Research
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ch11.pptChapter 11
Pricing Issues in
Channel Management
- THE AMOUNT OF MONEY AND SERVICES (OR GOODS) THE BUYER EXCHANGES FOR AN ASSORTMENT OF PRODUCTS AND SERVICES PROVIDED BY THE SELLER (Kent B Monroe, 1979)
- More than simply the amount that is shown on the sales invoice
- List prices
- Discounts and allowances
DISCOUNT AND ALLOWANCES
- Cash Discount 2/10 net 30
- Trade Discounts
- Promotional Allowances
- Quantity Discounts
- Seasonal Discounts
- Product Allowances
The Importance of Pricing
11
Objective 1:
Pricing decisions cause top-level marketing
executives more concern than any other
strategic marketing decision area.
Pricing is viewed as having a more direct
link to the firm’s bottom line.
>>Channel Pricing Structure: Channel participants each want a part of the total price sufficient to cover their costs and provide a desired level of profit.
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The “Golden Rule”
of Channel Pricing
It is not enough to base pricing decisions solely on
the market, internal cost considerations, and
competitive factors. Rather, for those firms using
independent channel members, explicit consideration
of how pricing decisions affect channel member
behavior is an important part of pricing strategy.
=>
Pricing decisions can have a
substantial impact
on channel member performance.
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Influencing Pricing Strategy
Objective 3:
The major challenge for the channel manager:
To help foster pricing strategies that
promote channel member cooperation and
minimize conflict
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Channel Manager’s Role
Major areas of consideration in a
manufacturer’s pricing decision
Internal
cost
considerations
Channel
considerations
Competitive
considerations
Target
market
considerations
Channel manager must focus
on the channel considerations
and work to incorporate them
into the firm’s pricing decisions
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Channel Manager’s Role
To find out about channel member views
and to appraise their
effects on channel
member performance
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Channel Manager’s Role
Have
channel members’
viewpoints on pricing issues included as an integral part of the manufacturer’s price-making process
Such action anticipates
and hopefully avoids
problems that may
arise after pricing
decisions have
taken effect
Channel Pricing Guidelines
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Objective 4:
1. To help those involved in pricing decisions to
focus more clearly on the channel implications
of their pricing decisions
Why?
To provide general prescriptions on how to
formulate pricing strategies that will help promote
channel member cooperation and minimize conflict
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Profit Margins
Guideline #1: Each efficient reseller must obtain
unit profit margins in excess of unit operating costs.
OR
Channel members who believe that the manufacturer is not allowing them sufficient margins are likely to seek out other suppliers or establish and promote their own private brands.
Different Classes of Resellers
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Guideline #2: Each class of reseller margins should vary
in rough proportion to the cost of the functions the
reseller performs.
Do channel members hold inventories?
Do they make purchases in large or small quantities?
Do they provide repair services?
Do they extend credit to customers?
Do they deliver?
Do they help train the customers’ sales force?
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Guideline #3: At all points in the vertical chain
(channel levels), prices charged must be in line with
those charged for comparable rival brands.
Channel managers should attempt to weigh any margin differentials between their own and competitive brands in terms of what kind of support their firms offer and what level of support they expect from channel members.
Rival Brands
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Guideline #4: Special distribution arrangements—
variations in functions performed or departures
from the usual flow of merchandise—should be
accompanied by corresponding variations in
financial arrangements.
The margin structure should reflect any changes in the usual allocation of distribution tasks between the manufacturer and the channel members.
Special Arrangements
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Guideline #5: Margins allowed to any type of
reseller must conform to the conventional
percentage norms unless a very strong case can be
made for departing from the norms.
Exceptions are possible if they can be justified in the eyes of the channel members. However, it is the job of the channel manager to attempt to explain to the channel members any margin changes that deviate downward from the norm.
Conventional Norms in Margins
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Guideline #6: Variations in margins on individual
models and styles of a line are permissible and
expected. However, they must vary around the
conventional margin for the trade.
Channel members are often amenable to accepting the lower margins associated with promotional products so long as they are convinced of the promotional value of the product in building patronage.
Margin Variation on Models
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Guideline #7: A price structure should contain
offerings at the chief price points, where such
price points exist.
Price points are specific prices, usually at the retail level, to which consumers have become accustomed. Failure to recognize retail price points can create problems for the manufacturer as well as its channel members if consumers expect to find products at particular price points and such products are not offered.
Price Points
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Guideline #8: A manufacturer’s price structure
must reflect variations in the attractiveness of
individual product offerings.
If the price differences are not closely associated with visible or identified product features, the channel members will have a more difficult selling job.
Product Variations
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Guideline Caveat
Objective 5:
There is no
Guarantee
Particular circumstances and situations exist
in which these guidelines will not apply or
will be irrelevant.
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Other Channel Pricing Issues
Objective 6:
Exercising control in channel pricing
Changing price policies
Passing price increases through the channel
Dual channel pricing
Using price incentives in the channel
Dealing with the gray market & with free riding
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Exercising Control in Pricing
Because channel members typically view pricing
as the area over which they have total control. . .
First: Rule out any type of coercive approaches
to controlling channel member pricing policies.
Second: The manufacturer should encroach on the
domain of channel member pricing policies only if
the manufacturer believes that it is in his or her
vital long-term strategic interest to do so.
Finally: If the manufacturer believes that it is necessary to
exercise some control over member pricing, he or she
should do so through “friendly persuasion.”
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Channel members fear such changes because they have
become accustomed to the strategy, or their own pricing
strategies may be closely tied to those of the manufacturer.
Changing Price Policies
Changes in
manufacturer pricing policies
or related terms of sale cause
reactions among
channel members.
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First: Manufacturers should consider the long- and the
short-term implications of such increases versus
maintaining the current prices.
Second: Manufacturers should do whatever possible if
passing on the price increase is unavoidable.
Finally: Manufacturers could change their strategies in
other areas of the marketing mix to help offset
the effects of such increases.
Passing Price Increases Through the Channel
Strategies for channel members to use in order
to avoid simply passing along price increases
through the channel:
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Possible Solutions:
• Make pricing promotions as simple and
straightforward as possible.
• Design price-promotion strategies to be at least as
attractive to retailers as they are to consumers.
Manufacturers face difficulties gaining strong
retailer acceptance and follow-through on
pricing promotions.
Using Price Incentives in the Channel
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Channel design decisions that result in closely controlled channels and selective distribution as well as changing buyer preferences may help limit the growth of the gray market and free riding.
Gray Market
The sale of brand-name products at very low prices by unauthorized distributors or dealers
Gray Market & Free Riding
Free Riding
Describes the behavior of distributors & dealers who offer extremely low prices but little service to customers
