PRICE AND PERFORMANCE

1. Price and Performance
UNIT-4
(DR.SELVAMOHANA.k)

2. • Retail pricing- concepts,
• Elements Determining the price
• Factors determining Pricing strategies
• Price adjustments- Mark ups and Mark downs
• Merchandise allocation
• Merchandising performance Evaluation-
methods
• Concept of GMROI

3. Retail Pricing-Meaning
• The price at which the product is sold to the
end customer is called the retail price of the
product.
• Retail price is the summation of the
manufacturing cost and all the costs that
retailers incur at the time of charging the
customer along with profit.

4. Factors InfluencingRetail Prices
Retail prices are affected by internal and external factors.
Internal Factors
 Manufacturing Cost
 The Predetermined Objectives
 Image of the Firm
 Product Status
 Promotional Activity
External Factors
 Competition
 Buying Power of Consumers
 Government Policies
 Market Conditions
 Levels of Channels Involved

5. Internal Factors
• Manufacturing Cost − The retail company considers
both, fixed and variable costs of manufacturing the
product.
• The fixed costs does not vary depending upon the
production volume.
• For example, property tax.
• The variable costs include varying costs of raw material
and costs depending upon volume of production. For
example, labor.
• The Predetermined Objectives − The objective of the
retail company varies with time and market situations.
• If the objective is to increase return on investment, then
the company may charge a higher price. If the objective
is to increase market share, then it may charge a lower
price.

6. • Image of the Firm − The retail company may consider
its own image in the market. For example, companies
with large goodwill such as Procter & Gamble can
demand a higher price for their products.
• Product Status − The stage at which the product is in
its product life cycle determines its price.
• At the time of introducing the product in the market,
the company may charge lower price for it to attract
new customers. When the product is accepted and
established in the market, the company increases the
price.
• Promotional Activity − If the company is spending
high cost on advertising and sales promotion, then it
keeps product price high in order to recover the cost of
investments.

7. External Factors
• Competition − In case of high competition, the
prices may be set low to face the competition
effectively, and if there is less competition, the
prices may be kept high.
• Buying Power of Consumers − The sensitivity
of the customer towards price variation and
purchasing power of the customer contribute to
setting price.
• Government Policies − Government rules and
regulation about manufacturing and
announcement of administered prices can
increase the price of product.

8. • Market Conditions − If market is under
recession, the consumers buying pattern
changes. To modify their buying behavior, the
product prices are set less.
• Levels of Channels Involved − The retailer
has to consider number of channels involved
from manufacturing to retail and their
expectations.
• The deeper the level of channels, the higher
would be the product prices.

9. Pricing Strategy
• Demand-Oriented Pricing Strategy
• Cost-Oriented Pricing Strategy
• Competition-Oriented Pricing Strategy
• Differential Pricing Strategy

10. Demand-Oriented Pricing Strategy
• The price charged is high if there is high
demand for the product and low if the demand
is low. The methods employed while pricing
the product on the basis of demand are −
• Price Skimming − Initially the product is
charged at a high price that the customer is
willing to pay and then it decreases gradually
with time.
• Odd Even Pricing − The customers perceive
prices like 99.99, to be cheaper than 100.

11. • Penetration Pricing − Price is reduced to
compete with other similar products to allow
more customer penetration.
• Prestige Pricing − Pricing is done to convey
quality of the product.
• Price Bundling − The offer of additional
product or service is combined with the main
product, together with special price.

12. Cost-Oriented Pricing Strategy
• A method of determining prices that takes a retail
company’s profit objectives and production costs into
account. These methods include the following −
• Cost plus Pricing − The company sets prices little
above the manufacturing cost. For example, if the cost
of a product is Rs. 600 per unit and the marketer
expects 10 per cent profit, then the selling price is set to
Rs. 660.
• Mark-up Pricing − The mark-ups are calculated as a
percentage of the selling price and not as a percentage
of the cost price.
• The formula used to determine the selling price is −
• Selling Price = Average unit cost/Selling price

13. Break-even Pricing − The retail company determines the
level of sales needed to cover all the relevant fixed and
variable costs. They break-even when there is neither
profit nor loss.
Target Return Pricing − The retail company sets prices
in order to achieve a particular Return On Investment
(ROI).
Early Cash Recovery Pricing − When market forecasts
depict short life, it is essential for the price sensitive
product segments such as fashion and technology to
recover the investment.
• Sometimes the company anticipates the entry of a
larger company in the market. In these cases, the
companies price their products to shorten the risks and
maximize short-term profit.

14. Competition-Oriented Pricing Strategy
• When a retail company sets the prices for its
product depending on how much the
competitor is charging for a similar product, it
is competition-oriented pricing.
• Competitor’s Parity − The retail company
may set the price as close as the giant
competitor in the market.
• Discount Pricing − A product is priced at low
cost if it is lacking some feature than the
competitor’s product.

15. Differential Pricing Strategy
• The company may charge different prices for the same
product or service.
• Customer Segment Pricing − The price is charged
differently for customers from different customer segments.
For example, customers who purchase online may be
charged less as the cost of service is low for the segment of
online customers.
• Time Pricing − The retailer charges price depending upon
time, season, occasions, etc. For example, many resorts
charge more for their vacation packages depending on the
time of year.
• Location Pricing − The retailer charges the price
depending on where the customer is located. For example,
front-row seats of a Movie theater are charged less price
than rear-row seats.

16. Price adjustments- Mark ups and Mark downs
• Definition: Mark up refers to the value that a player
adds to the cost price of a product.
• The value added is called the mark-up. The mark-up
added to the cost price usually equals retail price.
• For example, a FMCG company sells a bar of soap to
the retailer at Rs 8.
• This is the cost price. The retailer adds Rs 2 as his value
and sells the soap to the final consumer at Rs 10.
• The margin of Rs 2 between the cost price and MRP is
the mark-up.
• In this case, the mark up on the cost price is (2/8= 25%)
and on the MRP is 2/10 = 20%.
• Markup refers to the cost; margins to the price.

17. • The amount of markup allowed to the retailer
determines the money he makes from selling
every unit of the product.
• Higher the markup, greater the cost to the
consumer, and greater the money the retailer
makes.

18. Mark down
• In finance, a markdown is a reduction in the
price and value of an asset.
• Markdowns are designed to increase sales, so
they usually occur when a business cannot sell
a product at its current price.
• By reducing the price, a markdown makes a
good or service more desirable for customers.
• After a markdown, each unit has a lower profit
margin, but overall sales revenues are higher
because more units are sold.

19. Types of markdown
• Clearance markdowns: if a retailer doesn’t plan on
restocking an item, it could be more cost-efficient to sell the
product at a reduced price than to pay for storage. By
reducing the value of a product, clearance markdowns speed
up sales and therefore get rid of excess inventory.
• Damaged goods markdowns: if a unit of a product is
damaged, it is unlikely to sell for the same price as a non-
damaged unit. It is therefore common to reduce the price of
any spoiled or defective goods.
• Competitive markdowns: also known as price-matching,
competitive markdowns occur when a business reduces the
price of a product to match their competitors. If two
companies sell the same product at different prices, the
company with the higher price is likely to sell less.

20. Adjustments to Retail Price
• Adjustments to retail price can be done by way
of markdowns or by way of promotions.
• Markdowns are a permanent reduction in
price and may be taken as a result of slow
selling or as part of a systematic strategy.
• Promotions on the other hand, are a
temporary reductions in the price, used to
generate additional sales during peak selling
periods.

21. A comparison of markups and markdowns
• Markup is defined by Baker, as the gross profit (selling
price less cost price) price, expressed as a percentage of
the cost price.
• This method of price determination is closely rated to
cost plus pricing when a fixed percentage is added on
to a total unit cost.
• A markup is where profits expressed as a percentage of
costs as shown below:
 (Price – Cost) / Cost x 100
• A markdown is where profit is expressed as percentage
of the sale price and is calculated shown below:
 (Price – Cost)/ Price x 100

22. Merchandise allocation
• Merchandise allocation is the process of
determining how to distribute merchandise to
individual store units for maximum sales and
minimal markdowns.
• Depending on the size and sophistication of
the retail operation, this can be a simple
process, or an extremely complex algorithmic
exercise.

23. Merchandise types:
• Convenience goods. There are products in our lives
which we simply cannot do without. ...
• Impulse goods. “Two-thirds of the entire economy is
impulse buying.” This is a merchandising strategy
implemented by retailers where they stock impulse
goods – goods which are purchased instantaneously
without significant thought process – to great effect.
• Shopping products. Customers normally compare a
number of alternative brands based on price, quality
and content, etc. before making a final decision. There
are also psychological and emotional aspects of this
purchase such as acceptance, appreciation or belonging.

24. Speciality goods.
• the store is known as a speciality store which
carries speciality goods. For speciality
goods, customers are prepared to do extensive
research, pay much more and travel long
distances if necessary.
• These products also have a much higher cost
attached to them, causing customers to be
much more selective.

25. • Merchandise Allocation is the initial process of
distributing stock upon delivery from the supplier, through
the warehouse, and to a retailer’s various locations.
• There are five steps for successful merchandise allocation.
1: Implement a retail allocation system
• Using retail allocation systems and software helps retailers
adopt new approaches to stock.
• Data can be gathered, interpreted and analysed from
shopper behavior and habits, in order to get a more localised
and specific idea of what sells well in different locations.
• The process is sometimes referred to as ‘localization
analytics’ and supports effective store grading.
• Items that may be big sellers in a certain location may not
sell nearly as well in another.
• Recognising and monitoring this can ensure that stock is
allocated to the location it is needed most, avoiding low or
overstocking.

26. 2: Learn from the data
• This also provides the opportunity for retailers to
encourage sales by pushing stock of a similar
type, or that a certain type of shopper may favor,
to certain locations.
• Having a system that allows this information to be
analysed for future forecasting is something
retailers can profit from.
• Not only are retailers able to react to trends, they
are even able to predict them.
• The power of data within retail allocation is
significant.

27. 3.Pre-allocate stock (blocking of inventory predicting
its future demand)
• Pre-allocation refers to products that have been decided
at the time of purchase order management, and has the
advantage of reduced handling time at the distribution
centre, based on ‘in and out’ approach.
• Using a retail allocation system which recognizes and
flags pre-allocated stock is highly beneficial in any
retail allocation strategy.
• This removes the need for it to be subject to a put-away
process, meaning that it can make its way to retail
outlets much more quickly, fulfilling customer demand
faster, and increasing sales potential.
• As well as improving relationships with customers,
who are more likely to be satisfied.

28. 4: Reacting quickly to changes
• Manual allocation is a useful secondary
process, for example if there has been a
smaller number of products delivered than
anticipated, and another delivery needs to be
allocated soon afterward.

29. 5: Ensuring stores have the right product
• This can be particularly useful for global
retailers trading in lots of different countries:
for example, do not allocate certain products to
certain countries due to dress codes or product
unsuitability.
• If a retailer has a set number of sizes usually
allocated to store, ‘allocation size ratios’ are a
useful tool that can be pre-set, to ensure that
the optimum range of sizes are received by
stores.

30. Merchandising performance Evaluation-methods
• It is necessary for a merchandise buyer to
add/delete merchandise, search for new vendors
or add/delete/club some categories.
• Further, poor performance of merchandise, in
terms of quality and after use dissatisfaction,
force a merchandise buyer to change the vendor
in question to avoid further complaints and
reduced profits.
• Three methods are commonly employed to
analyze the performance of merchandise.

31. Three methods of evaluating merchandise
performance
(1) ABC Analysis
(2) Sell Through Analysis
(3) Multi-Attribute Method

32. 1) ABC Analysis
• The ABC analysis sometimes known as
Always Better Control inventory
classification process. where total inventory is
classified into three categories as
A – Outstandingly important;
B – Of average importance and
C – Relatively unimportant as a basis for a
control scheme.

33. • Each firm whether small or big has to maintain
several types of inventories. Some are small in
size but are costly ones, some large in size but
have less cost.
• The firm should pay maximum attention to
those items which are costly and less attention
to those which are cheaper.
• This logical approach is known as ABC
analysis and tends to measure the importance
of each item of inventories in terms of its
value.

34. Strategy to be followed:
• In case of ‘A’ items keen attention is paid to
work out the requirement, safety stocks, order
scheduling, and prompt receipt and inspection.
• ‘A’ and “B’ items should be frequently
reviewed and close watch is kept on their
consumption pattern, stock balance and refill
orders.
• For inexpensive ‘C’ items control is
comparatively stress free.

35. (2) Sell Through Analysis
• This method describes the comparison between
the actual and forecasted sales volume to
determine whether early markdowns should be
applied or fresh order for additional merchandise
should be given to satisfy current demand.
• There is no universal rule to indicate when a
markdown should be introduced or additional
stock of merchandise be ordered.
• It simply depends on the experience with the
merchandise, a buyer has in the past year.

37. • Table above shows a sell through analysis for
ladies jeans for the first two weeks of a
particular season.
• Since the ladies jeans belong to fashion
merchandise, demand is not easy to predict,
but necessary amendments may be made to the
merchandise plan any day after two weeks.
• The variation between actual and forecasted
sales guides the retailer about possible changes
with regard to addition/deletion of SKUs(stock
keeping units), vendors and departments.

38. • After carefully analyzing the performance of
the various items in ladies jeans category,
• Retailer can plan for whether to buy fresh
stock of merchandise (in case of good
customers’ response)
• or go for markdowns (in case the items have
no good response from customers).

39. (3) Multi-Attribute Method
• This method is used to analyze the various
alternatives available with regard to vendors
and select one that best satisfies store needs.
• This method is based on the concept that
customers look a retailer or a product as a
collection of features and attributes.
• The model is framed to forecast customers’
evaluation/ judgments of a product or retailer
based on following criteria.

40. (i) Products performance on customers’
parameter,
(ii) The significance of those parameters to the
customer.

42. Step 1:
• Column 1 illustrates nine issues that are
considered for the purpose of evaluating
vendor’s performance.
• The criteria list should not be either too
comprehensive or too small
• As comprehensive list may consider some
less/not important issues that may become
difficult to use and small list on the other hand
may ignore some vital issues.

43. Step 2:
• After deciding about the criteria, next step is to
assign weightage to each aspect (criteria) in the
scale of 1 to 10 (column 2), where 1 represents
‘not important aspect’ and 2 represents ‘very
important aspect’.
• This criteria weights for each aspect must be
decided by retailer/buyer in consultation with the
merchandise manager/merchandise in-charge.
• For instance, Vendor’s goodwill must receive 9
points being a very important aspect, payment
criteria should receive 5 points being a reasonably
important

44. Step 3:
• After allocating the respective weightage to each
aspect, now buyer will assign ranking to each
brand in question in consultation with the
merchandise managers.
Step 4:
• Under this stage, in order to calculate the overall
performance of the Vendors, we multiply column
2 with respective ratings of Brand ‘A’, ‘B’ and
‘C’.
• Then, we sum up for ‘Brand ‘A’ that comes to 40
+ 40 + 42 + 30 + 25 + 20 + 24 + 30 + 15 = 266;
similarly, for Brand ‘B’ 290 and Brand ‘C’ 308.

45. Step 5:
• Lastly we compare the overall ratings of
various Brands, and give preference to the
highest overall rating, like in this question,
• Brand ‘C’ has the highest overall rating (308),
so ‘C’ is the most preferable Vendor ahead of
‘A’ and ‘B’.

46. Concept of GMROI
• The gross margin return on investment
(GMROI) is an inventory profitability
evaluation ratio that analyzes a firm's ability
to turn inventory into cash above the cost of
the inventory.
• It is calculated by dividing the gross margin by
the average inventory cost and is used often in
the retail industry.

47. • The GMROI shows how much profit inventory
sales produce after covering inventory costs.
• A higher GMROI is generally better, as it
means each unit of inventory is generating a
higher profit.
• The GMROI can show substantial variance
depending on market segmentation, the period,
type of item, and other factors.

49. Some of the common adjustments retailers make
from GMROI calculations are:
• Instructing suppliers to ship more or less
frequently
• Changing the brands or varieties of products
carried
• Changing suppliers for select items or categories
• Reducing inventory in a particular category
• Cutting back on “special buys” or “one-time-
offers” from suppliers if the purchase quantity
seems high…
• Considering mark down ideas to increase sales

50. • Thus one branch may have a higher than average
GMROI due to a city centre location with a small stock
area.
• Equally a shoe retailer would expect a lower average
GMROI than a general clothing retailer due to the
greater number of size options he has to carry to avoid
stock-outs, resulting in comparatively higher cost of
inventory.
• To get this we have to take into account such costs as
head office, distribution , space and selling staff.
• This brings us into Direct Product Profitability
modeling.
• G.M.R.O.I may not be the complete answer, but it can
take a long way with very little extra effort or
investment.