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Rakesh Kumar Singh

Name : RAKESH KUMAR SINGH

Roll No. : 510910259

Learning Centre : Systems Domain (2779)

Subject : Retail Marketing

Assignment No. : Set – II (MK0003)

Date of Submission : 2010

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Rakesh Kumar Singh

MBA Semester 3
MK0003 – Retail Marketing
Assignment Set- 2

Q.1 Briefly explain the different price setting methods adopted in retailing. Give examples wherever
applicable. (10 marks)

Ans: Following are the various pricing strategies followed by the retailer to meet his short- and long-
term objectives. The adoption of these strategies is guided by the basic pricing approach of the retailer.

Every Day Low Pricing (EDLP): Here, goods are either sold below their normal prices, or some sales
promotion scheme is available. For EDLP to work, volumes are necessary so that the store can negotiate
with the manufacturers for bargain prices.

Some retailers have adopted a low-price guarantee policy where they guarantee that they will have the
lowest possible price for a product. The guarantee usually promises to match or better any lower price
found in the local market. If somebody is selling at a lower price, the retailer would refund the
difference.

High-Low Pricing: In high-low pricing, retailers offer prices that are sometimes above their competitor’s
ELDP, but they use advertisements to promote frequent sales. In the past, retailers would mark down
merchandise at the end of a season to clear the stock. Grocery stores would only have sales when they
were overstocked. Sale is very common in garment retailing.

Loss Leader Pricing: Retailers sometimes price particular fast moving products at a lower price to
attract customers to the store. Once the customers are in the store, they can be persuaded to buy more
profitable products. For example, a retailer can sell eggs cheaper than other competing stores so that
customers consider him while purchasing groceries.

Since the customer is also likely to buy milk, bread, flour, etc. along with eggs, these products are priced
slightly higher. So, the profit foregone on eggs is less than that recovered on other items of groceries,

Skimming Pricing: Price skimming is a pricing strategy in which a retailer sets a relatively high price for
a product or service at first, and then lowers the price over time. It allows the firm to recover its sunk
costs quickly before competition steps in and lowers the market price.

Penetration Pricing: Penetration pricing is the pricing technique of setting a relatively low initial entry
price, a price that is often lower than the eventual market price. The expectation is that the initial low
price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is
most commonly associated with the marketing objective of increasing market share or sales volume,
rather than short term profit maximization.

Cost-plus pricing: Set the price at your production cost, including both cost of goods and fixed costs at
your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials
and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs
come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20%
markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as
you have your costs calculated correctly and have accurately predicted your sales volume, you will always
be operating at a profit.
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Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's
use the same situation as above, and assume that you have $10,000 invested in the company. Your
expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first
year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price
of $60 per unit.

Value-based pricing: Price your product based on the value it creates for the customer. This is
usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is
"pay for performance" pricing for services, in which you charge on a variable scale according to the
results you achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say,
energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably
produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers
would gladly pay it, since they would get their money back in a matter of months. However, there is one
more major factor that must be considered.

Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your
price, figuring things like:

 Positioning: If you want to be the "low-cost leader", you must be priced lower than your
competition. If you want to signal high quality, you should probably be priced higher than
most of your competition.

 Popular price points: There are certain "price points" (specific prices) at which people
become much more willing to buy a certain type of product. For example, "under $100" is
a popular price point. "Enough under $20 to be under $20 with sales tax" is another
popular price point, because it's "one bill" that people commonly carry. Meals under $5 are
still a popular price point, as are entree or snack items under $1 (notice how many fast-
food places have a $0.99 "value menu"). Dropping your price to a popular price point
might mean a lower margin, but more than enough increase in sales to offset it.

 Fair pricing: Sometimes it simply doesn't matter what the value of the product is, even if
you don't have any direct competition. There is simply a limit to what consumers perceive
as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered
$10,000 in value, you'd have a hard time charging two or three thousand dollars for it --
people would just feel like they were being gouged. A little market testing will help you
determine the maximum price consumers will perceive as fair.

Q.2 a. Discuss the scope of business intelligence in retail. (6 marks)

Ans: Traditionally, the retail industry has lagged behind other industries in adopting new
technologies, and this holds true in its acceptance of BI technology. Some industries, such as financial
services, have become very sophisticated in using BI software for financial reporting and consolidation,
customer intelligence, Regulatory compliance and risk management. However, retailers are quickly
catching up and beginning to recognize the many areas of BI that can be applied specifically to their
businesses. As the industry continues to consolidate, retailers have begun to realize that using
technology to better understand customer buying behaviour, to drive sales and profitability, and to
reduce operational costs is a necessity for long-term survival. Retailers are now paying significant
attention to BI software, specifically in the areas of merchandise intelligence, customer intelligence and
operational intelligence. There are many factors that have led to adopt BI software:
 Increased competition,
 The need to squeeze more profitability out of less space,
 Prevalent credit card usage,
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 The internet’s role as an alternative sales channel,

 The popularity of loyalty cards and soon,
 RFID (radio frequency distribution).

These milestones have created a wealth of data that retailers are now beginning to appreciate
and use. Within individual companies, we view the history of BI in retail through the lens of the
Information Evolution Model, a framework that we devised to describe the status of any company’s
evolution toward becoming an intelligent enterprise. In this model, we determined that organisations
pass through five fundamental stages as they advance in their use of BI as a competitive differentiator:
Operate: At this most basic level are the companies rife with information mavericks: the people
in basement offices hammering away on desktop spreadsheets. If they go, the knowledge goes with
them. There are no processes, and each request becomes an adhoc data rebuild, resulting in multiple
versions of the truth, with the likelihood of a different answer to any one question every time it is
asked.
Consolidate: At this stage, a company has pulled together its data at the departmental level.
Here, a question gets the same answer every time, at least within the department. However,
departmental interests and interdepartmental competition can skew the integrity of the output and
result in multiple versions of the truth.
Integrate: At this point in the evolution, a company has adopted enterprise-wide data and bases
its decisions on this more complete information. This company is beginning to have a true awareness of
additional opportunities for the use of BI to improve processes and profits.
Optimise: At this stage, the company’s knowledge workers are much focussed on incremental
process improvements and refining the value-creation process. Everyone understands and uses analysis,
trending, pattern analysis, and predictive results to increase efficiency and effectiveness. The extended
value chain becomes increasingly critical to the organisation, including the customers, suppliers, and
partners who constitute intercompany communities.
Innovate: This level represents a major, quantum break with the past. It exploits the
understanding of the value-creation process acquired in the optimize stage and replicates that efficiency
with new products in new markets. Companies operating at this level understand what they do well and
apply this expertise to new areas of opportunity, thus multiplying the number of revenue streams
flowing into the enterprise.

b. What are the career or employment opportunities for MBA graduates in the retail sector? (4
marks)
Ans: MBA graduates are generally hired to work in brand management at the headquarters of large
corporations such as Procter & Gamble or Johnson & Johnson. Their starting salaries averaged
$40,000- $44,000. In some cases, starting salaries went as high as $60,000 for MBAs with full-time work
experience. These MBAs are often expected to fit in the product management teams immediately. Most
of the training is on – the – job. For example, at Johnson & Johnson a newly hired MBA may be given
an 18 month assignment followed by 6 weeks of sales training. After the training, a higher level 18
month assignment is offered. Successful completion of these assignments places the MBA squarely on
the road toward product director and brand manager.

Target, the upscale discount store owned by Dayton Hudson Corporation, has a relatively more
structured program for training MBAs. Each recruit spends approximately three months gaining an
overview of advertising, distribution, inventory management and merchandising positions at target. In
less than two years, the employee has an opportunity to manage a $30 million to $100 million business
as a buyer and, later, as a senior buyer. In these positions, national and international shopping is
required to identify retail trends and to develop merchandising and advertising strategies. The
successful manager is also involved in product development, financial planning and vendor
management.
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Q.3 Assume you have a capital of five lakhs and that with this amount you are planning to expand
your small mobile accessories outlet. How will you decide about the various expenses involved and
other requirements? (10 marks)

Ans: Earmarking of merchandising budgets is considered to be a vital component of the planning

phase. Usually, a budget states amount allocated for each product, based on the pre-set profitability or
other performance measures.

In other words, merchandise budgeting is a financial tool of planning and controlling the retailer’s
merchandise inventories investment. While planning and control of merchandise mix is direct at
meeting the customer-oriented objectives, equally important is that merchandising process is the firm’s
financial objective of profitability. To ensure profitable operations, the retailer must use a
merchandising budget in which sales volumes, stock levels, retail reductions, purchase orders, and profit
margins are planned and controlled. The important components of the merchandise budget plan are as
follows:

Projected Sales / Sales Forecast

At times, retailers choose to specialize in a single kind of merchandise and choose to carry a very deep
assortment. For example, in the Chandni Chowk market in Delhi a particular lane is referred to as the
Parathe Wali gali. Paratha is an Indian bread savory. All the retail food outlets only sell different
variants of parathas with a vegetable curry and pickle. Sometimes they may also serve a simple dessert.
The customers are attracted to the lane primarily because of its specialization. This is also the reason for
its popularity. Similar examples are seen in many parts of India – shops selling Chikan embroidered
material and garments in the Chowk and Aminabad markets of Lucknow, shops selling bandhni
material and garments in Jaipur, etc. Specialization is their best advertisement.

Budget planning starts with the development of a sales plan, this shows the expected or projected rupees
volume of sales for each merchandise or department. Sales forecasting helps the management in a
forecast of expected sales. Without having information on how much is to be sold, the retailer cannot
determine how much to buy. Mistakes made at this stage will be reflected in the entire budgeting plan
and may incur huge losses to the management in the future.

Usually, product categories experience an expected sales pattern. Sales start at low, then increase
gradually, stabilize, and finally decline. It is important to understand that the pattern experienced varies
from one product category to another product category. While making the sales forecast, a retailer or
planner should be aware of the consumer segment for the offer, expected drivers of variety, nature of
competition, promotion, and price range. One needs to classify the merchandise as a fashion, a fad, a
staple, or seasonal merchandise before developing a sales forecast.

The product category life cycle describes the primary form of sales pattern over time. It assists in
examining the sales pattern variations among fad, fashion, staple, and seasonal merchandise. The
product category life cycle is divided into four stages: introduction, growth, maturity, and decline.

The understanding of the life cycle stage of a particular product helps in developing sales forecast and
merchandising strategy. It is a well-known fact that the product category life cycle stage affects the retail
marketing mix such as target market, variety, place, price, and advertising. The target market for a newly
introduced product is usually the high-income innovator. For example, cellular phones, introduced in
India in 1996, targeted the high-income professionals or the business class. It was no doubt, very
expensive in comparison to the other modes of communication. With time, as the category reached the
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early and late stages, they became more appealing to the middle-income, mass-market customers who
were the target market for discount stores. This clearly shows how a new entry in the market enlarges its
market as it moves along its life cycle.

The variety available in cellular phone was small at its introductory stage. However, today the Indian
retail market is experiencing a huge expansion with a wide range of choices based on colour, product
features, and price levels.

Distribution intensity refers to the number of retailers carrying a particular category. In the introductory
stage, a product is distributed from a limited number of outlets. For example, in India, colour television
was initially acquired by people in the metros. Even after 20 years of introduction of CTV in Indian
markets, most of the semi-urban areas acquired it from the adjoining cities. In the same manner, cell
phone was earlier available in major cities only but today even the smaller cities have a good number of
unorganized retailers along with company-owned outlets in this sector. It is often observed that as the
new offer gains popularity in the growth and maturity stages, retail penetration increases. At the same
time, when certain products like pagers experience decline in sales, fewer or no retailer intends to stock
the product.

Inventory Plan: Inventory management plan provides information regarding sales velocity, inventory
availability, ordered quantity, inventory turnover, sales forecast, and quantity to order for specific SKU.
Inventory plan assists retailers in scheduling orders to vendors after considering tradeoffs between
carrying cost versus the cost of ordering and handling the inventory. The more they purchase at one
time, the higher the carrying costs, but the lower the buying and handling costs.

The inventory plan helps to devise the stock support levels for a specific sales period. Most widely used
methods to determine the stock support levels are: beginning-of-the-month ratios, weeks’ supply
method, the percentage variation method, and the basic stock method.

Estimated Reductions: Retailers are required to provide for retail reductions along with sales forecast
and inventory support levels. Retail reduction is anticipated sales below the list price. Retail reductions
are classified into three types of sales below price: markdowns, discounts, and shortages. Markdown is
defined as reduction in the original list price to encourage sales of the product. Discounts are reduction
in the original retail price given to special customer groups, such as loyal customers. Shortages are
reductions in the total value of inventory that results from damages to merchandise, shoplifting, or
pilferage. The retailers on the bases of their past experience on retail reductions make adequate
arrangements while evolving merchandise budgets.

Estimated Purchase Levels: At this stage a retailer is supposed to devise an actual budget for planned
purchase. In other words, planned purchases refer to planned purchases that must be made at the
beginning of each month. Here a retailer or planner uses information compiled at the initial stages of
merchandise budget planning. The planned monthly purchases figure informs buyers how much they
need to spend to support anticipated sales levels considering existing inventories.