 mm camera bundle could include a camera, batteries ,case and film. Price lining- A retailer first determine the price floors and ceilings in each product category .They then set a limited no: of price points within the range. Eg: The price range for a box of pen is Rs/-10-20 and the price points are 10,15,20,consumers know that distinct product quality exist.Auction type pricing -to dispose of excess inventories, used goods or antiquesEnglish auction (ascending order)-one seller and many buyers-customer raise the offer price until the top price is reached.Dutch auction (descending order)One seller and many buyers -high price is announced by the seller and slowly decreases until a buyer accept the priceOne buyer and many sellers- the buyer announces something that he wants to buy and then potential sellers compete to get the sale by offering the lowest price

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Value-pricing-try to win lion share of the market by charging a fairly low price. it is possible because of innovative manufacturing processAdministered pricing- on the basis of managerial decision and not on the basis of cost, demand, competitionMonopoly pricing- monopolist charge a price which brings him maximum profitDual pricing- when a marketer sells the same product at two different prices at the same places-for government at low prices and high price in open market.Survival pricing- the policy of lowering the price to survive a critical situation is known as survival pricingLife cycle pricingPrice discounts

(a) Cash discount- Price reduction to buyers who pay bills promptly (b) Quantity discount- Price reduction to those who buy large volumes

(c) Functional discount-It is offered by a manufacturer to channel members if they will perform certain functions such as selling, promoting, record keeping etc.

(d) Price reduction to those who buy product or service out of season(e) Allowance- Extra payment designed to gain reseller participation in special programmes Geographical differentials-(a) Postage stamp pricing- charging same price for all geographical area(b) Zone pricing-charging same price in a zone but different from other zones.(c) FOB pricing- The responsibility of the transportation is upon the customers.Anticipatory pricing- Companies often raise their prices by more than the cost increase, in anticipation of further inflation of government price controls.Discriminatory pricing- occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in cost.(a) Customer segment pricing-Customer groups are charged different prices. E g-railway charges, low for senior citizens(b) Product form pricing-Different versions of the products are priced differently but not Proportionately to their respective costs.(c) Image pricing-some companies’ price the same product at two different levels based on

Image differences. eg a perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at $10.It can put the same perfume in another bottle with a different name and image and price $30

(d) channel pricing- Coca-Cola carries a different price depending on whether it is Purchased in a restaurant, or a vending machine.

(e) Location pricing- the same product is priced differently at different locations even though the cost of offering at each location is same. E g-theatre(f) Time pricing- prices are varied by season, day or hour. Eg-telephone

Promotional pricing a) loss-leader pricing- some super markets and departmental stores reduces their selling prices

below the cost to attract more traffic b) special event pricing- reduce selling price during certain seasons like festivals c) low-interest finance d) Longer payment terms e) Warranties and service contracts f) Psychological discounting-This strategy involves setting an artificially high price and

then offering discounts.

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Product mix pricing- a) product line pricing-whether to charge same or different prices for products of different

size, color etc b) if by-products have no value we can charge for the disposal of wastage c) captive product pricing- this method is adopted by those companies which makes products

that must be used along with the main product-Kodak prices its cameras low because it makes higher profit on selling film

d) part pricing-one part of price is fixed and the other is variable. Telephone e) Optional feature pricing-Many companies offer optional products, features and services

along with their main product. eg-automobile buyer can order electric window control, power steering.

f) Product bundling pricing- (i) Pure bundling- Occurs when a firm only offers its products as a bundle (ii) Mixed bundling-the seller offers goods both individually and in bundles

Gain-and-risk sharing pricing- Buyers may resist accepting a seller’s proposal because of a high perceived level of risk .The seller ahs the option of offering to absorb part or all of the risk if he does not deliver the full promised value.

Price AdjustmentsPrice adjustments let retailers use price as a adaptive mechanism. Mark downs and additional markups may be needed due to competition, seasonality, demand patterns, merchandise cost and pilferage. A third price adjustment, the employee discount is not really an adaptive mechanism but it influences morale of employees. Mark down percentage = total mark down /net sales Off retail mark down percentage=( original price-new price)/new price Additional markup percentage=total additional mark up/net sales in Rs Addition to retail percentage=(new price –original price)/original price

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