Page 162 - DMGT550_RETAIL_MANAGEMENT

Unit 9: Merchandise Management

The main advantage of demand-oriented pricing strategy is to set the merchandise price per Notes
customer response towards the product offered.

Cost-oriented Pricing

In this form of pricing policy method, a retailer decides a floor price of the merchandise–a
minimum price suitable to the organization to achieve its financial goals. A retailer under this
method sets the price to cover production cost, operating cost and a predetermined percentage
of profit. The percentage varies strikingly among industries, among member outlets and even
among merchandise of the same retail firm.

The Markup Criterion

The retailer’s markup percentage or cost plus percentage depends on following considerations:
1. Product’s traditional markup policy

2. Competition in the market
3. Supplier’s guidelines regarding selling price
4. Operating expenses of store
5. Rented or own retail store

6. Inventory turnover
7. Level of customers service offered

Calculation of Markup Percentage

Retail selling price – Merchandise cost (at retail)
Markup percentage =
Retail selling price
Retail selling price – Merchandise cost (at cost)
Markup percentage =
Merchandise cost

Example: A food departmental store desires a minimum 30 percent markup at the retail
outlet. If a 100 gm butter cake should sell at ` 20, what maximum price the store can afford to pay
the suppliers?
Retail selling price – Merchandise cost (at cost)
Markup percentage =
Merchandise cost
20 – Merchandise cost
0.30 =
20
Merchandise cost = 20 – (0.30 × 20) = ` 14
Determination of initial markup, maintained markup and gross margin: with the emergence
various retail formats and enhanced competition, it is not practical for a retailer to sell all the
merchandise items at their actual prices. Therefore, retailers compute the initial markup,
maintained markup and gross margin during their normal course of business:
1. Initial markup: It is based on the selling price assigned to the merchandise less the costs
of the merchandise sold.

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