9. Pricing policies

PRICING POLICIES 9

Factors affecting individual prices. The prices  that any firm can charge for its  merchandise are subject to many influences. Some or all of the following considerations may apply in a particular case: 1. fair trade laws, 2. nationally advertised prices, 3. desired customer clientele, 4. competitor price policies, 5. market strategy, 6. manufacturers’ suggested  prices, 7. type of merchandise handled, 8. policy  on loss leaders, 9. seasonal nature of sales, 10. demand factor for certain products, 11. price lining, 12. target return pricing.

A word about each of these factors will introduce  us to the total scene of setting prices.  Fair trade laws still exist in many states. These laws allow the manufacturer of a product to make agreements with dealers who retail the product on the price at which it can be sold to the public. Nationally advertised prices must be recognized by small firms as at least an upper limit  to the prices they place on items so advertised. Competitor prices on similar lines or merchandise  with similar  quality  must be recognized when active competition exists between firms. Market strategy  is a policy of setting prices and quality  in a range not served by competitors. Where a special  clientele is served its buying  habits  can be reflected  in price policy. For example, if affluent people  want special  services and special  merchandise, they are willing to pay for them. In other cases, the desired clientele may be price- conscious and  price policy  will  be directed to serve them.

Manufactures’ suggested prices are designed by the manufacturers to protect the   quality image of their products and to protect  profit  margins for the individual retailer.  Price policy is significantly  affected  by the type  of merchandise. Novelties or special- interest items normally carry higher markups.

Loss – leaders  ( products sold below cost) are still illegal in some states whose laws  reflect an earlier attempt  by independent firms to combat the increase of chain store competition seasonal nature  of sales can affect pricing policy by making it possible to alter prices with the high and low seasons of sales volume. The nature of overall demand  is likewise  a consideration  in setting individual  prices. Elastic  demand suggests  lower prices. Specialty  goods, such as luxury  items and style merchandise, carry higher prices. Price lining  is a policy  of keeping  merchandise in fairly well-defined price ranges. Dresses at $19.95, $24.95 and $29.95 would be an example.

Target return pricing involves adding a desired percentage return  on investment or a specific dollar amount return to total  fixed costs in setting retail prices.

Setting initial prices. Initial prices on merchandise  must cover  all these items: 1. markdowns, 2. shortages, 3. damaged merchandise, 4. employee discounts, 5. operating expenses, 6. cost of goods sold, 7. profits.

When a business owner decides what price to charge for different items and services offered, some kind of method should be used. Poor pricing may end up costing the owner customers and profits. Two basic questions must be answered:1. Are prices high enough to cover expenses and assure  a fair profit, 2. Are prices low enough to meet or undersell the competition and attract customers?

Markup. The term markup refers to the amount which a proprietor  adds to the cost of an item in order to arrive at a selling  price. The selling price may be expressed in a simple formula: cost price plus markup equals selling price.
If a particular product  costs a proprietor $1.00, it may be sold to the customer for $ 1.50. the markup on the item is $.50 based on the cost.

Cost price + Markup = Selling price
$ 1.00 $ .50 $ 1.50

Because most businesses deal in a large number of different  items, an owner should not have  to decide on a markup every time new merchandise arrives. A standard markup system should  therefore be adapted.
There are two ways of figuring markup. One method is based on the cost price. The other  more modern method is based on the selling price:
1. Markup based on cost price:

Cost price +50% Markup = Selling price
$ 1.00 $ .50 $ 1.50


2. Markup based on selling  price:

Cost price – 33 1/3% Markup = Selling price
$ 1.00 $ .50 $ 1.00


In theory, for every dollar taken in over the counter , the merchant  should know how  much is clear profits, how much goes for merchandise, and how much goes for expenses. When a customer gives a merchant $1 for an item, then sales dollar might look like this:

Rent 1
Heat 2
Light 1
Wages 20
Cost of Insurance 1
Merchandise 70 Profit 5

Of course, a merchant  does not actually analyze every dollar. But when $1 is multiplied by 10,000 at the end of a six month business period, the effects are important.

Markdown. It is not as difficult to figure as markup. Markdown is simply an amount or percentage cut from the original  selling price. For example, if men’s shirts are not selling at $16.95 , they might sell for $ 14.95. The dollar value of the markdown is $ 2.00 and the percentage, found by dividing the markdown by the selling price, is 11.8%. To mark down an item  25%, simply multiply the selling price by 25%, or divide the selling price by 4 and subtract to find the new selling price.