Break even sales analysis

Break even calculation Mark down Mark down calculation Types of markdown Optimizing Markdown Decisions Merchandising Optimization Software Variable Pricing and Price Discrimination Pricing strategies

How retailers set prices on the basis of the merchandise cost and desired maintained margin How retailers adjust prices over time Markdowns and for different consumer segment Variable Pricing

break-even analysis
It is a useful analytical tool for making these assessment is called break-even analysis An analysis that determines on the basis of consideration of fixed and variable cost, how much merchandise needs to be sold to achieve a break-even (zero) point

Break-even Analysis
Break-even sales to cover a target profit Break-even Volume for a new product, product line or department Break even sales change needed to cover a price change

Break-even Analysis

Break-even Analysis

Break-even Analysis
If P/V ratio is given then profit/ PV ratio line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

Margin of Safety
Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point. margin of safety = (current output breakeven output) margin of safety% = (current output breakeven output)/current output x 100

Break-even Quantity =

Total Fixed Cost Actual Unit Sales Price- Unit Variab

Break-even calculation
A company is launching a new label. The cost of developing the same is $700,000 including salaries for design team and testing the product Since these costs do not change with the quantity of product produced , its called Fixed cost Variable cost is $5 Per Unit Selling Price is $12

Break-even Calculation
Break-even = Fixed cost Actual unit S.P- Unit Variable cost

Break even Quantity = $ 700,000/ ( $12-$5) = 100,000 bags

Brea-even Analysis
The company needs to sell 10,000 units to break-even or make zero profit For additional unit sold, it will make a profit of $7

Break-even and profits

Assume that the company wants to make a profit of $100,000 the break-even Quantity: Break even Quantity= ($700,000+ $100,000) ($12-$5) = 114,286 units

Impact of price change on breakeven

How much unit sales would have to increase to make a profit from a price cut Or how much sales would have to decline to make price increase unprofitable . How many units does the company need to sell to break even if it lowers its Selling price by 16.7% from $12 to $10

Impact of price change on breakeven

Break even = ($70,000+$100,00) ($10-$5) = 160,000 units

What is Markdown?
Markdowns are price reductions or discounts from initial retail price

 How retailers take markdowns How they optimize markdown decisions How they reduce the amount of markdowns by working with the vendors (SCM and Inventory Management) How they liquidate markdown merchandise

Reasons for Taking Markdowns

1. Clearance: dispose merchandise 2. Promotional : Generate Sales

Clearance Markdowns
1. When merchandise is selling at a slower rate than planned ( resulting in excess stock at the end of the season) 2. The product is priced higher than the competitor's goods

 Markdowns are a part of the cost of doing business and buyer plans it Bull Whip effect : to avoid Stocking out of a popular merchandise which is detrimental to the retailers image (esp. in apparel industry.)

Buyer aims at:

1. Not to minimize markdown . If markdown is too low, 2. Buyer is pricing the merchandise too low 3. Not purchasing enoug merchandise 4. Not taking enough risks with the merchandise being purchased

 Hence buyers set the initial Markup Price high enough so that even after markdown and other reductions being done, the planned maintained markup is achieved

Promotional Markdowns
Promote merchandise Increase sales Increase customer traffic flow Plan promotions with special markdowns for holidays, festival, events etc. And overall promotional programmes Increase sale of supplementary products

Optimizing Markdown Decisions

On the basis of weekly sale through percentages falling below a certain level On the basis of how long the merchandise has been stored in the store: have slabs for markdowns eg. 20% after 8 weeks, 30% after 12 weeks, 50% after 16 weeks. This rule- based approach is limited in use as it does not consider the sales generated by the merchandise at different prices

Merchandising Optimization Software

It monitors merchandise sales and prices Determines optimal / most profitable price and timing for markdowns It works on continually updating its pricing forecast on the basis of sales throughout the season and factoring in the differences in price sensitivity

Merchandising Optimization Software

Eg. The software recognizes that in Nov, winter items sales are better than expected, it delays the markdown that had been planned. Each week as the new sales data becomes available, it readjusts the casts to include the latest information

Merchandising Optimization Software

It computes thousands of scenarios for each process that is too complicated and time consuming for buyers to do on their own It then evaluates the outcome on the basis of expected profits and other factors and selects the action that produces the result

Liquidating Markdown merchandise

Even with the best planning some merchandise remains unsold at the end of the season. To liquidate the unsold merchandise, one of the following strategies is used by the buyer: Sell the merchandise to another retailer Consolidate the unsold merchandise Place unsold merchandise for online auction Carry them for charity ( CSR, building strong public relation, Cost value is deducted from income) Carry it over to next season ( non fashion merchandise)

1. 2. 3. 4. 5.

1.Sell the merchandise to another retailer

Its one of the most popular solutions Off price retailers like T. J.Maxx, Marshallls, Bluefly.com purchase end-off season merchandise and sell it at deep discounts This helps in recovering barely 10% of the merchandise cost

2. Consolidate the unsold merchandise

1. Can be done in one/ a few of retailers regular locations 2. It can be sent to another retail chain under the same ownership 3. Shipped to a distribution centre for final sale However consolidated sales can be complex and expensive due to extra transportation and recordkeeping involved

Variable Pricing and Price Discrimination 1. Individualized variable pricing/ First degree price discrimination 2. self-selected variable pricing/ second-degree price discrimination 3. Variable Pricing by Market Segmentation/ third degree price discrimination/ Zone pricing

1. Individualized variable pricing/ First degree price discrimination

Ideally retailers would maximize profit if they charge individual customers to pay as much as they are willing to pay e.g.. Customer with willingness to pay highest bid.. Allow customers to haggle over price

2. self-selected variable pricing/ second-degree price discrimination

Offer the same price and time schedule to all the customers but the customers need to do something to get lower price E.g. early bird specials (before 6 pm) Coupons, rebates etc. Price bundling eg. Happy meal Multiple-unit pricing/ quantity discounts

Variable Pricing by Market Segmentation/ third degree price discrimination/ Zone pricing
Different demographic segments, Different prices in different stores, markets, regions/ zones Food retailers often have 4-5 pricing zones in a single city( price can vary up to 10%) income and age etc..

Pricing strategies
Prevalent pricing strategies used by retailers Pricing issues that confront the retailers Special pricing techniques that retailers use

Retail Pricing Strategy

1. High/ Low Pricing 2. EDLP, Everyday Low Pricing

High/ Low Pricing

Its used frequently, often weekly , discount the initial prices for merchandise through frequent sales promotions

EDLP, Everyday Low Pricing

It emphasizes the continuity of retail prices at a level somewhere between the regular nonsale price and and the deep-discount sale price of high/ low retailers Its a consistent pricing strategy They occasionally have sales( not as frequently as their high/ low price competitors) EDLP is not essentially the lowest price in the market

Low Price Guarantee Policy

Low Price Guarantee Policy it guarantees the customers that they will have lowest price in the market of the products they sell. They promise to match/ better any lower price found in the market and might include provision to refund the difference between the sellers offer price and lower price

Advantages of Pricing Strategy

Increases profit through price discrimination Sales create excitement get them when they last Sells merchandise esp. slow-selling merchandise

Advantages of EDLP
Assures customers of low prices Reduces Advertising and operating expenses ( no labor required for changing tags/ sales signs) Reduces stockout ( reduces variation in demand ) Better inventory management

Yield Management
Practice of adjusting prices mark down in response to demand to control the sales generated E.g. airlines, restraunts, movie halls etc. where capacity is defined/ limited Using sophisticated computer programmmes, they monitor the reservations and ticket sales for each flight and adjust the prices as per the capacity utilization Prices are lowered when sales are below forecast and as ticket sales approach capacity, prices are increased

Leader Pricing/ Loss leaders

Retailer prices items lower than normal to increase the traffic flow/ boost sales of complimentary products Cherry pickers are customers who move from one store to the other buying only the items that are on special / lower prices this leads to retailers loss

Price Lining
Retailers offer limited number of predetermined price points within a merchandise category eg. Price A, A+x and A+X+Y reflecting Good, better and best quality of product Both customers and retailers are benefited

Demerits of price lining

Confusion arising from multiple choices Gives buyers/ customers flexibility Studies indicate consumers tendency to choose the product in the middle price line Retailers can trade up to more expensive models..

Odd Pricing
Practice of using a price that ends in odd number typically a 9 History : to avoid employee theft Today studies reveal that customers do not notice the last digits of a price. Sp $2.99 is percieved as $2 Another theory says 9 endings signal low prices

Odd Pricing
For price sensitive products , many retailers round the price down to the nearest nine to create a positive price image When price sensitivity is not high, even dollar prices/ round number endings are used