DB 5

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Distribution and Pricing:

Right Product, Right Person,

Right Place, Right Price

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Learning Objectives

By the end of this chapter, you should be able to:

13-1 Differentiate between channels of distribution and physical distribution

13-2 Describe the various types of wholesale distributors

13-3 Discuss strategies and trends in store and nonstore retailing

13-4 Explain the key factors in physical distribution

13-5 Outline core pricing objectives and strategies

13-6 Discuss pricing in practice, including the role of consumer perceptions

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Encourage students to look for answers to these learning objectives as you move through the lecture.

13-1

Distribution: Getting Your Product

to Your Customer

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13-1 Distribution (1 of 4)

Distribution strategy*: A plan for delivering the right product to the right person at the right place at the right time

Elements

Channel of distribution*: The network of organizations and processes that links producers to consumers

Physical distribution*: The actual, physical movement of products along the distribution pathway

* Words accompanied by an asterisk are key terms from the chapter.

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The channels of distribution and physical distribution are the two elements of the distribution strategy.

A channel of distribution is the path that a product takes from the producer to the consumer.

A physical distribution is the actual movement of products along that path.

13-1 Distribution (2 of 4)

Direct channel*: A distribution process that links the producer and the customer with no intermediaries

Channel intermediaries*: Distribution organizations that facilitate the movement of products from the producer to the consumer

* Words accompanied by an asterisk are key terms from the chapter.

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The producer and the customer are not separated by anyone in a direct channel.

Also, the movement of the products from the factory to the consumers is more effective and efficient when channel intermediaries are used.

13-1 Distribution (3 of 4)

The Role of the Distributors: Adding Value

Core role is to reduce the number of transactions

The ways distributors add value, or utility

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Form utility provides customer satisfaction by converting inputs into finished products.

Time utility adds value by making products available at a convenient time for consumers.

Place utility satisfies customer needs by providing the right products in the right place.

Ownership utility adds value by making it easier for customers to actually possess the goods and services they purchase.

Information utility boosts customer satisfaction by providing helpful information.

Service utility adds value by providing fast, friendly, personalized service.

Lecture Booster: Distribution is how one gets a product to one’s consumers. More generally, it can refer to how one spreads the message about one’s company. Distribution is the single most important topic that people understand the least. Even if one has an awesome product, one still has to get it out to people. Discuss with students the importance of distribution in start-ups.

Form utility

Ownership utility

Information utility

Service utility

Place utility

Time utility

Exhibit 13.1 Reducing Transactions through Marketing Intermediaries

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Even one marketing intermediary in the distribution channel can funnel goods from producers to consumers, with far fewer costly transactions.

13-1 Distribution (4 of 4)

The Members of the Channel: Retailers versus Wholesalers

Retailers*: Distributors that sell products directly to the ultimate users, typically in small quantities, that are stored and merchandized on the premises

Wholesalers*: Distributors that buy products from producers and sell them to other businesses or nonfinal users such as hospitals, nonprofits, and the government

* Words accompanied by an asterisk are key terms from the chapter.

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Discussion Activity 1

Explain the role of channel intermediaries in the product distribution process. Why is their role important?

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Answers may vary.

Channel intermediaries are distribution organizations—informally called middlemen—that facilitate the movement of products from the producer to the consumer. Their role is important because they make the distribution process more efficient and effective, adding value for both producers and consumers.

Discussion Activity 1 Debrief

What types of activities do you think of when you think of channel intermediaries?

When you buy products, how many intermediaries do you think might be between you as the consumer and the original producer?

How might the distribution channel look different for a local artisan or an item in a big box store or an item “Made in China”?

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Answers will vary. Shorter channels or perhaps no channel is needed with a local artisan. Big box stores most likely carry numerous “Made in China” items, in which case the distribution channel is much more extensive.

13-2

Wholesalers: Sorting Out the Options

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13-2 Wholesalers (1 of 2)

Independent wholesaling businesses*: Independent distributors that buy products from a range of different businesses and sell those products to a range of different customers

Categories

Store retailers

Nonstore retailers

Multichannel retailing*: Providing multiple distribution channels for consumers to buy a product

* Words accompanied by an asterisk are key terms from the chapter.

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Retailers represent the last stop on the distribution path, since they sell goods and services directly to final consumers.

13-3 Retailers (2 of 3)

Store Retailers

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Intensive, selective, and exclusive systems are the three major strategic distribution options available for retailers.

Intensive distribution makes the most sense for low-cost convenience goods that consumers won’t travel too far to find.

Selective distribution tends to work best for medium- and higher-priced products or stores that consumers don’t expect to find on every street corner.

Exclusive distribution tends to work for luxury-good providers with a customer base that actively seeks their products.

Wheel of retailing*: A classic distribution theory that suggests that retail firms and retail categories become more upscale as they go through their life cycles.

Lecture Booster: Products purchased wholesale are cheaper than the same products sold at retail outlets. Does this make the product less valued in the consumer’s eye? Ask students to write down their personal opinions.

Intensive distribution

Placing products in as many stores as possible

Selective distribution

Placing products only with preferred retailers

Exclusive distribution

Establishing only one retail outlet in a given area

13-3 Retailers (3 of 3)

Nonstore Retailers

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Online retailing, also known as e-tailing, is the selling and delivery of goods via the internet.

Direct response retailing includes catalogs, telemarketing, and advertising (such as infomercials) meant to elicit direct consumer sales.

Direct selling includes all methods of selling directly to customers in their homes or workplaces.

Vending machines take money in coins and notes and dispense the product chosen by the consumer.

Multilevel marketing (MLM)*: Involves hiring independent contractors to sell products to their personal network of friends and colleagues and to recruit new salespeople in return for a percentage of their commissions.

Online retailing

E-commerce and m-commerce

Direct response retailing

Includes catalogs, telemarketing, and advertising

Direct selling

Door-to-door and multilevel marketing

Vending

Providing select products in convenient locations

Exhibit 13.2 Retail Store Categories

Store type	Store description	Examples
Category killer	Dominates its category by offering a huge variety of one type of product	OfficeMax, Best Buy, Staples, PetSmart, Big 5 Sporting Goods
Convenience store	Sells a small range of everyday and impulse products at easy-to-access locations with long hours and quick checkout	7-Eleven, AM/PM markets, Circle K, and a wide range of local stores
Department store	Offers a wide variety of merchandise (e.g., clothes, furniture, cosmetics), plus (usually) a high level of service	Nordstrom, Macy’s, Neiman Marcus
Discount store	Offers a wide array of merchandise at significantly lower prices and with less service than most department stores	Target, Walmart, Kmart

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Among the number of retail store categories, each store category has its own function.

Lecture Booster: Ask students to discuss the advantages that store retailers have over nonstore retailers. Ask them to also come up with ideas that could help the nonstore retailers overcome these problems.

Exhibit 13.2 Retail Store Categories (continued)

Store type	Store description	Examples
Outlet store	Producer-owned store sells directly to the public at a huge discount. May include discontinued, flawed, or overrun items	Nike, Versace, Quicksilver, Calvin Klein, Converse, GUESS
Specialty store	Sells a wide selection of merchandise within a narrow category, such as auto parts	Barnes & Noble, Claire’s, AutoZone, Bath & Body Works
Supermarket	Offers a wide range of food products, plus limited nonfood Items (e.g., toilet paper)	Kroger, Safeway, Albertsons, Whole Foods Market, Trader Joe’s
Supercenter	Sells a complete selection of food and general merchandise at a steep discount in a single enormous location	Walmart Supercenter, Super Target
Warehouse club	Sells discounted food and general merchandise to club members in a large warehouse format	Costco, Sam’s Club

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Written Reflection Activity

Today’s retailers go to extraordinary lengths to create a shopping experience based on more than just what they sell. Starbucks, for instance, claims that people connect with the coffee house because they relate to “the romance of the coffee experience, the feeling of warmth and community people get in Starbucks stores.”

Visit your local Starbucks or another favorite coffee shop and check out the look and feel of the store. Notice background music, lighting, colors, decorations, signs, layout, and the servers’ appearance and customer service. Then, develop recommendations for how the store could improve the in-store experience for you and other college students. If possible, share your recommendations with the shop’s management.

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Answers will vary.

Depending on the coffee shop the student chooses to investigate, responses can include a recommendation for each relevant element mentioned in the question, plus a strong connection between the recommendations and the target audience (college students).

Instructors note: This activity requires some out-of-class time and can be done by groups of students or individually. It can shared through class presentations or through written reflection.

13-4

Physical Distribution:

Planes, Trains, and Much, Much More

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13-4 Physical Distribution (1 of 3)

Supply chain*: All organizations, processes, and activities involved in the flow of goods from the raw materials to the final consumer

Supply chain management (SCM)*: Planning and coordinating the movement of products along the supply chain, from the raw materials to the final consumers

Logistics*: A subset of supply chain management that focuses largely on the tactics involved in moving products along the supply chain

* Words accompanied by an asterisk are key terms from the chapter.

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The first half of the distribution strategy is to determine the best channel of distribution.

The second half involves the physical distribution of the product to the consumer.

Supply chain management and logistics are important processes for students to understand.

Lecture Booster: The two halves of the distribution strategy are to find the best channel of distribution and the physical distribution that follows. Explain to the students how one half is important to the other to attain optimum distribution in the market.

Exhibit 13.3 Elements of the Supply Chain

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The relationship between the production and distribution process in various organizations can be represented in the form of a supply chain.

13-4 Physical Distribution (2 of 3)

Collaboration among members of the supply chain is especially beneficial

Key management decisions in coordinating the supply chain:

Warehousing

Materials handling

Inventory control

Order processing

Customer service

Transportation

Security

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In a rapidly changing and global society, supply chain management has become increasingly complex.

Companies that foster collaboration among supply chain members, rather than competition, have typically experienced more success.

Vendor-managed inventory allows suppliers to determine buyer needs and automatically ship product.

It can save time and money but also requires an extraordinary level of trust and information sharing.

13-4 Physical Distribution (3 of 3)

Transportation Decisions

Modes of transportation*: The various transportation options—such as planes, trains, and railroads—for moving products through the supply chain

Proactive Supply Chain Management

Firms are choosing to outsource this challenge to experts rather than handle it internally

* Words accompanied by an asterisk are key terms from the chapter.

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For greatest effectiveness, marketers must consider what each mode of transportation offers in terms of cost, speed, dependability, flexibility, availability, and frequency of shipments.

Companies that specialize in helping other companies manage the supply chain—such as UPS—have done particularly well in today’s market.

Discussion Activity 2

Who benefits most from collaborative supply chain relationships? Explain your answer.

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Answers will vary.

Students should acknowledge that consumers ultimately benefit from collaborative supply chain relationships, in the form of lower prices and higher quality.

Discussion Activity 2 Debrief

What happens if a link in the supply chain does not do its job well?

During the COVID-19 pandemic, businesses experienced a variety of shortages. In what ways was distribution the issue?

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Answers will vary.

A big part of the distribution issue was just not having enough workers to physically move the products, at first. Then, the lack of the production given how many people were not allowed to work because they were not “essential” definitely affected the availability of products.

13-5

Pricing Objectives and Strategies:

A High-Stakes Game

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13-5 Pricing Objectives and Strategies (1 of 2)

Building Profitability

Firms can boost profits by increasing prices or decreasing costs

Matching the Competition

By wiping out price as a point of comparison, customers must choose based on other factors

Creating Prestige

Sending the message (and delivering) that higher price equates to higher quality

Skimming pricing*: A new product pricing strategy that aims to maximize profitability by offering new products at a premium price

* Words accompanied by an asterisk are key terms from the chapter.

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Marketers continually evaluate and refine their pricing strategies to ensure that they meet the following goals: building profitability, boosting volume, matching competition, and creating prestige.

Price directly affects spending choices at the entry level when compared to most other variables.

Price is perhaps the toughest variable for marketers to control.

Both legal constraints and marketing intermediaries play roles in determining the final price of most products.

Smart marketers evaluate and refine their pricing in order to meet their goals.

These goals can shift to align with the changing market.

13-5 Pricing Objectives and Strategies (2 of 2)

Boosting Volume

Penetration pricing*: A new product pricing strategy that aims to capture as much of the market as possible through rock-bottom prices

Everyday-low pricing (EDLP)*: Long-term discount pricing, designed to achieve profitability through high sales volume

High/low pricing*: A pricing strategy designed to drive traffic to retail stores by special sales on a limited number of products, and higher everyday prices on others

Loss-leader pricing*: Closely related to high/low pricing, loss-leader pricing means pricing a handful of items—or loss leaders—temporarily below cost to drive traffic

* Words accompanied by an asterisk are key terms from the chapter.

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Lecture Booster: Regardless of the type of product one sells, the price charged to customers or clients will have a direct effect on the success of the business. Discuss with students how the price of a product plays a role in the profit that a company makes.

Discussion Activity 3

Display an array of sample packages of competing products (e.g., toothpaste containers, cereal boxes, and empty fruit and vegetable cans with labels) in front of the class. Discuss as a group the typical price a consumer would pay for each of the products. Think about what types of factors determine that price, what type of consumer is likely to purchase each product, and how the manufacturer/retailer typically advertises or promotes the product.

What is the target market for each of the products on display? Do the characteristics of the target market impact price? What factors play the biggest role in determining the price of each? Do the manufacturers/retailers promote the products similarly? How?

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Answers will vary.

Marketers often determine product price based on specific attributes of the product or the product’s stage in the product life cycle. For the launch of new, innovative products with few competitors, skimming pricing is often used; examples of such products might include pharmaceuticals and electronics. As competition increases, pricing is often lowered. Products that face a considerable number of competitor products in the marketplace are often priced using penetration pricing; marketers attempt to set their price low enough to lure consumers to try their product rather than a competitor’s product.

Discussion Activity 3 Debrief

For which products was it easier to come up with answers to the questions? Why do you think that is?

In what ways is pricing for ordinary products different or the same as pricing for luxury items?

How important is price to you when you are making a purchase?

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Answers will vary.

The main difference between ordinary products and luxury items is that people are often willing to pay more for the perception of quality or the name, and pricing margins tend to be more flexible with higher-priced items.

13-6

Pricing in Practice:

A Real-World Approach

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13-6 Pricing in Practice (1 of 4)

Breakeven Analysis

Breakeven analysis*: The process of determining the number of units a firm must sell to cover all costs

Equation

* Words accompanied by an asterisk are key terms from the chapter.

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Sales above the breakeven point generate a profit; sales below the breakeven point lead to a loss.

𝐁𝐫𝐞𝐚𝐤𝐞𝐯𝐞𝐧 𝐏𝐨𝐢𝐧𝐭 (𝐁𝐏)=(𝐓𝐨𝐭𝐚𝐥 𝐟𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 (𝐅𝐂) )/(𝐏𝐫𝐢𝐜𝐞/𝐮𝐧𝐢𝐭 (𝐩) – 𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐜𝐨𝐬𝐭𝐬/𝐮𝐧𝐢𝐭 (𝐕𝐂))

13-6 Pricing in Practice (2 of 4)

Alternatives to Cover Costs

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Among the choices a company can choose to cover all costs, each comes with its own set of considerations.

No strategy is best in all circumstances, which is why studying the elements of a breakeven analysis can be helpful.

Raise prices

Decrease variable costs

Decrease

fixed costs

13-6 Pricing in Practice (3 of 4)

Fixed Margin Pricing

Profit margin*: The gap between the cost and the price of an item on a per-product basis

Ways to determine margins

Cost-based pricing

Demand-based pricing

* Words accompanied by an asterisk are key terms from the chapter.

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Profit margin can be expressed as a dollar amount, but it is more often expressed as a percentage.

13-6 Pricing in Practice (4 of 4)

Consumer Pricing Perceptions: The Strategic Wild Card

Price–quality relationships

Consumers use price as an indicator of quality unless they have additional information to guide their decision

Odd pricing*: The practice of ending prices in numbers below even dollars and cents in order to create a perception of greater value

* Words accompanied by an asterisk are key terms from the chapter.

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The link between price and perceived quality can be powerful.

Most consumers use price as an indicator to determine the quality of a product unless they have additional information regarding the product.

Marketers also must weigh the pros and cons of odd pricing.

Lecture Booster: Classic economics—plus common sense—says that consumers will research and weigh their options and make the best choice. But in the real world, consumers are not so rational. One’s emotions can trump one’s mind. In fact, recent research shows that money can act like a drug on one’s brain. Even just counting one’s money can literally raise one’s pain threshold. Pricing hot buttons, such as “FREE,” “99 cents,” and “limited time,” can play games with someone’s mind, too, luring people to purchase and consume products that they don’t really want! But the good news for marketers is that consumers are irrational in somewhat predictable ways.

Mere exposure to a high price makes a lower price seem reasonable, even if it isn’t. So smart marketers often keep overpriced items in their line simply to promote sales of other items. For instance, if the most expensive necklace in a jewelry store is $100 and no one wants to buy it, the owner might add a $200 necklace to boost sales of the $100 necklace. Economists call this “effect anchoring.” And research shows that anchors are tough to shake. One key takeaway that goes beyond consumer goods is as follows: “Be the first person to name a price in a negotiation—especially a salary negotiation—and don’t worry about being overly reasonable.”

Sources: David Kestenbaum, How Money Messes With Our Minds, May/June 2011, aarp.org/money/scams-fraud/info-04-2011/marketing-mind-tricks.html (accessed October 12, 2017); Peter Coy, Why the Price Is Rarely Right, January 21, 2010, Business Week.

Polling Activity

Which of the following products are you more likely to buy?

A knockoff sweatshirt of your favorite team at $20.00

A knockoff sweatshirt of your favorite team at $19.99

A licensed sweatshirt of your favorite team at $49.95

A licensed sweatshirt of your favorite team at $50.00

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Answers will vary.

Follow-up discussion might include why some would choose a knockoff versus a licensed version of the sweatshirt. Make note of whether the penny difference really affected anyone’s choices.

Self-Assessment

How important is price to you when making a purchase of everyday items such as food, gas, or clothes?

Are you a comparison shopper? Are there products for which you are more likely to comparison shop?

Do you always buy the least-expensive choice of a particular item? Why or why not?

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Instructors note: Can be used for in-class reflection or as written assignment for review

DB 5

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