IGNOU Study Notes BRL-006 | ASSIGNMENT -1 (Part-2) [ BUYING AND MERCHANDISING ]

BRL-6 Assignment-1
PART-2
Buying and Merchandisining-I

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Course Code :	BRL-006
Course Title :	Buying and Merchandisining-I
Assignment Code :	BRL-06/TMA/2021-22
Coverage :	All Blocks

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6. Distinguish between:
(a) Stock turn and stock to sales ratio

ANS: Stock Tum is a measure of how many times your inventory is replaced in the course of a year. For example, if you have an average inventory of 300 ties in a year and you sell 300 ties every 4 months, your inventory "turns over" or is totally replaced, 3 times per year. Therefore, your tum is 3. In three turns a total 900 ties are sold in a year on an average. Stock Tum is often increased by reducing selling price. Retailers like Wal Mart offer products at low prices thereby selling to more number of customers. However, this obviously reduces profit. A balance needs to be reached between the proper stock tum, and the proper profit margin on the products sold in the store. Increased stock tum is a number game in Retail and therefore competitive pricing policy can help achieve better stock turns and also result in better bottom line for the store
Stock Turn = Annual Sales / Average Inventory
Stock to Sales Ratio
This is the ratio of the inventory available for sale versus the quantity actually sold. For every unit sold, how many units were on hand? Stock to Sales Ratio is the exact inverse of Sell Through Percentage.
Stock turnover also indicates the briskness of the business. The purpose of increasing inventory turns is to reduce inventory for three reasons.
• Increasing inventory turns reduces holding cost. The organization spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be sold.
• Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant.
• Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant.

(b) Premium pricing and economy pricing (5+5)

NS: Premium Pricing: In order to "Differentiate" itself and convey products / services that are unique or luxurious, this method of pricing is used. These products cater to classes. Primarily, pricing strategy takes into account the current marketplace price of goods or services. Pricing strategy is also about considering your costs and pricing your product appropriately, so that you are able to make money off of your sales.
Economy Pricing: It is a "No Frill Pricing Model". Simply put, cost of manufacturing and marketing is kept at minimum. The objective here is to develop mass markets for these products. For example, Hypermarkets and Super market would use this model to drive volumes in respective categories.
Economy pricing is useful for companies who are keeping their overhead low. For example, generic grocery store brands of products usually have a lower price than the name-brand items, due to the lack of advertising or out-of-store promotion. Because these companies save on those aspects of the product, they are able to keep their pricing low. Companies who use economy pricing count on the fact that their lower price compared to the product next to them on the shelf will increase the number of sales. Economy pricing does particularly well during times of . . econonuc recession.

7. Why is assortment planning necessary for a successful business? Discuss the main guidelines for this purpose. (5+5)

Ans: One of the main ways a retailer can increase the financial performance is by increasing the level of customer satisfaction through the variety of products on offer. An important factor to consider during the assortment planning process is that assortment variety increases inventory costs. Therefore it is important for assortments to be optimised. Range i.e. assortment planning is the process that ensures that the customer needs are met by buying the right width of the right product in the right depth and delivering it to the stores at the right time. In simple terms, assortment planning is where you decide what to buy, how many options to buy and how much to buy of each option, and when to put it on sale. 'What' is determined by the customer profile, 'how much' by the planned turnover, 'how many' by the capacity available and when by commercial considerations and the product life cycle. Look at Figure 7.2 which shows the three drivers. Retailer operates in a competitive environment and must aim to differentiate themselves from their competitors. While some of this differentiation will come from other sources, such as the store environment or the marketing, a great deal of the onus will rest on the product. While planning the assortment you must consider about the right product, right place and the right time.
Although the customer is the most important element in determining what the assortment will contain, there are other influences and constraining factors that need to be taken into account. The physical limitations due to the size of the outlets, the developments in the market as a whole and the expected level of profitability must all be considered. It is important to understand the interdependencies between these four elements. For example, the customer may wish to have the widest possible Assortment but there may not be the sufficient space to stock it, the trend in the market may be for lower priced product but this may not deliver the required level of profitability, or, may be space is available but no suitable product is available. It is not possible to build a successful Assortment without understanding these relationships.

(B) Essay Type Questions

8. Describe the important factors that should be considered while making the selection of a vendor. (15)

Ans: Some of the factors relevant for the selection of a vendor are: 1. Quality 2. Price 3. Quick Delivery 4. Service 5. Assurance of supply 6. Size of the supplier 7. Number of suppliers 8. Local suppliers and 9. Miscellaneous Considerations.
1. Quality:
The term quality stands for ability and willingness of the supplier to meet the specifications of the buyer.
At no cost, the quality should be sacrificed for low price.

2. Price:
Normally quality does not always go side by side with price but we must try to find out those suppliers who make better than average product at an average price. However, sub-standard and poor quality purchases should not be made at the cost of a low price.

3. Quick Delivery:
The lead time i.e., time to get supplies, should be less so that there is a quick delivery of goods. Generally, the best suppliers are the busiest and in order to get goods from them, one has to wait for a long time. However, quick delivery reduces the amount of forward planning and increases the flexibility.

4. Service:
It is very important factor in selecting the vendor. It includes the provision of expert advice to the buyer before and after the sale of materials and other items. Good service helps in maintaining good relations between the supplier and the buyer. The speed and effectiveness of arrangements to service and repair equipment is very important to certain machines.

5. Assurance of supply:
Only those suppliers should be preferred who assure supplies of raw materials and other components. Thus, suppliers who suffer recurring shortages should be used with great care as it can adversely affect our production schedule.

6. Size of the supplier:
Some authorities recommended that orders of small size should be placed with a small company whereas the orders of large size should go to large companies. However, this correlation can't be always applied. A small supplier would generally work very hard to perform a large order, if given a chance.

7. Number of suppliers: Should we place all order with one supplier or use two or more suppliers? The use of a single supplier has the following advantages:
(a) In times of shortage, the supplier will give preference to the needs of the customer.
(b) A single supplier can also offer the best price with assured supplies
On the other hand two or more suppliers may be beneficial in times of shortage. Large companies generally buy from two or more suppliers getting the twin benefit of low price and service.

8. Local suppliers:
Sometimes, a buyer may be compelled to buy certain requirements locally on account of the following reasons.
Community relations between the company and public may force the buyer to buy locally. For example, the supplier to a hospital or charitable trust by the local businessman would help in raising the funds for such organisations.
b) Local buying is generally justified when small quantities of materials are purchased
c) There is a feeling of closer co-operation between the vendor and the buyer.
d) The delivery is quickly made.
e) Urgent orders can be met promptly.
f) Disputes, if any, can be easily resolved.

9. Miscellaneous Considerations:
The following points should also be taken into account at the time of selection of suppliers:
(a) In order to maintain complete objectivity, the buyer must keep himself free from unethical influences. Favour to friends should be avoided. Similarly commercial bribery such as gifts etc has no place in selecting vendors.
(b) Dishonest vendors must be rejected for ever.

9. Describe briefly different retail price strategies. (15)

Ans: Retail pricing is a core aspect of any business that sells products to customers. After all, consumers may care about a number of factors when making purchasing decisions, but the price they will pay for an item is almost always among their top concerns.

1. Manufacturer Suggested Retail Price (MSRP)
This pricing strategy is perhaps the most familiar for consumers. The idea behind the Manufacturer Suggested Retail Price (MSRP) is to standardize the prices of products sold across multiple locations, and it is often used for mass-produced items like consumer electronics or household appliances.
This approach can also be referred to as cost-based pricing, since it takes into account the cost of manufacturing the product, a profit margin for both the manufacturer and the retailer, as well as the prices of similar products. Generally, the manufacturer provides the products to the retailer at roughly half the MSRP, enabling the retailer to tum a profit from the sale.

Pros: This approach takes the guesswork out of price-setting for retailers, saving them time and energy.
Cons: Offering certain products at the MSRP can lower your competitive edge on those particular products-after all, if you offer the same item at the same price as other retailers, how do you set yourself apart?

2. Keystone pricing
Keystone pricing is essentially doubling the wholesale or production cost of a product to determine the retail price.
This practice actually stems from the MSRP, which, as we mentioned, is generally double the wholesale price.

Pros: Similar to the MSRP, this approach saves retailers time and energy, as it doesn't require too many calculations to determine the retail price of a product.
Cons: Although keystone pricing may work for some items, it won't work for all of them. For items that are truly worth more, you may be setting the price too low, which means you won't achieve the profit margins you feasibly could on that item. For other items, keystone pricing may be too high, which will end up hurting your sales-especially if there is a nearby competitor selling the item for cheaper.

3. Bundle pricing
Also known as multiple pricing, bundle pricing is when you sell a group of products for a single price-think three-pack socks or five-pack underwear.
Retailers often prefer bundle pricing because it streamlines their marketing campaigns, as they have to promote a single price instead of several price points. Customers also love bundle deals, since they believe they're getting more bang for their buck.

Pros: Bundle pricing often leads to larger-volume purchases of certain products or product groups, so if you have unsold inventory you're trying to move, this could be a smart tactic to employ.
Cons: Once you offer items in a bundle package at a low cost, it can be harder to sell them separately at their original price. This is due to what is called cognitive dissonance, whereby the consumers believe they're getting less value for the amount they pay because they're comparing it to the bundle deal that was previously available ( even if the bundle deal was more expensive than the individually priced item).

4. Discount pricing
As the name suggests, discount pricing is the practice of selling products at a discount, whether it's through sales codes or coupons sent directly to the customer or through in-store discounts or even store-wide markdowns. Although retailers don't love the idea of discounting items as it generally eats into their profit margins, offering the occasional sale can do wonders for getting more people into your store and attracting new groups of customers who are out looking for a deal

Pros: Discount pricing can be a great way for retailers to get rid of slow-moving or out-ofseason items.
Cons: If you offer discounts too frequently, it can lower your brand's perceived value m customers' eyes, making them unwilling to pay full price for your goods and services.

5. Penetration pricing
Often preferred by newer brands who are set to enter the market, penetration pricing is the practice of initially keeping product prices low so as to introduce the brand and its products to as many people as possible.
The idea is that by generating word of mouth among consumers, retailers can save on advertising and customer acquisition costs down the road.

Pros: Offering lower prices than the established competition can help retailers strike the right chord with shoppers, helping them to build a loyal customer base from day one.
Cons: If you make the switch from your initial low prices to regular pricing too abruptly, it has the potential to backfire and alienate the customers you had acquired by that point.

6. Loss-leading pricing
This is the approach of luring customers in by offering a discount on a product they want, then encouraging them to buy more products along with the original one once they're in your store.
By using the loss-leading pricing, retailers hope to offset their profit loss on the discounted item by selling additional products the consumer hadn't initially thought of buying.

Pros: This approach often increases the average transaction value (ATV), or the amount a shopper spends in a single shopping trip.
Cons: When it comes to implementing loss-leading pricing, it's cmcial to strike the right balance in customer service. Just as you don't want your customers to feel forced by staff to purchase items they don't need, you also don't want to risk losing money by only selling the discounted items and not much else.

7. Psychological pricing
Although the concept may sound like something out of a research paper, we all encounter psychological pricing on a daily basis.
Also known as "charm pricing," this approach relies on the theory that customers place greater trust in prices that end with odd numbers like 5, 7, or 9, the last one being the most popular. So, instead of offering an item for a rounded $200, the retailer may choose to price it at $199, and customers will perceive this to be a better deal based on the number alone.
Pros: Psychological pricing is especially useful for brands that want to increase their overall sales volume by driving customers to make impulse purchases of cheap to mid-range items.
Cons: Not all brands should implement psychological pricing. In fact, if you're a premium or luxury brand, implementing psychological pricing can have the opposite of the intended effect in that it makes you seem "cheap" or "gimmicky" in the customers' eyes.

8. Competitive pricing
As the name suggests, competitive pricing is the practice of using your competitors' prices as a benchmark and setting your prices lower. Again, retailers who take this approach hope to offset their reduced profit margins by increasing the total volume of sales.

Pros: For large retailers who are able to negotiate deals to lower their unit costs, the competitive pricing approach can really make a difference in getting ahead of the competition.
Cons: For smaller retailers, the only way this practice can be sustainable is to ensure that you sell high volumes of the product. Also, depending on the product, it can make customers think of your brand as the discount alternative to other brands.

9. Premium pricing
The opposite of competitive pricing, premium pricing is when you choose to offer your items at a higher price than the competition.

Pros: When combined with the right marketing tactics, this approach can help your brand be perceived as a "premium" or luxury brand.
Cons: Depending on your target customer group, premium pricing may not be the way to go. There are many factors at play here other than a product's price and perceived value, such as your customers' buying power, the quality of your competitors' offering, or even your geographical location.

10. Anchor pricing
Anchor pricing is the approach of placing both the discounted and the original prices of an item side-by-side to give the customer an idea of how much they're saving.
This method creates what's known as an anchoring cognitive bias, where the customer considers the listed original price as the reference point in evaluating whether to buy the discounted item.

Pros: Listing the anchor price along with the discounted price makes the customer feel like they're getting a deal, which can serve as an incentive to buy the item.
Cons: Don't be tempted to increase your anchor price to an unreasonable level. Keep in mind that consumers are much savvier today than they used to be, and thanks to the prevalence of smartphones, they can access your competitors' prices in just a few seconds.

11. Channel-based pricing
Channel-based pricing is a relatively new approach that's applicable for omnichannel retailers or simply those that sell their products across multiple channels like brick-and-mortar store, website, and social media accounts. With this method, retailers set different price points for the same product based on where it's sold.

Pros: For retailers looking to promote one channel over another-say, to drive their e-commerce operations or to draw more people into stores-channel-based pricing can be used as a great incentive for customers to choose that particular channel.
Cons: Customers may feel outright cheated if they see that you offer the same product at two distinct price points. One way to get around this is to keep prices the same but offer a channelspecific discount, one that's applicable only online or only in-store.

12. Wholesale pricing
Wholesale pricing is often used by retailers who sell their products to other businesses (B2B) instead of directly to the customer (B2C). In some cases, the same retailer can offer prices at the MSRP to the customer and at a discounted wholesale rate to other retailers, who then sell these products to the customer for a profit.
To set the wholesale price, you must first calculate the cost of goods manufactured (COGM), which includes both material and labor costs as well as additional costs like transportation and overhead expenses. Then, you must factor in the profit margin, which should be at least 50%, before setting your wholesale price.

Pros: Offering products at wholesale is a great option for retailers looking to move large quantities of slow-moving inventory, but this approach can also be used by brands looking to introduce their proprietary designs to a whole new group of shoppers. Cons: For wholesale pricing to be sustainable for your business, you must ensure that your sales volume stays consistently high-meaning you'll have to make sure that the quantity of items in each order meets the minimum required amount.