(A) Short Type Questions
1. Giving a suitable example, explain the concept of the 'Buying Behaviour
Model'.
2. What is meant by contribution? How is it important in determining
profitability?
3. Define different types of mark-ups and explain differences between them.
4. What do you mean by targeted sales? Discuss relevant factors that affect it.
5. Describe briefly the current retail scenario in India. Which products
command the top position in retail at present?
6. Explain the concept of brand potential index with a suitable example.
7. Describe important parameters used for assessing the performance of a
retail store.
(B) Essay Type Questions
8. What is meant by pricing? Explain different types of pricing commonly
used in the retail business. Discuss different factors that affect pricing of
merchandising in the retail business.
9. What do you mean by merchandising? Describe its key elements. Describe
different roles of the merchandiser in the retail business.
(A) Short Type Questions
1. Giving a suitable example, explain the concept of the 'Buying Behaviour Model'.
ANS: The buyer behaviour model is a structured step-by-step process. Under the influence of marketing stimuli (product, price, place, and promotion) and environmental factors (economic, technological, political, cultural), a customer understands the need to make a purchase.
The decision-making process they undergo afte1ward is affected by their characteristics, such as their beliefs, values, and motivation, resulting in the final decision to either buy or not to buy.
1. Need recognition
At the first stage, the buyer recognizes that there is a need for a product or service. For instance, they might realize that, since their company is growing, manual e mail outreach is no longer effective, so they need an email automation solution.
2. Information search
After understanding the need for a product or se1vice, the buyer struts looking for information. They might obtain it from different sources (friends, commercials, mass media). For example, a prospect may strut browsing email automation solutions, read reviews, etc.
3. Evaluation of alternatives
Once all the necessary information has been gathered, the buyer struts to evaluate a choice. They might compare key features and pricing, looking for advantages of one tool over all others.
4. Purchase decision
After evaluation, the buyer makes a purchase decision. For example, they sta1t their free tlial or purchase a paid plan.
5. Post-purchase evaluation
After purchasing the product or service, the buyer assesses whether it has met their expectations. At this stage, they might also leave an online review about the purchase or share their feedback with subscribers, colleagues, or friends. Source: Inline Manual
There are cases, however, when some stages of the decision-making process are skipped. For example, the customer already knows a lot about a product and does not need to search for information. Another situation is when the buyer might see a product in the store and decide to buy it impulsively. Besides, there are situations when, after evaluating alternatives, the customer goes back to the information search step.
Buyer behavior analysis
To offer relevant products and services to the target audience, marketers should analyze what and how people buy. Companies adhere to several ways of monitoring consumer buying behavior:
Using computer software
Computer software provides companies with valuable information about the customers' purchase experience. This allows analyzing what products or services are preferable among ce1tain groups of buyers, how the customers' location influences their purchase habits, etc.
Analyzing customers' reviews
Another way of analyzing buyer behavior is to study the customer's feedback. Online reviews can often reveal more than just people's feelings about the purchase. They might also share some information about how they choose items or the way they prefer buying goods.
Conducting online surveys
Some companies also conduct online surveys, which gives them an opportunity to research the buyer behavior at any angle they need. Surveys allow requesting direct information about what people like to buy, what product qualities they value the most, what dete1mines their purchase decision, and so on.
The analysis of buyer behavior tendencies will help companies find the right marketing strategies to attract potential customers and convert them.
2. What is meant by contribution? How is it important in determining profitability?
ANS: Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs eq uals the profit earned.
Direct costs are any costs that vary directly witl1 revenues, such as the cost of mate1ials and commissions. For example, if a business has revenues of $1,000 and direct costs of $800, then it has a residual amount of $200 that can be contributed to the payment of fixed costs. This $200 amount is the contribution arising from operations.
Tue contribution concept is usually referred to as contribution margin, which is the residual amount divided by revenues. It is easier to evaluate contribution on a percentage basis, to see if there a1•e changes in the proportion of contribution to revenues over time.
Contribution should be calculated using the accrual basis of accounting, so that all costs related to revenues are recognized in the same pe1iod as the revenues. Othe1wise, the amount of expense recognized may incorrectly include costs not related to revenues, or not include costs that should be related to revenues.
How Contribution is Used
The contribution concept is useful for determining the lowest possible p1ice point at which products and services should be charged, and still cover all fixed costs. Thus, a detailed knowledge of contribution is useful in the following situations:
Pricing. Special pricing deals should be designed to yield some amount of contribution; otherwise a company is essentially losing money eve1y time it makes a sale. This is a pa1ticular concern when customers want to place large-volume orders at a low price.
Capital expenditures. Management can estimate how expenditures for fixed assets alter the amount of direct costs incurred, and how this impacts profits. For example, an expenditure for a robot can reduce direct labor costs, but increases fixed costs.
Budgeting. The management team can use estimates of sales, direct costs, and fixed costs to forecast profit levels in future periods.
A common outcome of contribution analysis is an increased understanding of the number of units of product that must be sold in order to support an incremental increase in fixed costs. This knowledge can be used to drive down fixed costs or increase the contribution margin on product sales, thereby fine-tuning profits.
Contribution is important in determining profitability:
Contribution is defined as the difference between sales value and variable cost of sales. It contributes towards fixed costs and profits. It is also equal to fixed cost plus profit. Profit is arrived at after deducting fixed cost from the contribution.
Since fixed costs remain unchanged, therefore, profit can be increased or decreased by changing contribution. If contribution comes down by Rs. X, the profit earned will also come down to the same extent. Suppose the contribution of a film is Rs. 10,000 and its fixed cost is Rs. 7,000, then its profit would be Rs. 3,000.
Let us assume further that the firm's contribution comes down to Rs. 9,000. This reduced contribution thus accounts for a reduction in the profitability of the firm to the same extent. Therefore, contribution and profit are directly related.
3. Define different types of mark-ups and explain differences between them.
ANS: Markup refers to the percentage of profits which the company derives during the period over cost price of the product sold by it, and the same is calculated by dividing total profits of the company of the period by the cost price of the product and then multiplying the resultant with l 00 to derive the markup percentage.
It may also be the difference between an investment or security's lowest current offering p1ice in contrast to the price charged to the customers, which is usually common among broker-dealers. Mark-up is an important tool for the retail business. It refers to the amount added to the cost price to determine the retail price. Mark-up can work as a good guiding mechanism once the retailer understands its working. The retailer comes to know the final selling price to consumer. This helps the retailer to make a decision about what mark-up percentage will give him a balance between the desired profit target and acceptance of the retail price by the consumer.
There are two methods of calculating the mark-up. It can be calculated on the cost price or on the retail price. Generally, the retailers of fashion items and depai1ment stores prefer to work with the second method. He/she does so because the merchandisers are more used to working with the retail sales figures for understanding the performance of one product or category vis-a-vis the other product or category.
The merchandising team in a big retail store has to work with different types of products within a product category. The merchandising team may have to work with different product mark-ups based on the target mark-ups for the financial year for their different products.
There are different types of mark-ups, namely the initial ma1•k-up, maintained ma1•kup and the cumulative mark-up.
Consumer Goods MarkUps: In this case, the cost price is increased by a certain ratio to arrive at the selling price after considering the profit margin.
Broker-Dealer MarkUps: When a dealer sells ce1tain security to a retail customer from his accom1t, his only form of compensation comes from the markup, which essentially stands to be the difference between the purchase price and the price at which the dealer sells the security to the retail investor.
Initial Mark-Up
This mark-up dete1mines the price at which the product-purchased at a ce1tain p1ice-would be sold to customers. The mark-up that is levied initially on products at the time received in the store is called initial mark-up. Initial mark-up is also called the planned mark-up. While determining initial mark-up, many expenses may have to be estimated based on the retailer's experience of other product categories or similar product categories.
Let us first define the initial mark-up as shown below:
Initial Mark-Up Percentage = (Percentage Expenses+ Percentage Profit+ Percentage Reductions + Percentage Alteration Expenses -Percentage Cash Discounts)+ (Percentage Sales + Percentage Reduction)
Maintained Mark-Up
As explained earlier in the section on initial mark-up, it is decided, on the basis of certain estimated expenditures, to calculate planned operating expenses, planned profit and planned reduction. These help to derive the initial mark-up percentage for calculating the retail or MRP of the items in a given category. Thus, there is a need to calculate the actual mark-up or the maintained mark-up obtained at the end of the operation cycle (say, at the end of six months to one year). This is derived by finding the actual expenses incurred under various heads during a given pe1iod for which the maintained mark-up is to be calculated. Thus, we can define 'Maintained Mark-up' as the actual mark-up derived on the basis of actual expenses and results obtained at the end of the business cycle, season or the financial year.
Maintained Mark-up Per cent = (Net Sales Value - Gross Cost of Merchandise Sold)+- Net Sales Value
Cumulative Mark-Up
The cumulative mark-up is the average mark-up earned on the merchandise sold during a given season or over a period of time. Thus for calculating cumulative markup we have to start with the opening inventory value both at retail price and cost price, Afte1wards as the season proceeds we have to keep on adding gross new pm-chases (i.e. purchases plus other expenses like freight etc.) made during the given period, and taking effect of the same in the total retail merchandise. The retail merchandise value will also get affected if there is any change in mark-up policy or markdowns effected during the season or given period. Hence, we can define cumulative mark-up as the difference between the total retail value of merchandise sold during the season less total cost of merchandise sold.
Thus, Cumulative Mark-Up Per Cent= Cumulative Mark-Up Value+ Cumulative Retail Value
4. What do you mean by targeted s ales? Discuss relevant factors that affect it.
ANS: Targeted selling, also known as Target Account Selling (TAS), is a B2B sales process that consists of developing hyper customized nurturing, engaging, and long-term relationships with decision-makers within companies you've identified as highly qualified targets.
The main goal behind TAS is to drive "high-ticket" sales using a set of personalized touchpoints throughout the buying journey.
Here's what TAS looks like in real life:
Let's assume ACME Corp sells recruitment software.
Their marketing, sales, and customer success departments work hand-in-hand to dete1mine a set of characteristics that define a "best-fit" customer for the business.
A more appropriate term for "best-fit customer" here is Ideal Customer Profile (ICP).
So, instead of jumping off and reaching out to the HR person within their target company, ACME Corp's sales team then decides to take a 3-step approach to hit their TAS goal out of the park.
Build a list of the best-fit customers (aka the Target Account List). Here, the emphasis is put on the quality aspect of the list rather than quantity, as suggested by the traditional sales playbook. ACME Corp's list will include a range of highly qualified target accounts along with a list of key decision-makers within these accounts.
Invest time and energy in research. TI1e more you can zero in on who your Decision-Making Unit (DMU) or Buying Committee is, the better. You need to have as much information about each account as possible to nail the personalization part of your TAS strategy. Here, ACME Corp's research will not be limited to just one lead (the right person); instead, it will be a group of people who make up the buying committee (the right people).
Personalized outreach. There's no T AS without personalization. Here, you need to leverage all the data you've collected during the "research" stage. This will help ACME Carp's sales team target high-value accounts with a super-customized and ongoing experience while ensuring the appropriate resources are targeted towards the accounts with the highest potential value.
Internal factors
The internal factors originate within the company, and it's the company that has control over them.
These factors include:
1. The product
One of the top factors that can determine the business' sales growth is the capital itself. If the product is satisfying customers' needs at reasonable p1ices, it will sell. The business should ensure that they maintain the quality of the product and add or modify the functions according to the everchanging technology and the vruying tastes and preferences of the customers.
2. Marketing
The marketing strategy of an organization plays a significant role when it comes to sales. Marketing strategy is all about selecting the con-ect target audience, positioning the brand, proper p1icing, etc. when you do all these con-ectly, it can make a significant effect on the sales of a product.
Again, the qualifications and experience of the company's marketing team plays a cmcial role in winning more and more consumers. Creating well-defined marketing strategies, promotion ideas, using the right sales enablement platforms, and staying updated with cutTent market trends can help the organization to achieve higher sales volume.
3. Availability of finance
Availability of adequate capital at c1itical moments, like when introducing new products, dming an expensive campaign, or when switching your manufacturing technology to a more sophisticated one, require a significant amount of money. If the business has the money at its disposal, it can be easy to introduce newer business methods that cru1 positively affect sales.
4. Technology and automation
Any business that wants to achieve higher sales growth must upgrade their technology. Investing in n ewer, smaiter technology and automating their business processes like electronic payment se1vices, automated order booking, or electronically addressing the customers' grievances can generate an excellent market base and increase sales. Store o,mers should consider implementing an inventory management software to manage their stock and in the right way.
5. Availability of suppliers
It's cmcial to build and maintain a good network of suppliers. The availability of raw materials, consumables, and components can affect the sale of a finished product. Getting raw materials at the 1ight time ease the rnrumfacturing process and the delive1y of the right quality product in tl1e market.
External factors
The external factors are competition, political, economic, and technological forces that affect sales. The company has no control over them, but they can develop some strategies to respond to them. The external factors include:
1. Economic cycle
The economy of any country goes through vrufous cycles like growth, expansion, and recession. The demand for a product depends on the economic cycle that the country is currently experiencing. In the growth phase, the demand is high and customers have more disposable income, while in a recession phase, money is reduced as well as the demand and supply of a product. Therefore, the economic cycle has an impact on sales.
2. Consumers' expectations
Consumers' tastes, preferences and expectations with regards to p1ices, new features, packaging, and delive1y keep on changing, making a significant impact on demand for a product. The company has no control over these expectations; it can only change its production and marketing methods to meet its consumers' needs.
3. Laws a nd regulations
Any business has to comply with the demands of laws and regulations of that pai1icular country where it operates. Pronouncements of laws by the government regarding the legality of the product, its minimum pricing requirements, and taxes can affect sales of that paiticular product. Moreover, advertising restrictions can also affect sales. 4. Competition
The market position of the competitors' products plays an impo11ant role in dete1mining the sales of a particular business' product. If the competitor has a reputable brand controlling a significant market share, its presence may negatively affect the sales of the 1ival's products.
5. Des cribe briefly the current retail scenario in India. Which products command the top position in retail a t present?
ANS: The Indian retail market is largely unorganized. However, the organised Indian retail maiket has increased by-50% between 2012-2020 to its cunent value of nearly 12% of total retail. The modem Ind ian retail industry is expected to grow at a 15 % CAGR to reach 18% by 2025. Cunently the fashion sector in India commands a lion's share in the country's organized retail sector. This is in line with the retail evolution in other pait of the world, where fashion led the retail development in the early stages of evolution.
This was followed by other categories like Food & Grocery, Durable etc. The domestic apparel & textile industry in India contributes 2% to the country's GDP, 7% of industry output in value terms, The share of textile, apparel and handicrafts in India's total exports was 11.4% in 2020-21. India holds 4 % share of the global trade in textiles and apparel. India is the 6th largest exp01ter of textiles and apparel in the world.
India is one of the largest producers of cotton and jute in the world. India is also the 2nd lai•gest producer of silk in the world and 95% of the world's hand-woven fab1ic comes from India. The Indian technical textiles segment is estimated at $16 bn, approximately 6% of the global market. The textiles and apparel industiy in India is the 2nd largest employer in the counhy providing direct employment to 45 million people and 100 million people in allied industries.
India has also become the second-largest manufacturer of PPE in the world. More than 600 companies in India ai•e certified to produce PPEs today, whose global market worth is expected to be over $92.5 bn by 2025, up from $52.7 bn in 2019.
FDI in the textiles and apparel industry in India has reached up to $3.9 bn till December 2021 India's exports of textiles and apparel are expected to reach $100 bn in the next 5 yeai•s, growing at a CAGR of 11 %
To double the Indian textile and appai•el industry size to $190 bn by 2025-26, 7 mega textile parks have been planned
The Indian technical textiles market was estimated at $17 .6 bn in 2020-21 and grew at a CAGR of 10% since 2015-16
The domestic technical textile market for synthetic polymer was valued at $7 .1 bn in 2020 and is projected to reach $11.6 bn by 2027, growing at a CAGR of 7 .2%, while the technical textile market for wovens is expected to grow at a CAGR of 7.4% to $15.7 bn by 2027, up from $9.5 bn in 2020
India has a share of 5% of the global trade in textiles and apparel
India has been a manufacturing hub for the textile and apparel industry for years, thanks to its rich textile heritage, craftsmanship and cheap labour. The industty is c1itical in terms of income and employment generation, contributing to 5 percent of India's current GDP. Over the past decade, India's consumption with regards to fashion has also steadily increased.
Growing spending power of the middle class and the rise of fashion consciousness amongst the youth has propelled the demand in the countty. With US, Europe and China nearing saturation points, India's ever growing desire for fashion is drawing the world's attention.
In the past few years, several international brands have entered the market. Simultaneously, Indian fashion companies have also been expanding their reach rapidly. Newer brands and business models are cropping up in the country. Due to a tech-savvy con sumer group and booming internet penetration, fashion 1s now accessible to a much wider audience.
Top companies like Reliance, Shoppers Stop and Anita Dongre in the countly are also adopting sustainable methods to grow. Menswear giant Raymond is not far behind as it encourages the use of khadi cloth.
As much as the modem Indian urban consumer is influenced by westem t1ends, the majority of the customer base resonates with the marketing tactics used by local players. Tier II and tier III cities have access to multibrand stores like Reliance Trends, Pantaloons, Central and many others, b1inging trendy clothing to a large portion of the population.
6. Explain the concept of brand potential index with a suitable example.
ANS: The brand potential index (BPI) refers to the relationship between a brands development index, and it's market development index for a patticular market. Users of BPI use it to forecast the future sales and to also Oiganize for future adve1tising budget allocation. Most companies both big and small use the BPI as their brand management and development plans. The brand potential index helps in identifying the determinants of brand strength. It makes a comparison between the exact and prospective number of customers in a specific market region, to the percentage of all customers in the whole countty. With this, business personnel is able to identify where many of their brands customers reside. They can then tailor their marketing, advertising, and sales effo1ts towards that direction so as to increase their sales, and maximize their profits. Note that users of the BPI focus on a limited geog raphic area. This is because it enables them to get a better concept of how ce1tain regions will feature into their f uture sales, adve1tising, and marketing plans.
Calculating the Brand Potential Index
To be able to find out the BPI, you must use a brands market development and its brand development index. A market development index is a tool used in business development to detennine where exactly will the market penetration happens. This is usually expressed as a ratio between the exact numbers of customers versus potential customers in a particular market zone.
An Example of the Brand Potential Index (BPI):
Assume that a certain brand gets 10% of its sales in a region that is home to 20% of the counhys population. In this case, that regions brand development index becomes the product of l0xl00/20 or 50%. Also, if that particular region their total number of customers is 20,000, whereas the number of potential customers is 200,000, then the market development index results will be as follows; 20,000/200,000 or 0.1. TI1e relationship behveen the two factors is what makes up the brand potential index.
Metrics for Measuring Brand Potential Index
It is w01th noting that the residual equity dete1mines the brands value. You will be able to detennine the bonds value by relating it to what it is associated with. This may include things such as depth and competitiveness of the association, performance, and whether they are w01th. There are different metlics used to give an ove1view of the cunent brand worth. They are measures used to assess the future brands perfo1mance, and whether there is an opportunity for fmther investment.
They are as follows:
The popularity of the brand
Through popula1ity, you are able to know the performance of your brand strength and its future market position. It is, therefore, important to assess how much your brand is talked about by the consmners. How passionate the consumers are about your brand. You will also have to assess the popularity of your future brand plans. Find out if and why the customers will be excited about what you are planning to bring to the market. Why they will be glad to share infonnation about the brand with other potential consumers. All these will enable you to dete1mine the brands strength, and also decide whether to invest in it or not.
Brand performance
Brand perfo1mance is represented by what a number of people talk about regarding your brand. The talk can be about the market stocks, top-line sales, or profits generated from the capital. Therefore, to be able to assess the BPI of your brand, you need to know what has driven your brands perfonnance up to date, and conclusions you can draw regarding its performance in the futme. Note that a sti•ong brand must go beyond what the market delivers. You should, therefore, work to ensure that your brand performance smpasses the average market g rowth. Also, the brand should also be able to resist the market dynamics such as technology changes, customers reactions, and new ideas. If it can perfo1m well through such changes, then, it is an indication that your brand is doing much better in the market. Another indicator that your brands perf 01mance is good, is when you are able to successfully maintain its price beyond the market average. Steady p1ices when other competitors are losing margin, it is a sign that your brand is above market strength, and can clearly tell you about its futme performance.
The Intensity of the brand (brand ownership)
Another way to measure the BPI of your brand is to assess the loyalty of consmners towards it. Find out to what extreme do they love and buy your brand. Do an evaluation of your brands ability to grab a good share of consumers life, and if you can be able to maintain this better than your competitors. If more people love and are willing to buy, and use your brand, it means there is good potential for your brands future growth. Using this performance metric, you will be able to channel your budgets sti•ictly at brands with good chances of market performance.
Brand Association
A brand is able to generate value if people associate with it. You need to, therefore, find out what is it that makes people like being associated with your brand. What is the feeling like whenever they use your brand and where exactly do these people live? These aspects of the brand association will enable you to focus yom marketing effo1ts to powerful spo1ts where you ca11 establish and grow your brand fast.
Brand coverage
Brand coverage is another way you can measure the strength of your brand. Where you want your brand to reach, the number of people willing to buy and use your brand is a strong dete1minant of your brands strength. For this reason, you need to look for dish"ibution plans where consumers have similar ambitions and the same speed of change as yours. For instance, you can target a population where you want your brand to cover, but firsô€…™ you must ensure that your target population has a desi1e to be associated with your brand. This way, you will be able to successfully expand your brand coverage and at the same time, ensure its market strength.
Uses of the Brand Potential Index
The brand potential index can be used to predict future sal es of a paiticular p roduct. It helps in detennining its market strength in the fot ure. This way, you can able to know whether or not to invest in the product.
BPI is can be used to determine how you budget and allocate funds for advertisement.
It can be used to identify the main drivers with the greatest influence on brand strength. This will help you to direct investment in this direction so that you can maximize yom capital.
Limitations of the Brand Potential Index
The process of brand identity structming is difficult. It requires extensive market research, marketing audit, and usability among others. This may be complex where a firm h as a range of products and se1vices that may need such research. The BPI is also expensive to design. It is time consuming where you have to create and design. h1 this case, you may be forced to contract a consultant to do the designing for you of which you will pay a considerably good amount of money. Due to market dynamics such as fnm expansion, change in consumer preference, product or se1vices, the BPI may be difficult to maintain.
7. Describe important parameters used for assessing the performance of a retail store.
ANS: 1. Number of Customers (Customer Traffic) A number of customers are the most straightfo1ward metric for your retail business. Even a child gets that the place that's crowding with customers must be doing good. You normally don't go to an empty restaurant, don't you?
Customers are the sole source of money for your retail business. As Karl Maix had it, hwnan work adds real value to land and capital. For a retailer, the more potential customers you get into your shop, the more money they'll likely leave behind.
2. Effecthity (Retail Conversion Rate)
Alright, we already had to distinguish retail visitors and retail customers. Some visitor doesn't buy anything. It's rather unlikely in a big shopping mall, but very common in specialty stores or luxury boutiques.
In e-commerce, we're talking about customer conversion ratio. This shows how many visitors a retailer turns into a buyer. It's easy to calculate if you aheady know your retail customer traffic.
Just take the number of retail transactions and divide in with the number of people who visited your store. And multiply by 100, if you want a percentage
Customer conversion ratio = No of transactions / Customer traffic x l 00
The effectivity depends greatly on the type ofretail business you're in. If you 're selling clothing and apparel in a brick-and-mortai• retail store, your likely customer transaction effectivity is 18-25%. This means one out of five customers buys something. If you're lucky, one out of four. It's never 100%. Even ice cream restaurant on a hot day does not conve1t 100%, as one of your customers have left his wallet at home! If it's brand new luxury cars, the conversion rate is m icroscopic by nature.
According to Industry Retailer, the average conversion rate for e-commerce sites is about 2-3%. Sure it differs from industry to industry, but don't feel too relieved if you're in that range. To succeed, you need to be better than others. Just use common sense and browse the Intemet to find benchmarks suitable to your retail business, i.e. what you're selling.
3. Average Sale (Average purchase value)
Alright, now you have two essential retail metrics to watch. Going more in depth, you'll be interested in your average sale value. How money dollars, pound, yen or euros your average customer spends in checkout? How has it changed over time?
So you have been working on getting more people into your store, and tried to make them buy each time they visit your store? Calculate the average sale, also called average order v alue. It's the moment t:mth in many cases.
Even a business with unsophisticated technology can very easily measure the average sale, but surprisingly they don't. It is measured by dividing the total sales value ($) by the number of transactions. Keep in mind the same customer could initiate multiple transactions; AOV detennines sales per order, not sales per customer.
Average sales order value = Total sales value / Number of transactions
This is far the most powerful and the most effective measure of the productivity of the sales system. You get more people to your retail store, they do actually buy more often, but the order average is falling? Watch out, you might be pushing the well-paying customer away. More visitors means more hassle, you need more sales associates and your store might become too crowded.
On the other hand, it can be just about OK if the average sale order value is not growing. In many retail businesses, it is not possible to sell more expensive stuff or buy more at the time.
The average purchasing power of the society does have limits, and so does the rationally acceptable price level. You cannot charge 1000 bucks for a T-shilt. So sometimes the only thing you can do, is to get more customers and more transactions, even if the average value of a purchase is falling.
4. Items per purchase (Size of an average shopping cart)
In the retail business, especially b1ick-and-mortar outlet, a sold item more roughly estimates for added revenue. It also brings along handling costs like inventory caiTying costs, transaction time and salary of sales associates, needs for retail space.
5. Gross margin (Sales profit before costs)
Gross margin is the difference between revenue and cost before accounting for ce1tain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold. It's rather basic math for business to know how much it took you to acquire or produce the thing you're selling.
Product price when sold= Product acquiring or making price+ Gross margin
Gross margin is what a business lives on. This has to cover all the costs of selling and production, including salaries, taxes, rent, transp01t, and any other costs. If your business has debts to pay, these also must be covered by the margin, otherwise, it's impossible to survive.
Conclusions
There are plenty more indicators a retail business owner and manager can monitor. Erply is working in close cooperation with many large retail companies, including multinationals, and what we see is that successful management keeps day-to-day watch on a limited set of retail metrics.
(B) Essay Type Questions
8. What is meant by pricing? Explain different types of pricing commonly used in the retail business. Discuss different factors that affect pricing of merchandising in the retail business.
ANS: PRICING: The price at which the product is sold to the end customer is called the retail price of the product. Retail price is the summation of the manufacturing cost and all the costs that retailers incur at the time of charging the customer.
types of pricing commonly used in the retail business:
1. Geographical Pricing:
It involves the company in deciding how to price its products to customers located in different patts of the country. Should the company charge higher prices to distant customers to cover the higher transportation costs and thereby risk losing their business? Or should the company charge the same to all customers regardless of location. Companies have evolved different approach to geographical pricing strategies.
They are:
(a) FOB Origin Pricing - It means that the goods ru:e placed free on boru:d a carrier, which point the title and responsibility passes to the customer who pay the freight from the factory.
(b) Unifor m Delivered Pricing - Here the company charges the same p1ice plus freight to all customers regardless of their location. It is called 'Postage stamp pricing'. It is just opposite of FOB Origin pricing.
( c) Zone pricing- It falls between FOB origin pricing and unifo1m delivered pricing. The company establishes two 01 more zones. All customers within a zone pay the same total price and this price is higher in more distant zones.
(d) Basing Point Pricing- It allows the seller to designate some city as a basing point and charge all customers the freight cost from that city to the customer location regardless of the city from which the goods are actually shipped. If all the sellers used the same basing - point city, delivered prices would be the san1e for all customers, and price competition would be eliminated.
( e) Freight Absorption Pricing - The seller who is anxious to do business with a particular customer or geographical area might absorb all or part of the actual freight charges in order to get the business. Sellers might reason that if they can get more business their advantage costs will fall and more than compensate for the extra freight costs. Freight abso1ption pricing is used for market penetration and also to hold on to increasingly competitive markets.
2. Price Discounts and Allowances:
Most companies will modify their basic p1ice to reward customers for ce1tain acts, such as early payment, volume purchases and off-season buying. These p1ice adjustments called discount and allowances.
(a) Cash Discounts -A cash d iscount is a price reduction to buyers who pay their bills promptly.
(b) Quantity Discounts - A quantity discount is a price reduction to buyers who buy large volumes.
(c) Functional Discounts - Functional Discounts (Trade Discounts) are offered by the manufacturer to trade channel members if they perfonn certain functions such as selling, storing and record keeping.
( d) Seasonal Discounts - A seasonal discount is a price reduction who buys merchandise or services out of season. Seasonal discounts allow the seller to maintain steadier production during the year.
(e) Allowances -Allowances are other types of reductions from the list price. For example, trade in allowances is price reductions granted for turning in an old item when buying a new one. Promotional allowances ai-e payments or price reduction to reward dealers for participating in adve1tising and sales-support programme.
3. Promotional Pricing:
Under certain circumstances, companies will temporarily price their products below the list price and sometimes even below cost.
Promotional Pricing takes several forms:
(a) Special Event Pricing - This is used by the seller in c e1tain special events to draw in more customers.
(b) Cash Rebates - Consumers are offered cash rebates to get them to buy the manufacturer's product within a specified time period. The rebate can help manufacturer clear inventories without having to cut the list price.
(c) Low Interest Financing - This is another tool for stimulating sales without lowering the p1ice. It is mostly used for costly items.
(d) Psychological Discounting - This involves putting an a1tificially high price on a product and then offering it as substantial savings. For example "was 299 now 249".
The difficulty with promotional pricing tactics is that if they work, competitors copy them rapidly and they loose their effectiveness for the individual company. If they do not work, they waste company money that could have been put into longer impact marketing tools, such as building up product quality and service and improving the product image through advertising.
4. Discriminatory Pricing:
Companies will often modify their basic price to accommodate d ifferences in customers, products, locations and so on. Discriminato1y pricing describes the situation where the company sells a product or service at two or more p1ices that do not reflect a proportional difference in costs.
Discriminatory pricing takes several forms:
(a) Customer Segment Pricing - Here different customer groups are charged different prices for the same product or serv ice. For example, Zoo charges a lower admission fee to student. (b) Image Pricing - Some companies will price the same product at two different levels based on image differences. Thus, a perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at Rs.65/bottle and in a fancier bottle with a different name and image and price it as Rs.105/bottle.
(c) Location Pricing - Mere different locations are priced differently even though the cost of offering each location is the same. A theatre varies its seat prices because of viewer's preferences for certain locations.
factors that affect pricing of merchandising in the retail business:
Internal Factors Internal factors that influence retail prices include the following - Manufacturing Cost - The retail company considers both, fixed and variable costs of manufacturing the product. The fixed costs does not vary depending upon the production volume. For example, property tax. The variable costs include varying costs of raw material and costs depending upon volume of production. For example, labor.
The Predetermined Objectives - The objective of the retail company varies with time and market situations. If the objective is to increase return on investment, then the company may charge a higher price. If the objective is to increase market shaJe, then it may charge a lower price.
Image of the Fi1m - The retail company may consider its own image in the market. For example, companies with large goodwill such as Procter & Gamble can demand a higher price for their products.
Product Status - The stage at which the product is in its product life cycle detennines its price. At the time of introducing the product in the market, the company may charge lower price for it to attract new customers. Vi'hen the product is accepted and established in the market, the company increases the price.
Promotional Activity - If the company is spending high cost on advertising and sales promotion, then it keeps product p1ice high in order to recover the cost of investments.
External Factors
External prices that influence retail prices include the following -
Competition - In case of high competition, the prices may be set low to face the competition effectively, and if there is less competition, the prices may be kept high.
Buying Power of Consumers - The sensitivity of the customer towards price variation and purchasing power of the customer contribute to setting price.
Government Policies - Government rules and regulation about manufacturing and a1mouncement of administered prices can increase the price of product.
Market Conditions - If market is under recession, the consumers buying pattern changes. To modify their buying behavior, the product prices are set less.
Levels of Channels Involved - The retailer has to consider number of channels involved from manufacturing to retail and their expectations. The deeper the level of channels, the higher would be the product prices.
9. What do you mean by merchand ising? Describe its key elements. Describe different roles of the merchandiser in the retail business.
ANS: Merchandising refers to the marketing and sales approach for promoting goods at retail outlets and influencing consumer behavior, thus boosting sales. It constitutes a vital pait of retail management and makes products visually appealing to buyers at a b1ick-and-mo11ar or online store.
The in-store and on-store promotional strategy may consider display designs, free samples, discounts, coupons, points-of-sale, quantity, pricing, etc. It, therefore, ensures increased sales by making items on display presentable. Essentially, the concept entails using creativity and innovation to display and sell items to encourage customers to purchase. As a result, companies can meet their sales targets with ease.
KEY ELEMENTS:
Review
The review process consists of two separate activities. Firstly we can-y out a Pre-Season Review of performance history to identify opportunities and problems. Secondly we "normalise" it. Normalisation is the process of looking at history and ironing out the "bumps" to make it useful as a basis for planning.
Financial Merchandise Planning
The first element in the merchandise plan is the Strategic Plan. This is nonnally high level, with pe1haps a five year timescale. It is used to set the critical success factors for merchandising in tenns of sales, margins & stocks. Next we would create a Channel Sales Budget. This would allow us to take into account the effect of new channels, new stores, closures and refits. Once complete we would create a Category Level Margin Plan. Here we are creating a weekly version of the strategic plan at category level for sales, margins and markdowns.
We are now staiting to get input from the individ ual merchandisers, and gap analysis between these plans and the strategic plan will ensure that we stay on course. At the saine level we create a Category Level Weekly Sales, Stock & Intake Plan. It is here that we create our Open to Buy,
normally the fi st significant win in the implementation of a planning system. These categmy level plans create the box within which the range plan will be created
Range Planning
We begin here with the Assortment Plan. In this plan we break down the goals of the merchandise plan into specific lines, or sometimes SKUs. The system should be capable of extending the results so that we can see the effect on overall margin mix, for example, of a change in cost price of an item.
Once the assortment plan is unde1way we can strut Distribution Planning. The lines that we plan ai•e here given a distribution profile. From this we should be able to see both which stores a line is ranged to, and which lines a given store will receive. The link between available physical space and ranging done here is a key detenninant of merchandise performance.
In the ideal world we would now create a Line Level Weekly Sales, Stock & Intake Plan This would be the category level W.S.S.I., broken down by line to provide a detailed forecast of sales and stock requirements. However, volume & time constraints means that this may be for key items only.
At a basic level this provides us with the means to monitor and react to consumer demand
At a more sophisticated level this provides us with the hard cmTency that can make efficient consumer response systems function effectively. The advent of e-comnerce has increased the value and importance of line level forecasts shared with our suppliers.
There is another so1t of asso1tment plai1 emerging now. This is the Graphical Range Plan. TI1is s01t of plan moves out of the purely numeric type of planning that has been used up until now and starts to allow the range to be put together in a visual way. Typically digitally stored images are manipulated into collage type storyboards.
Space Planning
Space planning systems can be split into two types - numeric and visual. Numeric planning systems simply allow users to take account of space available and to calculate ratios like return on space. Visual systems allow users to create 3 dimensional walk-through models of the stores and to preview the look of a store once ranging decisions have been made.
different roles of the merchandiser in the retail business:
Merchandisers are responsible for everything that happens to a product from the moment it is delivered to the store to the moment a shopper picks it up off the shelf. They monitor product appearance and supply in various stores tln•oughout their designated geographic area. By working closely with both suppliers, retailers, and manufacturers, they make certain that the promotion of specific products will increase sales over a period oftime.
Planning:
Though the merchandisers may not be directly involved in the actual purchase of merchandise, they formulate the policies for the areas in which they are responsible. Forecasting sales for the fo1thcoming budget period is required and this involves estimating consumer demand and the impact of changes in the retail environment. The sales forecasts are then translated into b udgets to help the buyers work within the financial guidelines.
Directing:
Guiding and training buyers as and when the need mises is also function of the merchandiser. Many a times, the buyers have to be guided to take additional markdowns for products which may not be doing to well in the stores. Inspiring commitment and perfonnance in the pait of the buyers 1s necessary.
Coordinating:
Usually, merchandise managers supe1vise the work of more than one buyer, hence they need to coordinate the buying effort in tenns of how well it fits in with the store image and with the other products being b ought by other buyers.
Controlling:
Assessing not only the merchandise performance, but also the buyer's performance is part of the merchandise manager's job. Buying performance may be evaluated on the basis of net sales maintained mark up percentages, mark down percentages, gross margin percentages and stock tum. This is necessa1y to provide control and maintain high performance results.
Typically, the role of a divisional merchandise manager, immaterial of the size of the retail organization, would involve the following functions:
1) Forecasting sales for the forthcoming budget period: This involves estimating consumer demand and the impact of changes in tl1e retail environment.
2) Translating the sales forecast into inventory levels in terms of mpees. To do this effectively, the DMM needs to understands and provide for the inventory levels that would be needed to achieve of sales
3) Inspiring commitment and perfo1mance on the part of the merchandisers and buyers: Typically, as divisional merchandise managers are senior within the organization, it is believed that they can guide the merchandisers in tenns of vendor selection, merchandise lines that can be developed and fuhire trends.
4) Assessing not only the merchandise performance but also the buyer's performance in order to provide control and maintain high performance results.
