Page 212 - DMGT510_SERVICES_MARKETING

Unit 11: Pricing of Services

Ajay Bansal, the store manager, is in the process of evaluating the profitability of the Notes
overall store and its various departments. Of special interest is the store’s pricing strategy.
Ajay is under pressure from the university’s controller to generate improved profits,
while still serving the needs of customers. For example, the store must carry products
used by dormitory students even though they have low inventory turnover.
Bansal is aware of several factors that affect the store’s profitability and sales.
The profit margins on new texts are quite low relative to operating costs. While the
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store prices new texts using a 22 percent mark-up at retail, its costs of doing business
are about 24 percent of net sales. The store must also pay freight in (on text purchases)
and freight out (on text returns due to over-ordering). It is common for the store to
over-order texts, since professors do not want them to be out of stock. Freight costs
can average 2-4 percent of net sales for new texts.
While the initial profit margins on used texts are 40 percent at retail, Ajay really
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does not feel that these texts are all that profitable. Considerable time is spent by
store employees in purchasing used texts and determining their quality (different
prices are established for excellent, good, and fair quality). The store also has problems
in being ‘stuck’ with an old edition or with having to transport texts to a wholesaler
when faculty decide to no longer assigns a current title.

Even though signature goods have been priced at a full 50 percent mark-up at retail,
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the store has had large problems with size assortments. The store’s buyer assumed
that these goods are staples and purchased them in a standard size distribution; he
did not foresee the current appeal of oversized clothing. Even 50-kg students want
extra-large sizes. As a result, the store has had to take large unplanned markdowns.
Much older merchandise remains unsold.
Dormitory items must be stocked to accommodate students, but many of these
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items are slow-moving. It is hard to get students into the bookstore to purchase
health and beauty aids or small appliances, even with special sales. Many students
report purchasing these items at neighbouring supermarkets or on their trips to
home. They believe that the college store has above-average prices and does not
have a sufficient selection.
Table 1 contains data on planned versus actual sales, mark-ups, operating expenses, and
profit for the most recent year. Ajay Bansal wants to review these data carefully in planning
his pricing strategy for the coming year, and in deciding whether to add a personal
computer line.

The engineering and business schools plan to require entering freshmen to purchase
personal computers within the next two academic semesters. This policy will affect three
hundred new students per year. Although the personal computer business represents a
significant opportunity (units can be sold for more than ` 33,000 each if fully configured
with a graphics board, a monitor, and a printer). Bansal has two major concerns. One, he
estimates that there will be a 10-15 percent mark-up if the store stocks computer units and
handles warranty shipments for students. This may not be enough to compensate the store
for the space and inventory risk. Personal computer prices typically drop 15-20 percent
per year, and a new configuration may also render a peripheral (such as a graphics board)
obsolete. Two, many students will be able to get better prices through mail-order merchants.
These merchants do not charge sales tax to out-of-state purchasers.
Contd...

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