Question

Performance-Setting Retail Prices

Read the overview below and complete the activities that follow.

Emily has always been obsessed with smell. Emily believes that everyone has a signature scent. To pursue her passion, Emily is opening a boutique store, Perfumance, that specializes in scent development. Emily believes that to find a person's signature scent, she has to spend time with them one-on-one, understand their lifestyles and what makes them unique. Emily is having a difficult time determining what her pricing strategy should be. Emily's product category is very unique. She does not face any direct competition in her local market for her product, but faces the large threat of established perfume brands offered at department stores, Sephora, and many drug stores. Emily knows that she is adding value to customers by offering a customized, signature scent. However, she is having a hard time determining the best way to cover her costs.

The importance of pricing decisions is growing because today's customers have more alternatives to choose from and are better informed about the alternatives available in the marketplace. Customers are in a better position to seek a good value when they buy merchandise and services. Four factors retailers consider in setting retail prices are the price sensitivity of customers, the cost of the merchandise, competition, and legal constraints. Generally, as the price of a product increases, the sales for the product will decrease because fewer customers feel the product is a good value. In addition, customers have many choices for goods and services and can use multiple search tools to find the best value. Retailers also have to consider the cost of the merchandise in determining the retail sales price.

Read the case below and answer the questions that follow.

Emily has always been obsessed with smell. As a teenager, she would beg her mom for different perfumes for holidays and birthdays. She would scour the cosmetic bays at department stores asking for free samples of perfumes so that she could try them. Eventually, Emily began developing her own scents using flower extracts and herbal essences. Emily believes that everyone has a signature scent. To pursue her passion, Emily is opening a boutique store, Perfumance, that specializes in scent development for individual customers. Emily believes that to find a person's signature scent, she has to spend time with them one-on-one, understand their lifestyles and what makes them unique. She takes a few walk-ins, but mostly encourages customers to book appointments so that she can spend at least an hour with them, learning about them and trying out different scents. Once a scent is developed for a customer, Emily writes down the scent's formula so that the customer can repurchase the scent in the future. She also promises exclusivity to her customers and will not make the same scent for another customer.

Emily is having a difficult time determining what her pricing strategy should be. First, Emily's product category is very unique. Emily does not face any direct competition in her local market for her product, but she faces the large threat of established perfume brands offered at department stores, Sephora, and many drug stores. Emily knows that she is adding value to customers by offering a customized, signature scent, but she is unsure how customers will perceive the added value. Secondly, she knows that for many customers, perfumes are a luxury item. She is not sure what level of price sensitivity customers may have towards price. Finally, Emily's cost of merchandise is highly variable. Some flower extracts are very reasonable at $10/ounce, while others could cost up to $80/ ounce. Emily does not want to charge customers a flat rate if the customer's scent uses a disproportionate amount of a more expensive extract.

The materials in each scent are Emily's only variable cost. Emily is the only employee and will pay herself a fixed salary of $35,000 per year for the first two years. Her storefront is small and only costs $1,500/ month in rent. Her hours are from 10:00-5:00 Monday through Saturday. Her total utilities cost average around $250/ month.

Emily is hesitant to use a high/low pricing strategy because she does not want to have frequent sales promotions. She believes that an everyday low-pricing strategy is probably a better option because it ensures continuity and will reduce the amount of sales promotions that Emily has to offer. However, she does not want to promote the EDLP strategy to her customers because she does not want them to perceive her products as being "discount" products or inferior to current perfumes on the market. Rather, she guarantees that her customers will always receive a fair price and that prices will not be lowered by sales promotions or incentives.

Emily believes that if she prices each potential perfume component then she will confuse customers. In other words, Emily does not want to tell customers that "¼ ounce of lavender extract costs $50.00 and ¼ ounce of lilac extract costs $75.00." She wants to give customers a fixed price option. However, with the variability of the components, she knows that she will lose money on that strategy. Instead, Emily decides to offer fragrance categories. She tries to group her different fragrance components into three different groups based on their costs to her. She names the first category, "Beautifully Breezy." There are 50 different extract options in this category that customers can choose from to make their signature scent. Customers can purchase 2 ounces of their signature scent from this category for $60.00. This includes the 1-hour personalized appointment with Emily. The second category is called, "All Business." This category contains 15 unique extracts that customers can use to develop their signature scent. Customers can also use the scents in the Breezy category as well. An appointment and 2-ounce signature fragrance costs $75.00. The final category is "Romantic Retreat." For this category, customers have access to all of the extracts available in Perfumance to design their signature scent. This includes Emily's most expensive lilac, orchard, and saffron extracts. Customers who design a fragrance using this category will also receive a custom perfume bottle that can be reused for future scents. Scents from "Romantic Retreat" cost $100.00.

Emily hopes that customers will understand this price lining system and that she will be able to cover her costs.

1. Emily does not want to charge customers a flat rate for all products because she is afraid she will not cover all of her _________ with this strategy

A. reductions

B. profits

C. expenses

D. markups

E. markdowns

2. Because Emily is introducing a relatively new product concept to her market, she is unsure of customer's _______________ towards her products.

A. guarantee

B. inspiration

C. price sensitivity

D. competitive attitude

E. significance

3. To reduce promotional expenses and provide a consistent pricing message, Emily implements a(n) _____________________ strategy.

A. bottoms up pricing

B. high/low pricing

C. top down pricing

D. everyday low-pricing

E. pay what you can pricing

4. Emily is using three different price points for her signature scents and experience. This is called

A. loss leader pricing.

B. deceptive pricing.

C. couponing.

D. price discrimination.

E. price lining.

Answer 1

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1. Emily does not want to charge customers a flat rate for all products because she is afraid she will not cover all of her _________ with this strategy

C. expenses

2. Because Emily is introducing a relatively new product concept to her market, she is unsure of customer's _______________ towards her products.

C. price sensitivity

3. To reduce promotional expenses and provide a consistent pricing message, Emily implements a(n) _____________________ strategy.

D. everyday low-pricing

4. Emily is using three different price points for her signature scents and experience. This is called

E. price lining.

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