NOTES-UNIT-2

UNIT 2 – PRICING ANALYTICS

Definition: Pricing is the method of determining the value a producer will get in the
exchange of goods and services. Simply, pricing method is used to set the price of producer’s
offerings relevant to both the producer and the customer.

Every business operates with the primary objective of earning profits, and the same can be
realized through the Pricing methods adopted by the firms.

While setting the price of a product or service the following points have to be kept in mind:

 Nature of the product/service.

 The price of similar product/service in the market.
 Target audience i.e. for whom the product is manufactured (high, medium or lower
class)
 The cost of production viz. Labor cost, raw material cost, machinery cost, inventory
cost, transit cost, etc.
 External factors such as Economy, Government policies, Legal issues, etc.
Pricing Objectives

The objective once set gives the path to the business i.e. in which direction to go. The
following are the pricing objectives that clears the purpose for which the business exists:
1. Survival: The foremost Pricing Objective of any firm is to set the price that is opti-
mum and help the product or service to survive in the market. Each firm faces the
danger of getting ruled out from the market because of the intense competition, a ma-
ture market or change in customer’s tastes and preferences, etc.Thus, a firm must set
the price covering the fixed and variable cost incurred without adding any profit
margin to it. The survival should be the short term objective once the firm gets a hold
in the market it must strive for the additional profits.The New Firms entering into the
market adopts this type of pricing objective.
2. Maximizing the current profits: Many firms try to maximize their current profits by
estimating the Demand and Supply of goods and services in the market. Pricing is
done in line with the product’s demand in the customers and the substitutes available
to fulfill that demand. Higher the demand higher will be the price charged. Seasonal
supply and demand of goods and services are the best examples that can be quoted
here.
3. Capturing huge market share: Many firms charge low prices for their offerings to
capture greater market share. The reason for keeping the price low is to have an in-
creased sales resulting from the Economies of Scale. Higher sales volume lead to
lower production cost and increased profits in the long run.This strategy of keeping
the price low is also known as Market Penetration Pricing. This pricing method is
generally used when competition is intense and customers are price sensitive. FMCG
industry is the best example to supplement this.
4. Market Skimming: Market skimming means charging a high price for the product
and services offered by the firms which are innovative, and uses modern technology.
The prices are comparatively kept high due to the high cost of production incurred be-
cause of modern technology. Mobile phones, Electronic Gadgets are the best exam-
 ples of skimming pricing that are launched at a very high cost and gets cheaper with
the span of time.
5. Product –Quality Leadership: Many firms keep the price of their goods and services
in accordance with the Quality Perceived by the customers. Generally, the luxury
goods create their high quality, taste, and status image in the minds of customers for
which they are willing to pay high prices. Luxury cars such as BMW, Mercedes,
Jaguar, etc. create the high quality with high-status image among the customers.
Thus, every firm operates with the ultimate objective of earning profits and, therefore, the
price of a product must be set keeping in mind the cost incurred in its production along with
the benefits it offers for which people are ready to pay extra.

What is Pricing Method?

Pricing method is a technique that a company apply to evaluate the cost of their products.
This process is the most challenging challenge encountered by a company, as the price
should match the current market structure and also compliment the expenses of a company
and gain profits. Also, it has to take the competitor’s product pricing into consideration so,
choosing the correct pricing method is essential.

Types of Pricing Method:

The pricing method is divided into two parts:

 Cost Oriented Pricing Method– It is the base for evaluating the price of the finished
goods, and most of the company apply this method to calculate the cost of the prod-
uct. This method is divided further into the following ways.
o Cost-Plus Pricing- In this pricing, the manufacturer calculates the cost of pro-
duction sustained and includes a fixed percentage (also known as mark up) to
obtain the selling price. The mark up of profit is evaluated on the total cost
(fixed and variable cost).
o Markup Pricing- Here, the fixed number or a percentage of the total cost of a
product is added to the product’s end price to get the selling price of a product.
o Target-Returning Pricing- The company or a firm fix the cost of the product to
achieve the Rate of Return on Investment.
 Market-Oriented Pricing Method- Under this category, the is determined on the base
of market research
o Perceived-Value Pricing- In this method, the producer establishes the cost tak-
ing into consideration the customer’s approach towards the goods and ser-
vices, including other elements such as product quality, advertisement, promo-
tion, distribution, etc. that impacts the customer’s point of view.
o Value pricing- Here, the company produces a product that is high in quality
but low in price.
o Going-Rate Pricing- In this method, the company reviews the competitor’s
rate as a foundation in deciding the rate of their product. Usually, the cost of
the product will be more or less the same as the competitors.
 o Auction Type Pricing- With more usage of internet, this contemporary pricing
method is blooming day by day. Many online platforms like OLX, Quickr,
eBay, etc. use online sites to buy and sell the product to the customer.
o Differential Pricing- This method is applied when the pricing has to be differ-
ent for different groups or customers. Here, the pricing might differ according
to the region, area, product, time etc.
What is price optimization?

o Price optimization is the practice of using data from customers and the market
to find the most effective price point for your product or service that will max-
imize sales or profitability. The optimal price point is the price where compa-
nies can best meet their objectives, whether that means increased profit mar-
gins, customer growth, or a blend.

Information used in price optimization includes things like:

o Customer survey data

o Demographic and psychographic data
o Historic sales data
o Operating costs
o Inventories
o Machine learning outputs
o Subscription lifetime value and churn data (for subscription business models)
o Pricing optimization is a similar process to dynamic pricing strategies used in
hospitality, travel, ecommerce, and other industries, although dynamic pricing
tends to change much more rapidly as companies tweak pricing to match real-
time demand.

What you need to optimize for?

The goal of pricing optimization is to find that perfect balance of profit, value, and desire.
Since you can’t control which products and features customers want, and adding valuable
product features takes time and effort, most companies start finding that balance by setting
two things: the starting price of their product or services, and any discounts or promotions
they might offer.

o Starting prices
o Your starting price, or base price, is important since it lets customers know
whether your product or service is worth their time and investment. Starting
prices should be optimized to match the baseline demand for your product be-
fore any discounts or promotions are applied. Optimizing the starting price
works well for companies with products and services that remain fairly stable
over time, like groceries, office supplies, or even SaaS products.
o Discounted prices
o If you’re in sales, you need to know what works best to pull in new customers.
Offering your product at a discount—or, in some cases, even offering
 a freemium version—is a great way to bring in new customers (customers ac-
quired through freemium offerings cost nearly half as much to acquire as those
who sign up for paid offerings directly).
o Promotional prices
o What promotional offers would serve you and your customers best? Will
markdowns create any additional profit, or are you better off charging the
starting price? How big of a discount should you offer below your starting
prices? How long will something take to sell at a specific price point? Opti-
mizing your promotional prices can help boost sales for newly introduced prod-
ucts and promotional bundles—for example, a SaaS company launching a new
product, or bundling multiple products.

Why many companies fail at pricing optimization?

o To make a long story short, most companies aren’t willing to put in the effort
to optimize their pricing decisions. All the customer research needed to figure
out the right valuations takes time and effort. Surprisingly, the average com-
pany only spends less than ten hours per year on their pricing strategy, which is
not enough.

o Instead, companies turn to strategies like guessing, relying on discounts, and

not pricing based on value.

Guessing

o Many companies simply guess what an optimal price point would be instead
of using analytics and metrics that their customers have given them. It’s an in-
sidious cycle. With the right positioning and promotion, even guessing at your
 prices will work to some extent—it’s easy to take that as a sign that your pric-
ing is “good enough.” Ultimately, though, you are leaving money on the table.

Misunderstanding tiers

o Many companies don’t know how many different pricing tiers or levels they
should incorporate into their pricing structure. It’s a common misconception
that more tiers equals more conversions. Data shows that too many or too few
options pushes away potential customers, with a clear decrease in conversion
rates as the number of tiers gets higher.

Relying heavily on discounts

o The problem with discounting is that many companies wield discounting like a
sledgehammer instead of a scalpel. Yes, it juices your acquisition metrics in
the short term, but over time discounting can reduce your SaaS lifetime value
by over 30%. Discounted customers have just over double the churn rate of
those who pay full price—they’ve either been trained to devalue the product,
or they just weren’t the right customers in the first place.
Not pricing for value

o Value-based pricing is the best price optimization model since it includes both you
and your customer’s optimal prices. The goal with value-based pricing is to
figure out how much each customer is willing to pay for your product, so you
can maximize revenue by charging each customer exactly what they’re willing
to pay. Figuring out what that price should be, though, isn’t easy.

That’s why so many companies lose out on revenue by setting their prices based on those of
their competitors or on their costs—they don’t want to put in the effort.

How to optimize your pricing

Deciding on the right product pricing strategy —a price that maximizes value for
customers and profit for you—starts with gaining a deep understanding of your
customers. You need to understand who your best customers are, what features
they like, and what features they need. You also need to understand your market:
retailers will have different considerations than B2B companies. Once you
understand that, you can align your pricing with what they value, tracking the
results of the price changes you make and improving over time.

1. Get to know your customers

Optimizing your pricing is all about the data—both qualitative and quantitative.
Hard data is the only way to find out how much customers are willing to pay for
your product, and it’s the key to breaking free from the guessing cycle.

Quantitative data, like transactional data, customer reviews, supply and demand
data, churn rate, MRR, and more show you how you’re doing and what needs to
be changed. Software like Price Intelligently can help you make sense of those
metrics and turn them into pricing insights by slicing and dicing your data based
on demographic, psychographic, and customer preferences.

Just as helpful, qualitative data comes from talking to customers. Surveys are
great, but they’re no match for picking up the phone and actually talking to
customers, asking them about topics such as their price sensitivity and what
features or benefits they value most in your product.

2. Quantify value

Once you’ve collected all your customer data, it’s time to work out what “value”
actually means to your customers. That means working out your value metric.
Your value metric is essentially what and how you’re charging for your product—
identifying and pricing along your proper value metric is the difference between
surviving and thriving.

3. Analyze the data

You’ve collected some customer data and worked out what your customers value
—now it’s time to look for patterns in the features, benefits, price points, and
value metrics that drive or detract from value. You’ll also find out how willing
different segments and personas are to pay different prices for your products.

Use your findings to create tiers and proper packages for your product or services.
Each tier should be priced along your value metric, and should align with your
different buyer personas so that you're offering the right amount of product or
service to each customer segment.

4. Adjust pricing and monitor

Even once you’ve set your prices, you’re still not done—the value you provide
versus your competitors’ is constantly changing, so you need to be constantly
monitoring and adjusting your pricing.
Pricing is an ongoing process. You should use your pricing strategy to eliminate as
much doubt as possible. Think back to our dartboard example from earlier—
adjusting your pricing helps eliminate sections of the dartboard, focusing in on the
right region for your dart to land as you learn more about what works.

You need to continually collect data and analyze the value customers are getting
from your product to make sure that what you’re offering still meets your
customers’ needs and pricing desires. Make sure you keep a very close eye on
your pricing, and see how customers respond. If need be, re-evaluate and change
things up—but don’t be too quick to switch, since you might alienate potential or
existing customers.

What is Complementary Product Pricing?

Complementary Product pricing is a method in which one of the products is priced

to maximize the sales volume and which in turn stimulates the demand of other
product.

One product is priced low, just to cover the costs with little or no profit margin
while the other product is priced high with a very high profit margin. Both the
products are complementary products i.e use of one product is complemented by
the other. This strategy is basically followed to overcome the loss due to product’s
sale by the profit provided by the sales of the other complementary product.

For example Printer & cartridge. This strategy is successful because once you
have bought a printer; you are required to buy the complementary cartridge unless
you are willing to buy in a new printer itself. Also, Companies avoid competitors
selling ink for their printers by having unique cartridges.

Price Optimization

Multi-Product Pricing, also called “Portfolio Pricing” and “Category Pricing”,

offers a way to eliminate cannibalization and increase profitability without
sacrificing market share. In other words, you can get more profit from the same
customers.

“More Profit + Same Customers”

Scientific Up / Down Adjustments

Multi-Product Pricing works by making small, scientific, up/down price

adjustments across all the products in a portfolio.

The average price of the portfolio should remain about the same – this will ensure
customers don’t see a change in the value-for-price offered by your brand or store.
Maintaining the average price should also appease paranoid competitors who
worry that you are disrupting the market. The new portfolio prices are calculated
against the Willingness To Pay (WTP) of your customers.
The math works by ensuring the number of customers still buying the “up”
increased-price products outweigh the number of customers who switch to the
“down” decreased-price products.

Cannibalization is reduced because “premium” customers who are willing to pay

more won’t be tempted by the cheaper products. At the same time, “value”
customers who have a low Willingness To Pay (WTP) are given additional
options that encourage them to remain as customers.

Simple Example

Imagine you are selling red shirts and blue shirts for $100 each. About 75% of
your customers are buying the red shirts and 25% of customers are buying the
blue shirts. There are also a lot of other sellers that make up the Total Market Size
for shirts. If the shirts are costing you $80 then you are making a profit of $20,000
per month.

Multi-Product Pricing is then used to calculate the profit-maximizing prices for

each product across your portfolio.

After calculating the Willingness To Pay (WTP) of your customers, Multi-Product

Pricing determines that a small up/down price change to both shirts would
increase profitability.

Price Bundling & Nonlinear Pricing

Bundling
is a marketing practice that involves offering several different products for sale as
one combined product. Examples would include things like "combos" or value
meals at fast food restaurants (where a combination might include a burger, a
drink and a beverage) or the concession stand at a movie theater (where it might
include popcorn, soda and candy). Bundles are also common from cable
companies (their bundles include the basic service, hardware like the cable box,
access to specific features like packages of movies, sports and other specialty
programming, etc). It is a popular practice that can increase revenue for the seller
(by increasing sales) and provide increased satisfaction for the customer (who
enjoy any savings and the convenience that comes with having to evaluate a single
price).

Pure Bundling

is a type of bundling where the individual components that make up the bundle are
only available when purchased as a bundle – they are not available for purchase
separately. One example would be the cable company – you can choose different
bundles of services and channels, but you can't select the individual channels that
make up those bundles. Pure bundling is sometimes favored because it is seen as a
way to increase sales – to get the channel you really want you also have to pay for
a lot of channels you really don't care about. Because pure bundling also limits the
choices available to the consumer it can come under scrutiny and even be subject
to litigation.

Mixed Bundling

... an approach to bundling where the individual components that make up the
bundle are also available for purchase individually. Movie theater snacks and fast
food combos are examples of mixed bundling – you can purchase each item
individually, or together as part of the combo for a single price.

Pure bundling and mixed bundling are both examples of product bundling. The
big difference between pure and mixed bundling is that mixed bundling allows the
consumer to purchase the items separately while pure bundling does not.

Bundling offers a very powerful way to increase sales and also customer
satisfaction. Although unbundling has become very popular, especially in things
like flower delivery where perceived cost can be reduced with separate service
fees and delivery charges, there are many customers that prefer the convenience
that comes with bundled pricing.
 Watch the customers at a movie theater, where the bundled packages offer little if
any savings (almost always less than 5%). Customers love the bundles because
there is less thinking (they don't need to add up the prices in their heads) and
greater perceived value (they assume savings even when they aren't there).

More specifically mixed bundling is good, pure bundling more problematic.

Mixed bundling allows your customers more options, when they want them,
something they appreciate. Pure bundling can effectively force them to spend
more money, but does anyone really like dealing with the cable company? Unless
there are very few alternatives for your customers pure bundling is generally a
dangerous game.

But mixed bundling offers the best of both worlds. Customers are not trapped,
they have the ability to choose each individual item and you are not limiting their
options. At the same time you are offering them the convenience of a bundle of
products at a single price.

For optimal price bundling, Kindly follow the link:

https://theintactone.com/2020/01/19/determine-optimal-bundling-pricing/

Nonlinear pricing

1. Introduction
A nonlinear pricing schedule refers to any pricing structure where the total charges
payable by customers are not proportional to the quantity of their consumed ser-
vices. The most common form is quantity discount for the purchase of large vol-
umes. Several other forms of such pricing schemes exist across different industries.
The following examples show the ubiquitous nature of this pricing strategy.

1. Telecommunications Most long-distance providers charge customers

based on a combination of fixed fees (for access to the service) and per-
minute price for each minute of a long-distance call. Wireless companies
also charge customers in a similar manner for consumption of minutes
but typically include some free minutes of consumption, along with a ser-
vice plan.
2. Consumer packaged goods Quantity discounts are common in the con-
sumer pack- aged goods industry. Typically, the per-unit price declines
with package size. For instance, a recent search on Netgrocer.com
showed that an 8 oz can of original B & M baked beans cost $1.39,
which translates to $0.17/oz. A 16 oz can of the same baked beans cost
$2.19, which is $0.14/oz. Some past research such as Nason and Della
Bitta (1983) shows that consumers expect such quantity discounts.
 3. Electricity and water supply Utility companies also offer quantity dis -
counts. For instance, higher levels of consumption cost less for each
kilowatt of consumption. In addition, energy rates for business users are
different from those for residential users. Business users also incur vary-
ing rates based on peak versus off-peak electricity consumption.
4. Business-to-business transactions Many businesses offer quantity discounts to
their customers. For instance in the electricity industry, customers purchasing large
quan tities of power have a high utilization as well. A quantity discount acknowledges
the lower cost of idle capacity for such customers. Similar instances occur in the news-
paper advertising industry, where businesses that advertise with a high frequency get
charged at a lower rate per advertisement. See Dolan (1987) for a detailed discussion
of various aspects of quantity discounts.

5. Magazine subscriptions Most magazines offer a lower rate for a two- or three-year
subscription compared to the one-year subscription rate.

Reasons for nonlinear pricing

There are several reasons for firms to adopt a nonlinear pricing scheme. Here we
discuss a few of the salient ones.

Price discrimination Heterogeneity among customers is the primary reason to

implement a nonlinear pricing scheme. This pricing structure can be thought of as a
menu of quantities and corresponding charges. Each customer is expected to self- select
the quantity–charge combination that is most appealing to him.

1. Cost considerations Decreasing block pricing schemes such as quantity

discounts offer incentives for customers to stockpile and transfer the in -
ventory of units from the firm to the customer. If the inventory cost for a
firm is high, then such discounts offer a way of reducing its costs. Wilson
(1993, pp. 15–16) gives an example from the electric utilities industry. In
that industry, customers purchasing large quantities of power have a
high utilization as well. A quantity discount acknowledges the lower cost
of idle capacity for such customers.
The pricing scheme within the package delivery industry provides another il-
lustration of where the pricing scheme reflects cost considerations. Federal Ex-
press charges different rates depending on the weight of package and speed of
delivery.
2. Competitive pressures Competitive pressures lead firms to use innovative
nonlinear pricing schemes to entice customers. For instance, frequent
flier miles began with each airline trying to acquire and retain business
customers. Similarly, in the package delivery industry, many competitors
of Federal Express such as UPS offer competitive nonlinear pricing
schemes to draw customers.
The principles of price discrimination were introduced by Pigou (1920)
who distinguished between three basic forms of price discrimination:
●
First degree (Direct) discrimination where prices are based on the
purchasers’ willingness-to-pay.
 ●
Second degree (Indirect) discrimination where prices are based
on some observable characteristics of the purchase (e.g. volume),
which is correlated with the customer’s preferences.
●
Third degree (Semi-direct) discrimination where prices are based
on some observable characteristics of the buyer (e.g. geographic
location or age).

Five generic nonlinear pricing schemes

●
Bundling
●
Quantity discounts
●
Ramsey pricing
●
Quality differentiation
●
Priority pricing and efficient rationing

B UNDLING
Bundling is the most basic form of nonlinear pricing and indirect price discrimina-
tion which segments the market by offering commodities either separately or in a bun-
dle which is offered at a price below the sum prices of the components. There is a fine
line between bundling and “tying” which is illegal in the USA. Under tying, cus-
tomers are forced to buy one thing as a condition for being able to buy another pop-
ular or essential product or service. Companies often use tying as a mechanism to
monitor usage of the essential product, which will enable them to discriminate based
on usage. For instance IBM used to force their customers who bought IBM comput-
ers to buy only IBM punch cards. By controlling the price of the punch cards they
were effectively able to charge their computers different prices based on use. Similarly
Xerox was forcing their customer to use only Xerox toner in their copiers and more re-
cently HP was trying to force their customers to buy HP maintenance services for
their HP computers. These practices are now considered illegal.

QUANTITY DISCOUNTS
In order to analyze quantity discount strategies, we have to extend our concept of a de-
mand function to capture the divergence among customer types with regard to pur-
chasing of multiple units of a product. If we assume that all units are sold at the same
price, as in basic economic theory, we do not care if ten units are purchased by ten
different customers or by one customer.
R AMSEY PRICING
As mentioned in the introduction, Ramsey pricing is a form of semi-direct price dis-
crimination. Its purpose is to enforce a total profit constraint while incurring the least
social cost. It is presented here because, in spite of the different motivation and appar -
ent philosophical differences, the methodology used to derive Ramsey pricing and the
end results bear remarkable similarity to those presented in the previous section in de-
riving optimal volume discount schedules.
Here instead of differentiating among the demands for the first, second, and third . . .
unit of consumption the regulated monopoly seller (with the blessing of the regulator)
differentiates among the demand of different customer classes; say, commercial and
residential. This type of price discrimination was common in the old days when
AT&T had a monopoly over long distance phone service.

QUALITY DIFFERENTIATION

Pricing exogenous quality attributes

Quality differentiation in the context of nonlinear pricing is done through unbundling
quality attributes of products or services for which customers have heterogeneous
preferences, for the purpose of market segmentation and indirect price discrimination.
Typical unbundled attributes include product features, packaging, distribution chan-
nels, or delivery conditions such as time of use, class of service in airlines, speed of
delivery in mail service, bulk versus retail.
Price induced endogenous qualities
Differential quality of service can sometimes be created by inducing customers to
sort themselves through differential pricing in situations where quality is a ffected
by the demand, for example through congestion.

Rationing-based quality differentiation

When the supply of a product is limited by scarcity or limited capacity, it is possible to
use supply uncertainty as a mechanism for quality di fferentiation. Such an approach is
particularly useful when the demand function is such that using a single price will re-
sult in monopoly prices that underutilize available supply. This may occur when the
profit function as a function of supply quantity is non-monotone so that the monopoly
supplier may be induced to withhold available capacity.
Priority service pricing and efficient rationing
This pricing mechanism is a quality differentiation and enables an efficient ra-
tioning in situations where supply is both scarce and uncertain. It enables customers
to pay different prices based on the order in which they are served or probability of
getting the product. In the case of electricity supply, for instance, customers can
sign up for an option of being curtailed when supply is scarce in exchange for a dis-
count on their electricity bills. Another example of priority pricing is the practice of
the discount clothing store Filene’s Basement, which posts on each item a series of
increasing percentage discounts on the item and the date on which each discount
level will go into effect. Customers must trade off the option of a larger discount
against the probability that someone else will purchase the item they want.

What Is Price Skimming?

Price skimming is a product pricing strategy by which a firm charges the highest initial price that
customers will pay and then lowers it over time. As the demand of the first customers is satisfied
and competition enters the market, the firm lowers the price to attract another, more price-
sensitive segment of the population. The skimming strategy gets its name from "skimming"
successive layers of cream, or customer segments, as prices are lowered over time.

How Price Skimming Works

Price skimming is often used when a new type of product enters the market. The goal is to gather
as much revenue as possible while consumer demand is high and competition has not entered the
market. Once those goals are met, the original product creator can lower prices to attract more
cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering
the market. This stage generally occurs when sales volume begins to decrease at the highest price
the seller is able to charge, forcing them to lower the price to meet market demand.

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-
priced product to grab as much market share as possible. Generally, this technique is better-suited
for lower-cost items, such as basic household supplies, where price may be a driving factor in most
customers' production selections.

Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the
following contexts:

 There are enough prospective customers willing to buy the product at a high price.
 The high price does not attract competitors.
 Lowering the price would have only a minor effect on increasing sales volume and
reducing unit costs.
 The high price is interpreted as a sign of high quality.

When a new product enters the market, such as a new form of home technology, the price can
affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity.
This may help attract early adopters who are willing to spend more for a product and can also
provide useful word-of-mouth marketing campaigns.

Price Skimming Limits

Generally, the price skimming model is best used for a short period of time, allowing the early
adopter market to become saturated, but not alienating price-conscious buyers over the long term.
Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late,
leading to lost sales and most likely lost revenue.
Price skimming may also not be as effective for any competitor follow-up products. Since the initial
market of early adopters has been tapped, other buyers may not purchase a competing product at
a higher price without significant product improvements over the original.

What is a Markdown?
In business, a markdown refers to the practice of lowering a product’s price for the purpose
of accumulating sales. Markdowns shall not be confused with other related pricing
strategies like promotions and discounts since the price in markdown has been reduced
permanently. Calculating markdowns usually involves subtracting the actual selling price
from the original selling price.

For instance, you purchased a set of shirts with a price of $5 each and offered it in your
retail store for about $15. The problem is that the sales of these shirts turned out to be
lackluster, so to avoid loss of revenue, you decided to mark down their price to only $10.

Advantages of Markdowns
Markdowns are considered to be essential tools, especially for the retailing industry. It can
be used in a variety of ways that can save a company from constant problems regarding
product selling. If a company is on the verge of collapsing due to issues such as slow-moving
inventory and inability to provide informed customer decisions, price markdowns are
perhaps the best option that they can apply.

However, this doesn’t mean that markdowns must be taken as a last resort. In fact,
regardless of the current condition of a retail business, marking down the prices of specific
products can aid in clearing stocks so that they can be replaced with more popular items.
Moreover, cutting down the costs of your items can make them much more attractive for
buyers that are looking for some good bargains.
Markdowns can be implemented in a couple of ways: early markdown and late markdown.

Early Markdown
If a store is in urgent need of maintaining the flow of all products in the store for as fast as
possible, early markdowns can make short work of it. To understand how early markdown
works, here’s an example:
Supposed that you have a store that implemented a policy that all products that are
receiving low sales for quite some time must be marked down by 25 percent after three
weeks of staying on the shelf. Once that time threshold has been reached, the products are
then marked down by 50 percent if it remained unsold for seven weeks, and 75 percent
after eleven weeks.
This early markdown strategy tends to bring more positive results if your store regularly
receives high customer traffic because people will likely notice the gradual decrease in your
products. As a result, your store will be filled with more customers and, ultimately, more
purchases that lead to increased sales.

Buy-one-get-one-free (BOGO)

According to research from AMG, 66% of shoppers believe that BOGO is the most preferable
sales promotion type, with over 93% of them enjoys finding a BOGO deal in the past. BOGO
is widely popular amongst retailers nowadays due to its perceived value. Shoppers tend to
be more engaged in BOGO deals because of its concept that buying a single product gives
them the entitlement to own a product without any extra cost.
The word “free” is an extremely vague concept in business that can attract customers like a
magnet. But before marking down your products by BOGO deals, make sure that the
strategy you have will still be guided by your store’s overall pricing strategy.

Late Markdown
While early markdown takes advantage by overusing the markdown strategy itself, late
markdowns are for those who wanted to avoid lowering down the price of their products as
long as it’s necessary to do so.
Owners who use late markdowns tend to give their products a chance to attract customers
for a bit of time before marking down their products at a steep rate. Organizing clearance
sales is one good example of a late markdown. Late markdowns typically start with at least a
37 percent decrease in the original price. The main attraction of this type of markdown is
that it prompts the shoppers to plan their lists for the event and buy a bulk of your items at
once, potentially sweeping the stocks of your less popular products in a single sale.

How Markdowns Affect Customer Buying Decisions?

Many stores are practicing different markdown strategies in order to manipulate the buying
decisions of their customers to a certain extent. If a store announces to the public that
they’re going to mark down the price of some specific products, imagine how the customers
will respond.
Some might want to wait until the store gave the lowest price possible, while others prefer
buying the products in the first markdown because they’re afraid that it might be sold out
pretty soon. Another common trick for retailers who are more experienced in markdown
prices is that they deliberately price some items higher than their competitors. This way,
even if they often hold markdown sales, it gives the customers the impression that they’re
getting bargains on an expensive product.