Sunday, July 8, 2018

Kyle Phoenix Answers: Why does Target have such weird prices? How do they determine their pricing model?

Sales/retail you're always looking at margins. I did a six month sabbatical at WalMart and loved every minute of it; a customer could bring me an item at customer service and in the multi store/state computer I could see price Q fluctuations. Xbox is the crack of the poor. $400 in store....but not everywhere. One thing the system allows you to see is the overall scheme is ruled by multiple factors, with a goal towards a designed price.
Say an Xbox is $200 wholesale, WalMart is trying to capture that other $200. But that may not be realistic with competitors like Target. So $125 is the decision margin on each unit. But you know you'll have to play against competitors so you open price at $400, online at $375, and Xmas order at $350 if the customer will take a voucher until December 27th when you Xbox wholesale is down to $150 of $375 if the customer pays upfront, guaranteed to get one before New Years.
So there are multiple Xbox prices:
$400
$375
$350
$375
Averaged: $325($125 uptick) $225 margin uptick after date
Margin achieved.
Now lets go even deeper. Walmart acts as its own distribution center. By doing so they turn to the Xbox manufacturing center and say in country we'll forward some of our semis to pick up, if shipped from overseas, just tag them in China and we'll bring them on our shipping tankers, cutting your costs, about 50%. So we'll just cut you the $100 by obviating that other $100. We'll sweeten it by moving a million upfront by November to beat the Xmas rush.....but we'll still maintain our offline/online price structure.
Now profit margins are:
$300
$275
$250
$275
Per unit.
At those margins if Target drops to $349, WalMart can drop across the board to $300 , have a $200 margin (66%) and still meet projected $125 margins on Xbox's. Even if a spread operations cost is $25 per unit to ship.
I watched WalMart play this price brinkmanship due to setting up a shipping structure, worldwide and a computer state that tracked items worldwide. At customer service the issue wasn't simply theft and floor shortage to turn items over from returns and exchanges but in 24 hours they had to be back on the floor to match the systems view of the store.
Target is doing the same thing. I used to think about going to work six months there, the smock being the only difference.

Smile, Kyle
KylePhoenixShow@Gmail.com




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