The Psychology Of Price
(The Markup &
Markdown Game)
Paul Erickson
RMSA Retail Solutions
The most interesting retailer of 2012
“Honey …. I just blew up the
brand”
RON JOHNSON NEW CEO JC
PENNEY
New logo
New spokesperson
NEW REVAMPED LAYOUT
Sephora
MNG by Mango
“Fair and Square” pricing model
Three-tier
model
1.“Everyday”
low pricing
2.“Month-Long
Values”
3.“Best Prices”
J.C. Penny Turnaround Goes The Wrong Way
High / Low pricing
Coupon or
discount
signals good
deal
High / Low pricing
No
reference
point
High / Low pricing
Relative not
absolute
price
initial markup (IMU)
Which is the
Highest Markup?
A. Keystone
B. Flintstone
C. The Buyer was stoned
D. Tombstone
difference between markup & margin
markup
margin
• initial markup and
maintained markup
• retail aspect
• from buyer’s perspective
• initial margin and
gross margin
• accounting aspect
• from business owner’s
perspective
retail method of calculation
retail method of calculation
original selling price - cost /
original selling price
• Example: $100 - $40 / $100 = 60%
Zizzybaloobah/Fickr
“…that’s what
I always price
it at…”
“…I multiple
the cost by
2.2…”
“…I double the
cost and then add
a $1 or $2…”
three key elements
three key elements
operating
markdowns
expenses
desired
net profit
three key elements
operating
markdowns
expenses
desired
net profit
three key elements
operating
markdowns
expenses
desired
net profit
IMU formula
IMU =
(markdown % +
operating expense % +
desired net profit %) /
100% + markdown%
markdowns =
20%
operating
expenses =
40%
.06 + .40 + .20
1.0 + .20
= .55
desired
net profit =
6%
annual sales $1,000,000
IMU
52.5%
55%
MDS
20%
20%
MMU
43% = $430K
46% = $460K
EXP
40% = $400K
40% = $400K
NET
3% = $ 30K
6% = $ 60K
pricing for profit
52.5%
$9.00 cost
$19.00 retail
55%
$9.00 cost
$19.99 retail
psychology of pricing
competitive pricing
competitive pricing
multiple
pricing
discount
pricing
know your
competition
loss
leaders
customer
service
competitive pricing
multiple
pricing
discount
pricing
know your
competition
loss
leaders
customer
service
competitive pricing
multiple
pricing
discount
pricing
know your
competition
loss
leaders
customer
service
competitive pricing
multiple
pricing
discount
pricing
know your
competition
loss
leaders
customer
service
competitive pricing
multiple
pricing
discount
pricing
know your
competition
loss
leaders
customer
service
steering clear of
cost-base pricing
steering clear of cost-base pricing
decide on
price before
knowing
cost
determine
price when
writing order
steering clear of cost-base pricing
decide on
price before
knowing
cost
determine
price when
writing order
steering clear of cost-base pricing
decide on
price before
knowing
cost
determine
price when
writing order
=
then make
decision
to buy
initial markup review
initial markup review
right
product
price?
determine
each product
category
separately
use
psychological
pricing when
possible
steer clear of
cost-base
pricing
key expenses
go up, so
should IMU
initial markup review
right
product
price?
determine
steer clear of
each product
cost-base
category
pricing
separately
use
psychological
pricing when
possible
key expenses
go up, so
should IMU
initial markup review
right
product
price?
determine
each product
category
separately
use
psychological
pricing when
possible
steer clear of
cost-base
pricing
key expenses
go up, so
should IMU
initial markup review
right
product
price?
determine
each product
category
separately
steer clear of
cost-base
pricing
use
key expenses
psychological
go up, so
pricing when
should IMU
possible
initial markup review
right
product
price?
determine
each product
category
separately
use
psychological
pricing when
possible
steer clear of
cost-base
pricing
key expenses
go up, so
should IMU
Expense Percents
Advertising
Occupancy cost
Payroll
3.3%
8.0%
19.5%
Markdowns
20.6%
Retailers are losing over
$200 billion a year due
to markdowns.
--United States Census Bureau & National Retail Federation
decision making
best laid plans of mice and men
the calculation
markdown percent calculation
total retail markdown $
net sales
(sales after markdowns)
Example:
$ 20 = 25%
$ 80
the good and the bad
the good
keeps
inventory
fresh
assures
good cash
flow
cost of
doing
business
the good
keeps
inventory
fresh
assures
good cash
flow
cost of
doing
business
the good
keeps
inventory
fresh
assures
good cash
flow
cost of
doing
business
the bad
higher than
other expenses
on the income
statement
raises the cost of
goods sold and
result in a net
loss
the bad
higher than
other expenses
on the income
statement
raises the cost of
goods sold and
result in a net
loss
root causes of
excessive markdowns
root causes
poor
buying
too
large
assortments
duplication
overbuying
root causes
poor
buying
too
large
assortments
duplication
overbuying
Overbuying
1. 70% of your sales come from
inventory less than 3 months old
2. Recognize short shelf life
3. Recognize slow sellers in season
20% OFF!
“Just
Reduced!”
Do not advertise
% or specific $ off
at this time!
psychological pricing
math of psychological pricing
original price:
$38.00
original price:
$98.00
25% off
= $28.50
20% off
= $78.00
psychological
pricing
psychological
pricing
$29.99
= 21% off
$79.99
= 18% off
same message?
25% off plus
“take an additional 15% off”
= 40% off
=36.25%
50% off plus
“take an additional 20% off”
= 70% off
=60%
markdown rules
markdown rules
plan
plan
plan
use a
budget…
don’t be
under
learn from
every
markdown
price points
not
percentages
pay
your tuition
markdown rules
plan
plan
plan
use a
budget…
don’t be
under
learn from
every
markdown
price points
not
percentages
pay
your tuition
markdown rules
plan
plan
plan
use a
budget…
don’t be
under
learn from
every
markdown
price points
not
percentages
pay
your tuition
markdown rules
plan
plan
plan
use a
budget…
don’t be
under
learn from
every
markdown
price points
not
percentages
pay
your tuition
markdown rules
plan
plan
plan
use a
budget…
don’t be
under
learn from
every
markdown
price points
not
percentages
pay
your tuition
markdown truths
markdown truth #1
• Always explain to your
customer why the items
are marked down
markdown truth #2
• Overbuying is the
number one cause of
excessive markdowns
markdown truth #3
• Your first markdown is
the cheapest!
markdown truth #4
• The price you paid has
nothing to do with the
markdown price
markdown truth #5
• Learn from every
markdown
markdown truth #6
• Always keep your
markdown items at the
back of the store!
markdown truth #7
• Nurture your
customers who do not
shop you on price alone
final word on markdowns
•
•
•
•
commit to lean inventories
maintain liquidity
avoid the last buy
use an open-to-buy plan
and follow it
Thank you!
Paul Erickson
www.rmsa.com
[email protected]
[email protected]