Written assignment 3 ( Samsung)

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Week 6 Using Marketing Channels and Price to

Create Value for Customers Sometimes when you buy a good or service, it passes straight from the producer to you. But

suppose every time you purchased something, you had to contact its maker? For some products

or services, such as a haircut, this would work. But what about the items you purchase at the

grocery store? You couldn't begin to contact and buy from all the makers of those products. It

would be an incredibly inefficient way to do business.

Fortunately, companies partner with one another, alleviating you of this burden. So, for example,

instead of Procter & Gamble selling individual toothbrushes to consumers, it sells many of them

to stores, which then sell them to everyone.

The specific avenue a seller uses to make a finished good or service available for purchase—for

example, whether you are able to buy it directly from the seller, at a store, online, or from a

salesperson—is referred to as the product's marketing channel (or distribution channel). All of

the people and organizations that buy, resell, and promote the product "downstream" as it makes

its way to you are part of the marketing channel.

Likewise, price creates value for customers and is the way the company makes its revenue and

profit by exchanging value with the customer. When Chick-fil-A opens new locations, the company

offers the first 100 customers a free meal every week for a year. Customers camp out overnight to

get in line for the free meals. When KFC introduced its grilled chicken, the company put coupons

good for a free piece of chicken in many Sunday newspapers.

So how do sellers make any money if they always offer goods and services on sale or for a special

deal? Many sellers give customers something for free, hoping they'll buy other products, but a

careful balance is needed to ensure profit.

Price is the only marketing mix variable or part of the offering that generates revenue. Buyers

relate the price to value. They must feel they are getting value for the price paid. Pricing decisions

are extremely important. So how do organizations decide how to price their goods and services?

This week, we explore both distribution and price as a means to add value for customers.

6.1 Marketing Channels and Channel Partners

LEARNING OBJECTIVES

1. Explain why marketing channel decisions can result in the success or failure of products. 2. Describe the types of organizations that work together as channel partners and what each does.

Today, marketing channel decisions are as important as the decisions companies make about the

features and prices of products (Littleson, 2007). Consumers have become more demanding.

They are used to getting what they want. If you can't get your product to them when, where, and

how they want it, they will simply buy a competing product. In other words, how companies sell

has become as important as what they sell (CBSNews.com, 2007).

The firms a company partners with to actively promote and sell a product as it travels through its

marketing channel to users are referred to by the firm as its channel members (or partners).

Companies strive to choose not only the best marketing channels but also the best channel

partners. A strong channel partner like Walmart can successfully promote and sell a product that

might not otherwise turn a profit for its producer. In turn, Walmart wants to work with strong

channel partners it can depend on to continuously provide it with great products. By contrast, a

weak channel partner, like a bad spouse, can be a liability.

The simplest marketing channel consists of just two parties—a producer and a consumer. Your

haircut is a good example. When you get a haircut, it travels straight from your hairdresser to you.

No one else owns, handles, or remarkets the haircut before you get it. However, many other

products and services pass through multiple organizations before they get to you. These

organizations are called intermediaries (or middlemen or resellers).

Companies partner with intermediaries not because they necessarily want to (ideally they could

sell their products straight to users) but because the intermediaries can help them sell the

products better than they could working alone. In other words, they have some sort of capabilities

the producer needs: contact with many customers or the right customers, marketing expertise,

shipping and handling capabilities, and the ability to lend the producer credit are among the types

of help a firm can get by using a channel partner.

Intermediaries also create efficiencies by streamlining the number of transactions an organization

must make, each of which takes time and costs money to conduct. As Figure 6.1, "Using

Intermediaries to Streamline the Number of Transactions" shows, by selling the tractors it makes

through local farm machinery dealers, manufacturer John Deere can streamline the number of

transactions it makes from eight to just two.

Figure 6.1 Using Intermediaries to Streamline the Number of Transactions

The marketing environment is always changing, so what was a great channel or channel partner

yesterday might not be a great channel partner today. Changes in technology, production

techniques, and your customer's needs mean you have to continually reevaluate your marketing

channels and channel partners. Moreover, when you create a new product, you can't assume the

channels that were used in the past are the best ones (Lancaster & Withey, 2007). A different

channel or channel partner might be better.

Consider Microsoft's digital encyclopedia, Encarta, which was first sold on CD and via online

subscription in the early 1990s. Encarta nearly destroyed Encyclopedia Britannica, a firm that had

dominated the print encyclopedia business for literally centuries. Ironically, Microsoft had

actually tried to partner with Encyclopedia Britannica to use its encyclopedia information to make

Encarta but was turned down.

But today, Encarta no longer exists. It's been put out of business by the free online encyclopedia

Wikipedia. The point is that products and their marketing channels are constantly evolving.

Consequently, you and your company have to be ready to evolve, too.

Types of Channel Partners Let's now look at the basic types of channel partners. To help you understand the types of channel

partners, we will go over the most common types of intermediaries. The two types you hear about

most frequently are wholesalers and retailers. Keep in mind, however, that the categories we

discuss in this section are just that—categories. The lines between wholesalers, retailers, and

producers have begun to blur. Microsoft is a producer of goods, but it has opened its own retail

stores to sell products to consumers, much as Apple has done (Lyons, 2009). Walmart and other

large retailers now produce their own brands and sell them to other retailers. Similarly, many

producers have outsourced their manufacturing, and although they still call themselves

manufacturers, they act more like wholesalers. Wherever organizations see an opportunity, they

are beginning to take it, regardless of their positions in marketing channels.

Wholesalers

Wholesalers obtain large quantities of products from producers, store them, and break them

down into cases and other smaller units more convenient for retailers to buy, a process called

"breaking bulk." Wholesalers get their name from the fact that they resell goods "whole" to other

companies without transforming the goods. If you are trying to stock a small electronics store, you

probably don't want to purchase a truckload of iPads. Instead, you probably want to buy a smaller

assortment of iPads as well as other merchandise. Via wholesalers, you can get the assortment of

products you want in the quantities you want. Some wholesalers carry a wide range of different

products; others carry narrow ranges of products.

Most wholesalers "take title" to goods—or own them until purchased by other sellers. Wholesalers

such as these assume a great deal of risk on the part of companies farther down the marketing

channel. For example, if the iPad you plan to purchase is stolen during shipment, damaged, or

becomes outdated because a new model has been released, the wholesaler suffers the loss—not

you. Electronic products, in particular, become obsolete very quickly. Think about the cell phone

you owned just a couple of years ago. Would you want it today?

Retailers

Retailers buy products from wholesalers, agents, or distributors and then sell them to

consumers. Retailers vary by the types of products they sell, their sizes, the prices they charge, the

level of service they provide consumers, and the convenience or speed they offer. You are familiar

with many of these types of retailers because you have purchased products from them.

Supermarkets, or grocery stores, are self-service retailers that provide a full range of food

products to consumers, as well as some household products. Supermarkets can be high, medium,

or low range in terms of the prices they charge and the service and variety of products they offer.

Whole Foods and Central Market are grocers that offer a wide variety of products, generally at

higher prices. Midrange supermarkets include stores such as Albertsons and Kroger. Aldi and

Sack 'n Save are examples of supermarkets with a limited selection of products and service but

low prices. Drugstores specialize in selling over-the-counter medications, prescriptions, and

health and beauty products, and offer services such as photo developing.

Convenience stores are miniature supermarkets. Many of them sell gasoline and are open 24

hours. Often they are located on corners, making it easy and fast for consumers to get in and out.

Some of these stores contain fast-food franchises such as Subway. Consumers pay for the

convenience in the form of higher markups on products.

Specialty stores sell a certain type of product, but they usually carry a deep line of it. Zales,

which sells jewelry, and Williams-Sonoma, which sells an array of kitchen and cooking-related

products, are examples of specialty stores. The personnel who work in specialty stores are usually

knowledgeable and often provide customers with a high level of service. Specialty stores vary by

size. Many are small. However, giant specialty stores called category killers have emerged.

A category killer sells a high volume of a particular type of product and, in doing so, dominates

the competition, or "category." Petco and PetSmart are category killers in the retail pet-products

market. Best Buy is a category killer in the electronics-product market.

Department stores, by contrast, carry a variety of household and personal types of

merchandise such as clothing and jewelry. Many are chain stores. The prices department stores

charge range widely, as does the level of service shoppers receive. Neiman Marcus, Saks Fifth

Avenue, and Nordstrom sell expensive products and offer extensive personal service. Department

stores such as JCPenney, Sears, and Macy's charge midrange prices, and offer a midrange level of

service. Walmart, Kmart, and Target are discount department stores with cheaper goods and a

limited amount of service.

Superstores are oversized department stores that carry a broad array of general merchandise as

well as groceries. Banks, hair and nail salons, and restaurants such as Starbucks are often located

within these stores for the convenience of shoppers. You have probably shopped at a SuperTarget

or a huge Walmart with offerings such as these.

Warehouse clubs are supercenters that sell products at a discount. They require people to

become members by paying an annual fee. Costco and Sam's Club are examples. Off-

price retailers are stores that sell a variety of discount merchandise that consists of seconds,

overruns, and the previous season's stock other stores have liquidated. Big Lots, Ross Dress for

Less, and dollar stores are off-price retailers.

A new type of retail store that turned up in the last few years is the pop-up store. Pop-up stores

are small, temporary stores. They can be kiosks that temporarily occupy unused retail space. The

goal is to create excitement and "buzz" for a retailer that then drives customers to their regular

stores. In 2006, JCPenney created a pop-up store in Times Square for a month. Kate Coultas, a

spokesperson for JCPenney, said the store got the attention of Manhattan's residents. Many

hadn't been to a JCPenney in a long time. "It was a real dramatic statement," Coultas said. "It

kind of had a halo effect" on the company's stores in the surrounding boroughs of New York City

(Austin, 2009).

Not all retailing goes on in stores, however. Nonstore retailing—retailing not conducted in

stores—is a growing trend. Door-to-door sales; party selling; selling to consumers via television,

catalogs, the Internet, and vending machines; and telemarketing are examples of nonstore

retailing. So is direct marketing. Companies that engage in direct marketing develop and send

promotional materials such as catalogs, letters, leaflets, e-mails, and online ads straight to

consumers urging them to contact their firms directly to buy products.

6 . 1 K E Y T A K E A W A Y

The specific way in which you are able to buy a product is referred to as its marketing channel. Marketing channel decisions are as important as the decisions companies make about the features and prices of products. Channel partners are firms that actively promote and sell a product as it travels through its channel to its user. Companies try to choose the best channels and channel partners to help them sell products because doing so can give them a competitive advantage.

6.2 Typical Marketing Channels

LEARNING OBJECTIVES

1. Describe the basic types of channels in business-to-consumer (B2C) and business-to-business (B2B)

markets. 2. Explain the advantages and challenges companies face when using multiple channels and alternate

channels.

3. Explain the pros and cons of disintermediation. 4. List the channels firms can use to enter foreign markets.

Figure 6.2, "Typical Channels in Business-to-Consumer (B2C) Markets," shows the typical

channels in business-to-consumer (B2C) markets. As we explained, the shortest marketing

channel consists of just two parties—a producer and a consumer. A channel such as this is

a direct channel. By contrast, a channel that includes one or more intermediaries—say, a

wholesaler, distributor, or broker or agent—is an indirect channel. In an indirect channel, the

product passes through one or more intermediaries. That doesn't mean the producer will do no

marketing directly to consumers. Levi's runs ads on TV designed to appeal directly to consumers.

The makers of food products run coupon ads. However, the seller also has to focus its selling

efforts on these intermediaries because the intermediary can help with the selling effort. Not

everyone wants to buy Levi's online.

Figure 6.2 Typical Channels in Business-to-Consumer (B2C) Markets

Disintermediation

You might be tempted to think middlemen, or intermediaries, are bad. If you can cut them out of

the deal—a process marketing professionals call disintermediation—products can be sold more

cheaply, can't they? Large retailers, including Target and Walmart, sometimes bypass middlemen.

Instead, they buy their products directly from manufacturers and then store and distribute them

to their own retail outlets. Walmart is increasingly doing so and even purchasing produce directly

from farmers around the world (Birchall, 2010).

However, cutting out the middleman is not always desirable. A wholesaler with buying power and

excellent warehousing capabilities might be able to purchase, store, and deliver a product to a

seller more cheaply than its producer could alone. Likewise, hiring a distributor will cost a

producer money. But if the distributor can help the producer sell greater quantities of a product,

it can increase the producer's profits.

Moreover, when you cut out the middlemen, you have to perform the functions they once did.

Those functions could include storing the product or dealing with hundreds of retailers. More

than one producer has ditched its intermediaries only to rehire them later.

The trend today is toward disintermediation. The Internet has facilitated a certain amount of

disintermediation by making it easier for consumers to contact one another without going

through any middlemen. The Internet has also made it easier for buyers to shop for the lowest

prices. Today, most people book trips online without going through travel agents. People also

shop for homes online rather than using real estate agents. To remain in business, resellers need

to find new ways to add value to products.

However, for some products, disintermediation via the Internet doesn't work so well. Insurance is

an example. You can buy it online directly from companies, but many people want to buy through

an agent they can talk to for advice. Most large insurance companies offer consumers both

options, and each method of selling insurance products has a different pricing structure based on

the level of service.

Sometimes it's simply impossible to cut out middlemen. Would the Coca-Cola Company want to

take the time and trouble to personally sell you an individual can of Coke? No. Coke is no more

capable of selling individual Cokes to people than Santa is capable of delivering toys to children

around the globe.

Even Dell, which initially made its mark by selling computers straight to users, now sells its

products through retailers such as Best Buy as well. Dell found that to compete effectively, its

products needed to be placed in stores alongside Hewlett-Packard, Acer, and other computer

brands (Kraemer & Dedrick, 2002).

Multiple Channels and Alternate Channels

Marketing channels can get a lot more complex than the channels shown in Figure 6.2, "Typical

Channels in Business-to-Consumer (B2C) Markets," though. Look at the channels in Figure 6.3,

"Alternate Channel Arrangements." Notice how in some situations, a wholesaler will sell to

brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell

straight to retailers or straight to consumers. Manufacturers also sell straight to consumers, and,

as we explained, sell straight to large retailers like Target.

Figure 6.3 Alternate Channel Arrangements

The point is that firms can and do use multiple channels. Take Levi's, for example. You can buy a

pair of Levi's jeans from a retailer such as Kohl's, or you can buy a pair directly from Levi's at one

of the outlet stores it owns around the country. You can also buy a pair from the Levi's website.

The key is understanding the different target markets for the product and designing the best

channel to meet the needs of customers in each. Is there a group of buyers who would purchase

your product if they could shop online from their homes? Perhaps there is a group of customers

interested in your product, but they do not want to pay full price. The ideal way to reach these

people might be with an outlet store and low prices. Each group then needs to be marketed to

accordingly. Many people regularly interact with companies via numerous channels before

making buying decisions.

Using multiple channels can be effective. At least one study has shown that the more marketing

channels your customers use, the more loyal they are likely to be to your products (Fitzpatrick,

2005). Companies work hard to integrate their selling channels so users get a consistent

experience. For example, QVC's TV channel, website, and mobile service—which sends alerts to

customers and allows them to buy products via their cell phones—all have the same look and feel.

Would you like to purchase gold from a vending machine? You can in Germany. Germans like to

purchase gold because it's considered a safe alternative to paper money, which can become

devalued during a period of hyperinflation. So, in addition to selling gold the usual way, TG-Gold-

Super-Market company has installed "gold to go" machines in German-speaking countries. The

gold is dispensed in metal boxes, and cameras on the machine monitor the transactions to

prevent money laundering (Wilson & Blas, 2009).

6 . 2 K E Y T A K E A W A Y

A direct marketing channel consists of just two parties—a producer and a consumer. By contrast, a channel that includes one or more intermediaries (wholesaler, distributor, or broker or agent) is an indirect channel. Firms often use multiple channels to reach more customers and increase their effectiveness. Some companies find ways to increase their sales by forming strategic channel alliances with one another. Other companies look for ways to cut the middlemen from the channel, a process known as disintermediation.

6.3 Functions Performed by Channel Partners

LEARNING OBJECTIVES

1. Describe the activities performed in channels. 2. Explain which organizations perform which functions.

Different organizations in a marketing channel are responsible for different value-adding

activities. The following are some of the most common functions channel members perform.

However, keep in mind that "who does what" can vary, depending on what the channel members

actually agree to in their contracts with one another.

Disseminate Marketing Communications and Promote Brands

Somehow, wholesalers, distributors, retailers, and consumers need to be informed—via marketing

communications—that an offering exists and that there's a good reason to buy it. Sometimes, a

push strategy is used to help marketing channels accomplish this. A push strategy (discussed in

greater detail in Week 7, "Public Relations and Sales Promotions") is one in which a manufacturer

convinces wholesalers, distributors, or retailers to sell its products. Consumers are informed via

advertising and other promotions that the product is available for sale, but the main focus is to

sell to intermediaries.

By contrast, a pull strategy focuses on creating demand for a product among consumers so that

businesses agree to sell the product. A good example of an industry that uses both pull and push

strategies is the pharmaceutical industry. Pharmaceutical companies promote their drugs to

pharmacies and doctors, but they now also run ads designed to persuade individual consumers to

ask their physicians about drugs that might benefit them.

In many cases, two or more organizations in a channel jointly promote a product to retailers,

purchasing agents, and consumers and work out which organization is responsible for what type

of communication to whom. The actual forms and styles of communication will be discussed more

in the promotions and sales section of the book.

Sorting and Regrouping Products As we explained, many businesses don't want to receive huge quantities of a product. One of the

functions of wholesalers and distributors is to break down large quantities of products into

smaller units and provide an assortment of different products.

Storing and Managing Inventory If a channel member has run out of a product when a customer wants to buy it, the result is often

a lost sale. That's why most channel members stock, or "carry," reserve inventory. However,

storing products is not free. Warehouses cost money to build or rent and heat and cool;

employees have to be paid to stock shelves, pick products, and ship them. Some companies,

including Walmart, put their suppliers in charge of their inventory. The suppliers have access to

Walmart's inventory levels and ship products when and where the retailer's stores need them.

Distributing Products Physical goods that travel within a channel need to be moved from one member to another and

sometimes back again. Some large wholesalers, distributors, and retailers own their own fleets of

trucks for this purpose. In other cases, they hire third-party transportation providers—trucking

companies, railroads—to move their products.

Being able to track merchandise like you can track a FedEx package is important to channel

partners. They want to know where their products are and what shape they are in. Losing

inventory or having it damaged or spoiled can wreak havoc on profits. Other problems include not

getting products on time or being able to get them at all when your competitors can.

Assume Ownership Risk and Extend Credit If products are damaged during transit, one of the first questions asked is who owned the product

at the time. In other words, who suffers the loss? Generally, no one channel member assumes all

of the ownership risk in a channel. Instead, it is distributed among channel members depending

on the contracts they have with one another and their free on board provisions. A provision

designates who is responsible for what shipping costs and who owns the

free on board (FOB) title to the goods and when.

Share Marketing and Other Information Each of the channel members has information about the demand for products, trends, inventory

levels, and what the competition is doing. The information is valuable and can be doubly valuable

if channel partners trust one another and share it. More information can help each firm in the

marketing channel perform its functions better and overcome competitive obstacles (Frazier,

Maltz, Antia, & Rindfleisch, 2009).

6 . 3 K E Y T A K E A W A Y

Different organizations in a marketing channel are responsible for different value-adding activities. These activities include disseminating marketing communications and promoting brands, sorting and regrouping products, storing and managing inventory, distributing products, assuming the risk of products, and sharing information.

6.4 Marketing Channel Strategies

LEARNING OBJECTIVES

1. Describe the factors that affect a firm's channel decisions. 2. Explain how intensive, exclusive, and selective distribution differ from one another. 3. Explain why some products are better suited to some distribution strategies than others.

Channel Selection Factors

Selecting the best marketing channel is critical because it can mean the success or failure of your

product. One of the reasons the Internet has been so successful as a marketing channel is because

customers get to make some of the channel decisions themselves. They can shop virtually for any

product in the world when and where they want to, as long as they can connect to the web. They

can also choose how the product is shipped.

Type of Customer

The Internet isn't necessarily the best channel for every product, though. For example, do you

want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or

not overripe? Then online grocery shopping might not be for you. Clearly, how your customers

want to buy products will have an impact on the channel you select. In fact, it should be your

prime consideration.

First of all, are you selling to a consumer or a business customer? Generally, these two groups

want to be sold to differently. Most consumers are willing to go to a grocery or convenience store

to purchase toilet paper. The manager of a hospital trying to replenish its supplies would not. The

hospital manager would also be buying a lot more toilet paper than an individual consumer and

would expect to be called upon by a distributor, but perhaps only semiregularly. Thereafter, the

manager might want the toilet paper delivered on a regular basis and billed to the hospital via

automatic systems. Likewise, when businesses buy expensive products such as machinery and

computers or products that have to be customized, they generally expect to be sold to personally

via salespeople. And often they expect special payment terms.

Type of Product

The type of product you're selling will also affect your marketing channel choices. Perishable

products often have to be sold through shorter marketing channels than products with longer

shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown overnight

to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by

"slow boat" and handled by more intermediaries. Valuable and fragile products also tend to have

shorter marketing channels. Automakers generally sell their cars straight to car dealers (retailers)

rather than through wholesalers. The makers of corporate jets often sell them straight to

corporations, which demand they be customized to certain specifications.

Channel Partner Capabilities

Your ability vs. the ability of other types of organizations that operate in marketing channels can

affect your channel choices. If you are a massage therapist, you are quite capable of delivering

your product straight to your client. If you produce downloadable products like digital books or

recordings, you can sell your products straight to customers on the Internet. Hypnotic World, a

United Kingdom producer of self-hypnosis recordings, is a company such as this.

But suppose you've created a great personal gadget—something that's tangible, or physical. You've

managed to sell it via two channels—say, on TV (via the Home Shopping Network, perhaps) and

on the web. Now you want to get the product into retail stores like Target, Walgreens, and Bed

Bath & Beyond. If you can get the product into these stores, you can increase your sales

exponentially. In this case, you might want to contract with an intermediary—perhaps an agent or

a distributor who will convince the corporate buyers of those stores to carry your product.

The Business Environment and Technology

The general business environment, such as the economy, can also affect the marketing channels

chosen for products. For example, think about what happens when the value of the dollar declines

relative to the currencies of other countries. When the dollar falls, products imported from other

countries cost more to buy relative to products produced and sold in the United States. Products

"made in China" become less attractive because they have gotten more expensive. As a result,

some companies then look closer to home for their products and channel partners.

Technological changes affect marketing channels, too. We explained how the Internet has

changed how products are bought and sold. Many companies like selling products on the Internet

as much as consumers like buying them. An Internet sales channel gives companies more control

over how their products are sold and at what prices than if they leave the job to another channel

partner such as a retailer. Plus, a company selling on the Internet has a digital footprint, or

record, of what shoppers look at, or click on. As a result, it can recommend products they appear

to be interested in and target them with special offers and prices (Food Channel, 2008).

Some sites let customers tailor products to their liking. On the Domino's website, you can pick

your pizza ingredients and then watch them as they fall onto your virtual pizza. The site then lets

you know who is baking your pizza, how long it's taking to cook, and who's delivering it. Even

though interaction is digital, it somehow feels a lot more personal than a basic phone order.

Developing customer relationships is what today's marketing is about. The Internet is helping

companies do this.

Competing Products' Marketing Channels

How your competitors sell their products can also affect your marketing channels. As we

explained, Dell now sells computers to firms such as Best Buy so the computers can compete with

other brands on store shelves.

You don't always have to choose the channels your competitors rely on, though. Netflix is an

example. Netflix turned the video rental business on its head by coming up with a new marketing

channel that better meets the needs of many consumers. Maybelline and L'Oréal products are

sold primarily in retail stores. However, Mary Kay and Avon use salespeople to personally sell

their products to consumers.

Factors That Affect a Product's Intensity of Distribution Firms that choose an intensive distribution strategy try to sell their products in as many

outlets as possible. Intensive distribution strategies are often used for convenience offerings—

products customers purchase on the spot without much shopping around. Soft drinks and

newspapers are an example. You see them sold in many different places. Redbox, which rents

DVDs out of vending machines, has made headway using an intensive distribution strategy: the

machines are located in fast-food restaurants, grocery stores, and other places people frequent.

Figure 6.4

Because installing a vending machine is less expensive than opening a retail outlet, Redbox has

been able to locate its DVD vending machines in places where people go frequently.

Source: Photo by Greg Goebel. (2012). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 2.0 Generic license.

By contrast, selective distribution involves selling products at select outlets in specific

locations. For instance, Sony TVs can be purchased at a number of outlets such as Circuit City,

Best Buy, or Walmart, but the same models are generally not sold at all the outlets. By selling

different models with different features and price points at different outlets, a manufacturer can

appeal to different target markets.

Exclusive distribution involves selling products through one or very few outlets. For instance,

supermodel Cindy Crawford's line of furniture is sold exclusively at the furniture company Rooms

To Go. Designer Michael Graves has a line of products sold exclusively at Target. To purchase

those items you need to go to one of those retailers. TV series are distributed exclusively. A

company that produces a TV series will sign an exclusive deal with a network like ABC, CBS, or

Showtime, and the series will initially appear only on that network. Later, reruns of the shows are

often distributed selectively to other networks.

To control the image of their products and the prices at which they are sold, the makers of upscale

products often prefer to distribute their products more exclusively. Expensive perfumes and

designer purses are an example. During the economic downturn, the makers of some of these

products were disappointed to see retailers had slashed the products' prices, "cheapening" their

prestigious brands.

Distributing a product exclusively to a limited number of organizations under strict terms can

help prevent a company's brand from deteriorating, or losing value. It can also prevent products

from being sold cheaply in gray markets. A gray market is a market in which a producer hasn't

authorized its products to be sold (Burrows, 2008).

6 . 4 K E Y T A K E A W A Y

Selecting the best marketing channel is critical because it can mean the success or failure of your product. The type of customer you're selling to will have an impact on the channel you select. In fact, this should be your prime consideration. The type of product, your organization's capabilities vs. those of other channel members, the way competing products are marketed, and changes in the business environment and technology can also affect your marketing channel decisions. Various factors affect a company's decisions about the intensity of a product's distribution. An intensive distribution strategy involves selling a product in as many outlets as possible. Selective distribution involves selling a product at select outlets in specific locations. Exclusive distribution involves selling a product through one or very few outlets.

6.5 Channel Dynamics

LEARNING OBJECTIVES

1. Explain what channel power is and the types of firms that wield it. 2. Describe the types of conflicts that can occur in marketing channels. 3. Describe the ways in which channel members achieve cooperation with one another. 4. Understand how supply chains differ from marketing channels.

Channel Power

Strong channel partners often wield what's called channel power and are referred to

as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble

and Dell were often channel captains. But that is changing. More often today, big retailers like

Walmart and Target are commanding more channel power. They have millions of customers and

are bombarded with products wholesalers and manufacturers want them to sell. As a result, these

retailers get what they want.

Category killers are in a similar position. Consumers like you are gaining marketing channel

power, too. Regardless of what one manufacturer produces or what a local retailer has available,

you can use the Internet to find whatever product you want at the best price available and have it

delivered when, where, and how you want.

Channel Conflict A dispute among channel members is called a channel conflict. Channel conflicts are common.

Part of the reason for this is that each channel member has its own goals, which are unlike those

of any other channel member. The relationship among them is not unlike the relationship

between you and your boss. Both of you want to serve your organization's customers well.

However, your goals are different. Your boss might want you to work on the weekend, but you

might not want to because you need to study for a Monday test.

All channel members want to have low inventory levels but immediate access to more products.

Who should bear the cost of holding the inventory? What if consumers don't purchase the

products? Can they be returned to other channel members, or is the organization in possession of

the products responsible for disposing of them? Channel members try to spell out such details in

their contracts.

No matter how "airtight" their contracts are, there will still be points of contention among

channel members. Channel members are constantly asking their partners, "What have you done

(or not done) for me lately?" Wholesalers and retailers frequently lament that the manufacturers

they work with aren't doing more to promote their products—for example, distributing coupons

for them or running TV ads—so they will move off store shelves more quickly.

Meanwhile, manufacturers want to know why wholesalers aren't selling their products faster and

why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened

its own retail stores around the country, in part because it didn't like how its products were being

displayed and sold in other companies' stores.

Vertical vs. Horizontal Conflict

The conflicts we've described so far are examples of vertical conflict. A vertical conflict is

conflict that occurs between two different types of members in a channel—say, a manufacturer, an

agent, a wholesaler, or a retailer. By contrast, a horizontal conflict is conflict that occurs

between organizations of the same type—say, two manufacturers that each want a powerful

wholesaler to carry only its products.

Horizontal conflict can be healthy because it's competition-driven. But it can create problems,

too. In 2005, Walmart experienced a horizontal conflict among its landline telephone suppliers.

The suppliers were in the middle of a price war and cutting the prices to all the retail stores to

which they sold. Walmart wasn't selling any additional phones due to the price cuts. It was just

selling them for less and making less of a profit (Hitt, Black, & Porter, 2005).

Channel leaders such as Walmart usually have a great deal of say when it comes to how channel

conflicts are handled, which is to say that they usually get what they want. But even the most

powerful channel leaders strive for cooperation. A manufacturer with channel power still needs

good retailers to sell its products; a retailer with channel power still needs good suppliers from

which to buy products. One member of a channel can't squeeze all the profits out of the other

channel members and still hope to function well.

Moreover, because each of the channel partners is responsible for promoting a product through

its channel, to some extent they are all in it together. Each one of them has a vested interest in

promoting the product, and the success or failure of any one of them can affect that of the others.

Figure 6.5

Boar's Head's in-store displays help its channel partners sell its products.

Source: Photo by Scorpions and Centaurs. (2010). Flickr. Used under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic license.

Producing marketing and promotional materials their channel partners can use for sales purposes

can also facilitate cooperation among companies. In-store displays, brochures, banners, photos

for websites, and advertisements the partners can customize with their own logos and company

information are examples.

Educating your channel members' sales representatives is an important part of facilitating

cooperation, especially when you're launching a new product. The reps need to be provided with

training and marketing materials in advance of the launch so their activities are coordinated with

yours. Microsoft does a good job of training its partners. Before launching operating systems such

as Windows XP and Vista, Microsoft provides thousands of its partners with sales and technical

training (IrieAuctions.com, 2009).

In addition, companies run sales contests to encourage their channel partners' sales forces to sell

what they have to offer. Offering your channel partners certain monetary incentives, such as

discounts for selling your product, can help, too. We'll talk more about incentive programs

in Week 7, "Public Relations and Sales Promotions."

Finally, you don't want to risk breaking the law or engage in unfair business practices when

dealing with your channel partners (IrieAuctions.com, 2009). Another issue channel partners

sometimes encounter relates to resale price maintenance agreements. A resale price

maintenance agreement is an agreement whereby a producer of a product restricts the price a

retailer can charge for it.

The producers of upscale products often want retailers to sign resale price maintenance

agreements because they don't want the retailers to deeply discount their products. Doing so

would "cheapen" their brands, producers believe. Producers also contend that resale price

maintenance agreements prevent price wars from breaking out among their retailers, which can

lead to the deterioration of prices for all of a channel's members.

Channel Integration: Vertical and Horizontal Marketing Systems Another way to foster cooperation in a channel is to establish a vertical marketing system. In

a vertical marketing system, channel members formally agree to closely cooperate with one

another. (You have probably heard the saying, "If you can't beat 'em, join 'em.") A vertical

marketing system can also be created by one channel member taking over the functions of

another member.

Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a

retailer of them. But the company's long-term strategy is to compete in every personal-care

channel, including salons, where the men's business is underdeveloped. In 2009, P&G purchased

The Art of Shaving, a seller of pricey men's shaving products in upscale shopping malls. P&G also

runs retail boutiques around the globe that sell its prestigious SK-II skin-care line (Neff, 2009).

Franchises are another type of vertical marketing system. They are used not only to lessen

channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the

right to market a company's goods or services within a certain territory or location (Daszkowski,

n.d.). McDonald's sells meat, bread, ice cream, and other products to its franchises, along with the

right to own and operate the stores. And each of the owners of the stores signs a contract with

McDonald's agreeing to do business in a certain way.

By contrast, in a conventional marketing system, the channel members have no affiliation

with one another. All the members operate independently. If the sale or the purchase of a product

seems like a good deal at the time, an organization pursues it. But there is no expectation among

the channel members that they have to work with one another in the future.

A horizontal marketing system is one in which two companies at the same channel level—

say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell

their products or to make the most of their marketing opportunities. The Internet phone service

Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming to

put Skype's service on Nokia's phones. Skype hoped it will reach a new market (mobile phone

users) this way. And Nokia hoped to sell its phones to people who like to use Skype on their

personal computers (PCs) (Gelles, 2009).

Channels vs. Supply Chains In the past few decades, organizations have begun taking a more holistic look at their marketing

channels. Instead of looking at only the firms that sell and promote their products, they have

begun looking at all the organizations that figure into any part of the process of producing,

promoting, and delivering an offering to its user. All these organizations are considered part of

the offering's supply chain.

For instance, the supply chain includes producers of the raw materials that go into a product. If

it's a food product, the supply chain extends back through the distributors all the way to the

farmers who grew the ingredients and the companies from which the farmers purchased the

seeds, fertilizer, or animals. A product's supply chain also includes transportation companies such

as railroads that help physically move the product and companies that build websites for other

companies. If a software maker hires a company in India to help it write a computer program, the

Indian company is part of the partner's supply chain. These types of firms aren't considered

channel partners because it's not their job to actively sell the products being produced.

Nonetheless, they all contribute to a product's success or failure.

Firms are constantly monitoring their supply chains and tinkering with them so they are as

efficient as possible. This process is called supply chain management. Supply chain

management is challenging. Done well, it's practically an art. We'll talk more about supply chains

and what companies can do to improve them to satisfy customers and gain a competitive edge.

As we explained earlier, your product's supply chain includes not only the downstream companies

that actively sell the product but also all the other organizations that have an impact on it before,

during, and after it's produced. Those companies include the providers of the raw materials your

firm uses to produce it, the transportation company that physically moves it, and the firm that

helped build the web pages to promote it. If you hired a programmer in India to help write code

for a computer game, the programmer is also part of the product's supply chain. If you hired a

company to process copies of the game returned by customers, that company is part of the supply

chain as well. Large organizations with many products can have thousands of supply chain

partners. Service organizations also need supplies to operate, so they have supply chains, too.

Today, the term value chain is sometimes used interchangeably with the term supply chain. The

idea behind the value chain is that your supply chain partners should do more for you than

perform just basic functions; each partner should help you create more value for customers as the

product travels along the chain—preferably more value than your competitors' supply chain

partners can add to their products.

Zara, a trendy but inexpensive clothing chain in Europe, is a good example of a company that has

managed to create value for its customers with smart supply chain design and execution.

Originally, it took six months for Zara to design a garment and get it delivered to stores. To get the

hottest fashions in the hands of customers sooner, Zara began working more closely with its

supply chain partners and internal design teams. It also automated its inventory systems so it

could quickly figure out what was selling and what was not. As a result, it's now able to deliver its

customers the most cutting-edge fashion in just two weeks (Smith, 2008).

Sourcing is the process of evaluating and hiring individual businesses to supply goods and

services to your business. Procurement is the process of actually purchasing those goods and

services. Sourcing and procurement have become a bigger part of a supply manager's job, in part

because businesses keep becoming more specialized. Just like Ford's workers became more

efficient by performing specialized tasks, so, too have companies.

Firms look at their supply chains and outside them to see which companies can add the most

value to their products at the least cost. If a firm can find a company that can add more value than

it can to a function, it will often outsource the task to that company. After all, why do something

yourself if someone else can do it better or more cost effectively?

Other companies go a step further and outsource their entire order processing and shipping

departments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS

Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of

3PLs. A 3PL is a one-stop shipping solution for a company that wants to focus on other aspects of

its business. Firms that receive and ship products internationally often hire 3PLs so they don't

have to deal with the headaches of transporting products abroad and completing import and

export paperwork for them.

6 . 5 K E Y T A K E A W A Y

Channel partners that wield channel power are referred to as channel leaders. A dispute among channel members is called a channel conflict. A vertical conflict is one that occurs between two different types of members in a channel. By contrast, a horizontal conflict is one that occurs between organizations of the same type. Channel leaders are often in the best position to resolve channel conflicts. Vertical and horizontal marketing systems can help foster channel cooperation, as can creating marketing programs to help a channel's members all generate greater revenues and profits. All of the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user are part of the offering's supply chain. Firms have begun looking at these organizations in addition to the organizations that sell and promote their products. The process of managing and improving supply chains is called supply chain management.

6.6 Demand Planning and Inventory Control

LEARNING OBJECTIVES

1. Explain why demand planning adds value to products. 2. Describe the role inventory control plays when it comes to marketing products. 3. List the reasons why firms collaborate with another for the purposes of inventory control and

demand planning.

Demand Planning Imagine you are a marketing manager who has done everything in your power to help develop

and promote a product—and it's selling well. But now your company is running short of the

product because the demand forecasts for it were too low. Recall that this is the scenario

Nintendo faced when the Wii came out. The same thing happened to IBM when it launched the

popular ThinkPad laptop in 1992.

Not only is the product shortage going to adversely affect the profitability of your company, but

it's going to adversely affect you, too. Why? Because you, as a marketing manager, probably earn

either a bonus or commission from the products you work to promote, depending on how well

they sell. And, of course, you can't sell what you don't have.

As you can probably tell, the best marketing decisions and supplier selections aren't enough if

your company's demand forecasts are wrong. Demand planning is the process of estimating

how much of a good or service customers will buy. If you're a producer of a product, this will

affect not only the amount of goods and services you have to produce but also the materials you

must purchase to make them. It will also affect production scheduling, or the management of

the resources, events, and processes need to create an offering. For example, if demand is heavy,

you might need staff members to work overtime. Closely related to demand forecasting are lead

times. A product's lead time is the amount of time it takes for a customer to receive a good or

service once it's been ordered. Lead times also have to be considered when a company is

forecasting demand.

The promotions you run will also affect demand for your products. Consider what happened to

KFC when it came out with its grilled chicken. As part of the promotion, KFC gave away coupons

for free grilled chicken via Oprah.com. Just 24 hours after the coupons were uploaded to the

website, KFC risked running out of chicken. Customers were turned away. Others were given

"rain checks" (certificates) they could use to get free grilled chicken later (Weisenthal, 2009).

In addition to looking at the sales histories of their firms, supply chain managers also consult with

marketing managers and sales executives when they are generating demand forecasts. Sales and

marketing personnel know what promotions are being planned because they work more closely

with customers and know what customers' needs are and if those needs are changing. Firms also

look to their supply chain partners to help with their demand planning.

Demand-planning software can also be used to create more accurate demand

forecasts. Demand-planning software can synthesize a variety of factors to better predict a

firm's demand—for example, the firm's sales history, point-of-sale data, warehouse, suppliers,

and promotion information, and economic and competitive trends. So a company's demand

forecasts are as up-to-date as possible, some of the systems allow sales and marketing personnel

to input purchasing information into their mobile devices after consulting with customers.

Inventory Control Demand forecasting is part of a company's overall inventory control activities.

Inventory control is the process of ensuring your firm has an adequate supply of products and

a wide enough assortment to meet your customers' needs. One of the goals of inventory

management is to avoid stockouts. A stockout occurs when you run out of a product a customer

wants. Customers will simply look elsewhere—a process the Internet has made easier than ever.

When the attack on the World Trade Center occurred, many Americans rushed to buy batteries,

flashlights, American flags, canned goods, and other products in the event that the emergency

signaled a much bigger attack. Target sold out of many items and could not replenish them for

several days, partly because its inventory tracking system only counted what was needed at the

end of the day. Walmart, on the other hand, took count of what was needed every five minutes.

Before the end of the day, Walmart had purchased enough American flags, for example, to meet

demand and in so doing, completely locked up all their vendors' flags.

Just-in-Time Inventory Systems To lower the amount of inventory and still maintain they stock they need to satisfy their

customers, some organizations use just-in-time inventory systems in both good times and

bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they

contract with their suppliers to ship them inventory as they need it—and even sometimes manage

their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an

example of a company that uses a just-in-time inventory system that is vendor-managed. Dell

carries very few component parts. Instead, its suppliers carry them. They are located in small

warehouses near Dell's assembly plants worldwide and provide Dell with parts "just-in-time" for

them to be assembled (Kumar & Craig, 2007).

Dell's inventory and production system allows customers to get their computers built exactly to

their specifications, a production process that's called mass customization. This helps keep

Dell's inventory levels low. Instead of a huge inventory of expensive, already-assembled

computers consumers may or may not buy, Dell simply has the parts on hand, which can be

configured or reconfigured should consumers' preferences change. Dell can more easily return the

parts to its suppliers if at some point it redesigns its computers to better match what its customers

want. And by keeping track of its customers and what they are ordering, Dell has a better idea of

what they might order in the future and the types of inventory it should hold. Because mass

customization lets buyers "have it their way," it also adds value to products, for which many

customers are willing to pay.

Product Tracking Some companies, including Walmart, are beginning to experiment with new technologies such as

electronic product codes in an effort to better manage their inventories.

An electronic product code (EPC) is similar to a barcode, only better, because the number on

it is truly unique. You have probably watched a checkout person scan a barcode off a product

identical to the one you wanted—perhaps a pack of gum—because the barcode on your product

was missing or wouldn't scan. Electronic product codes make it possible to distinguish between

two identical packs of gum. The codes contain information about when the packs of gum were

manufactured, from where they were shipped, and where they were going. Being able to tell the

difference between "seemingly" identical products can help companies monitor their expiration

dates if the products are recalled for quality or safety reasons. EPC technology can also be used to

combat "fake" products, or knockoffs, in the marketplace.

Electronic product codes are stored on radio-frequency identification (RFID) tags. A radio-

frequency identification (RFID) tag emits radio signals that can record and track a shipment

as it comes in and out of a facility. If you have unlocked your car door remotely, microchipped

your dog, or waved a tollway tag at a checkpoint, you have used RFID technology (EPCglobal,

n.d.). Because each RFID tag can cost anywhere from 50 cents to $50 each, they are generally

used to track larger shipments, such as cases and pallets of goods rather than individual items.

See Figure 6.6, "How RFID Tagging Works," to get an idea.

Figure 6.6 How RFID Tagging Works

Some consumer groups worry that RFID tags and electronic product codes could be used to track

their consumption patterns or for the wrong purposes. But keep in mind that like your car-door

remote, the codes and tags are designed to work only within short ranges. (You know that if you

try to unlock your car from a mile away using such a device, it won't work.)

6 . 6 K E Y T A K E A W A Y

The best marketing decisions and supplier selections aren't enough if your company's demand forecasts are wrong. Demand forecasting is the process of estimating how much of a good or service a customer will buy. If you're a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. Demand forecasting is part of a company's overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate amount of products and a wide enough assortment of them to meet your customers' needs. One of the goals of inventory control is to avoid stockouts without keeping too much of a product on hand. Some companies are beginning to experiment with new technologies such as electronic product codes and RFID tags to better manage their inventories and meet their customers' needs.

6.7 Warehousing and Transportation

LEARNING OBJECTIVES

1. Understand the role warehouses and distribution centers play in the supply chain. 2. Outline the transportation modes firms have to choose from and the advantages and disadvantages

of each.

Warehousing At times, the demand and supply for products can be unusually high. At other times, it can be

unusually low. That's why companies generally maintain a certain amount of safety stock, often in

warehouses. As a business owner, it would be great if you didn't have excess inventory to store in

a warehouse. In an ideal world, materials or products would arrive at your facility just in time for

you to assemble or sell them. Unfortunately, we don't live in an ideal world.

Toys are a good example. Most toymakers work year-round to be sure they have enough toys for

sale during the holidays. However, retailers don't want to buy a huge number of toys in July. They

want to wait until November and December to buy large amounts of them. Consequently,

toymakers warehouse them until that time. Likewise, during the holiday season, retailers don't

want to run out of toys, so they maintain a certain amount of safety stock in their warehouses.

Some firms store products until their prices increase. Oil is an example. Speculators, including

investment banks and hedge funds, have been known to buy, and hold, oil if they think its price is

going to rapidly rise. Sometimes they go so far as to buy oil tankers and even entire oil fields

(Winnett, 2004).

A distribution center is a warehouse or storage facility where the emphasis is on processing

and moving goods on to wholesalers, retailers, or consumers (Wikipedia, n.d.). A few years ago,

companies were moving toward large, centralized warehouses to keep costs down. In 2005,

Walmart opened a 4-million-square-foot distribution center in Texas. (Four million square feet is

about the size of 18 football fields.)

Today, however, the trend has shifted to smaller warehouses. The use of smaller warehouses is

being driven by customer considerations rather than costs. The long lead times that result when

companies transport products from Asia, the Middle East, and South America are forcing

international manufacturers and retailers to shorten delivery times to consumers (Specter,

2009). Warehousing products regionally, closer to consumers, can also help a company tailor its

product selection to better match the needs of customers in different regions.

How Warehouses and Distribution Centers Function

So how do you begin to find a product or pallet of products in a warehouse or distribution center

the size of 18 football fields? To begin with, each type of product that is unique because of some

characteristic—say, because of its manufacturer, size, color, or model—must be stored and

accounted for separate from other items. To help distinguish it, its manufacturer gives it its own

identification number, called a SKU (stock-keeping unit) (BusinessDictionary.com).

Warehouses and distribution centers are also becoming increasingly automated and wired. Some

warehouses use robots to picks products from shelves. At other warehouses, employees use voice-

enabled headsets to pick products. Via the headsets, the workers communicate with a computer

that tells them where to go and what to grab off shelves. As a result, the employees are able to pick

products more accurately than they could by looking at a sheet of paper.

It's pretty amazing when you think about how the thousands of products that come in and out of

Amazon's distribution centers every day ultimately end up in the right customer's hands. After all,

how many times have you had to look really hard to find something you put in your own closet or

garage? Processing orders—order fulfillment—is a key part of the job in supply chains. Why?

Because delivering what was promised, when it was promised, and the way it was promised drives

customer satisfaction (Thirumalai & Sinha, 2005).

One of the ways companies are improving their order fulfillment and other supply chain processes

is by getting rid of paper systems and snail mail. Instead of companies receiving paper orders and

sending paper invoices to one another, they send and receive the documents via electronic data

interchange (EDI). Electronic data interchange (EDI) is a special electronic format that

companies use to exchange business documents from computer to computer. It also makes for

greater visibility among supply chain partners because they can all check the status of orders

electronically rather than having to fax or e-mail documents.

Another new trend is cross-docking. Products that are cross-docked spend little or no time in

warehouses. As Figure 6.7, "How Cross-Docking Works" shows, a product being cross-docked will

be delivered via truck to a dock at a warehouse where it is unloaded and put on other trucks

bound for retail outlets.

Figure 6.7 How Cross-Docking Works

Transportation Not all goods and services need to be physically transported. When you get a massage, oil change,

or a manicure, the services pass straight from the provider to you. Other products can be

transported electronically via electronic networks, computers, phones, or fax machines.

Downloads of songs, software, and books are an example. So are cable and satellite television and

psychic hotline readings delivered over the phone.

Other products, of course, have to be physically shipped. Logistics refers to the physical flow of

materials in the supply chain. You might be surprised by some of the physical distribution

methods that companies use. To get through crowded, narrow streets in Tokyo, Seven-Eleven

Japan delivers products to its retail stores via motorcycles. In some countries, Coca-Cola delivers

syrup to its bottlers via camelback. More commonly, though, products that need to be transported

physically to get to customers are moved via air, rail, truck, water, or pipeline.

Companies face different tradeoffs when choosing transportation methods. Which is most

important? Speed? Cost? Frequency of delivery? The flexibility to respond to different market

conditions? Again, it depends on your customers.

Goya Foods has many challenges due to the variety of customers it serves. The company sells

more than 1,600 canned food products. Because the types of beans people prefer often depends

on their cultures, Goya sells about 40 varieties of beans alone. Almost daily, Goya's truck drivers

deliver products to tens of thousands of US food stores, from supermarket chains in Texas to

independent mom-and-pop bodegas in New York City. Delivering daily is more costly than

dropping off jumbo shipments once a week and letting stores warehouse goods, says the

company's CEO, Peter Unanue. However, it's more of a just-in-time method that lets Goya offer

stores a greater variety and ensure that products match each store's demographics. "Pink beans

might sell in New York City but not sell as well in Texas or California," says Unanue (De Lollis,

2008).

6 . 7 K E Y T A K E A W A Y

Some firms store products until their prices increase. A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to other parts of the supply chain. Warehousing products regionally can help a company tailor its product selection to better match the needs of customers in different regions. Logistics refers to the physical flow of materials in the supply chain. Not all goods and services need to be physically transported. Some are directly given to customers or sent to them electronically. Products that need to be transported physically to get to customers are moved via air, rail, truck, water, and pipelines. The transportation modes a firm uses should be based on what its customers want and are willing to pay for.

6.8 The Pricing Framework and a Firm's Pricing Objectives

LEARNING OBJECTIVES

1. Understand the factors in the pricing framework. 2. Explain the different pricing objectives organizations have to choose from.

Prices can be changed and matched by your competitors. Consequently, your product's price

alone might not provide your company with a sustainable competitive advantage. Nonetheless,

prices can attract consumers to different retailers and businesses to different suppliers.

Organizations must remember that the prices they charge should be consistent with the needs of

their customers, their offerings, promotions, and distribution strategies. In other words, it

wouldn't make sense to promote a high-end, prestige product, make it available in only a limited

number of stores, and then sell it for an extremely low price. The price, product, promotion

(communication), and placement (distribution) of a good or service should convey a consistent

image.

The Pricing Framework Before pricing a product, an organization must determine its pricing objectives. In other

words, what does the company want to accomplish with its pricing? Companies must also

estimate demand for the product or service, determine the costs, and analyze all factors (e.g.,

competition, regulations, and economy) affecting price decisions. Then, to convey a consistent

image, the organization should choose the most appropriate pricing strategy and determine

policies and conditions regarding price adjustments. The basic steps in the pricing framework are

shown in Figure 6.8, "The Pricing Framework."

Figure 6.8 The Pricing Framework

The Firm's Pricing Objectives Different firms want to accomplish different things with their pricing strategies. For example, one

firm may want to capture market share, another may be solely focused on maximizing its profits,

and another may want to be perceived as having products with prestige. Some examples of

different pricing objectives companies may set include profit-oriented objectives, sales-oriented

objectives, and status quo objectives.

Earning a Targeted Return on Investment (ROI)

ROI, or return on investment, is the amount of profit an organization hopes to make given the

amount of assets, or money, it has tied up in a product. ROI is a common pricing objective for

many firms. Companies typically set a certain percentage, such as 10 percent, for ROI in a

product's first year following its launch. So, for example, if a company has $100,000 invested in a

product and is expecting a 10 percent ROI, it would want the product's profit to be $10,000.

Maximizing Profits

Many companies set their prices to increase their revenues as much as possible relative to their

costs. However, large revenues do not necessarily translate into higher profits. To maximize its

profits, a company must also focus on cutting costs or implementing programs to encourage

customer loyalty.

In weak economic markets, many companies manage to cut costs and increase their profits, even

though their sales are lower. How do they do this? The Gap cut costs by doing a better job of

controlling inventory. The retailer also reduced its real estate holdings to increase its profits when

its sales were down during an economic recession. Other firms such as Dell cut jobs to increase

profits. Meanwhile, Walmart tried to lower its prices so as to undercut its competitors' prices to

attract more customers. After it discovered that wealthier consumers who didn't usually shop at

Walmart before the 2009 recession were frequenting its stores, Walmart decided to upgrade some

of its offerings, improve the checkout process, and improve the appearance of some of its stores to

keep these high-end customers happy and enlarge its customer base. Other firms increased their

prices or cut back on their marketing and advertising expenses.

A firm has to remember, however, that prices signal value. If consumers do not perceive that a

product has a high degree of value, they probably will not pay a high price. Furthermore, cutting

costs cannot be a long-term strategy if a company wants to maintain its image and position in the

marketplace.

Maximizing Sales

Maximizing sales involves pricing products to generate as much revenue as possible, regardless of

what it does to a firm's profits. When companies are struggling financially, they sometimes try to

generate cash quickly to pay their debts. They do so by selling off inventory or cutting prices

temporarily. Such cash may be necessary to pay short-term bills, such as payroll. Maximizing

sales is typically a short-term objective since profitability is not considered.

Maximizing Market Share

Some organizations try to set their prices in a way that allows them to capture a larger share of the

sales in their industries. Capturing more market share doesn't necessarily mean a firm will earn

higher profits, though. Nonetheless, many companies believe capturing a maximum amount of

market share is downright necessary for their survival. In other words, they believe if they remain

a small competitor, they will fail. Firms in the cellular phone industry are an example. The race to

be the biggest cell phone provider has hurt companies such as Motorola. In the last decade,

Motorola held only 10 percent of the cell phone market, and its profits on product lines were

negative.

Maintaining the Status Quo

Sometimes a firm's objective may be to maintain the status quo or simply meet, or equal, its

competitors' prices or keep its current prices. Airline companies are a good example. Have you

ever noticed that when one airline raises or lowers its prices, the others all do the same? If

consumers don't accept an airline's increased prices and fees such as the charge for checking in

with a representative at the airport rather than checking in online, other airlines may decide not

to implement the extra charge, and the airline charging the fee may drop it. Companies, of course,

monitor their competitors' prices closely when they adopt a status quo pricing objective.

6 . 8 K E Y T A K E A W A Y

Price is the only marketing variable that generates money for a company. All the other variables (product, communication, distribution) cost organizations money. A product's price is the easiest marketing variable to change and also the easiest to copy. Before pricing a product, an organization must determine its pricing objective(s). A company can choose from pricing objectives such as maximizing profits, maximizing sales, capturing market share, achieving a target return on investment (ROI) from a product, and maintaining the status quo in terms of the price of a product relative to competing products.

6.9 Factors That Affect Pricing Decisions

LEARNING OBJECTIVES

1. Understand the factors that affect a firm's pricing decisions. 2. Understand why companies must conduct research before setting prices in international markets. 3. Learn how to calculate the breakeven point.

Having a pricing objective isn't enough. A firm also has to look at a myriad of other factors before

setting its prices. Those factors include the offering's costs, the demand, the customers whose

needs it is designed to meet, the external environment—such as the competition, the economy,

and government regulations—and other aspects of the marketing mix, such as the nature of the

offering, the current stage of its product life cycle, and its promotion and distribution.

If a company plans to sell its products or services in international markets, research on the factors

for each market must be analyzed before setting prices. Organizations must understand buyers,

competitors, the economic conditions, and political regulations in other markets before they can

compete successfully.

Next, we look at each of the factors and what they entail.

Customers How will buyers respond? Three important factors are whether the buyers perceive the product

offers value, how many buyers there are, and how sensitive they are to changes in price. In

addition to gathering data on the size of markets, companies must try to determine how price-

sensitive customers are. Will customers buy the product, given its price? Or will they believe the

value is not equal to the cost and choose an alternative, or decide they can do without the product

or service? Equally important is how much buyers are willing to pay for the offering. Figuring out

how consumers will respond to prices involves judgment as well as research.

Price elasticity, or people's sensitivity to price changes, affects the demand for products. Think

about a pair of sweatpants with an elastic waist. You can stretch an elastic waistband, but it's

much more difficult to stretch the waistband of a pair of dress slacks. Elasticity refers to the

amount of stretch or change. The waistband of sweatpants may stretch if you pull on it.

Similarly, the demand for a product may change if the price changes. Imagine the price of a 12-

pack of sodas changing to $1.50 a pack. People are likely to buy a lot more soda at $1.50 per 12-

pack than they are at $4.50 per 12-pack.

Conversely, the waistband on a pair of dress slacks remains the same (doesn't change) whether

you pull on it or not. Likewise, demand for some products won't change even if the price changes.

The formula for calculating the price elasticity of demand is as follows.

Price elasticity = percentage change in quantity demanded ÷ percentage change in price

Figure 6.9 The Relationship Between Price and Demand

When consumers are very sensitive to the price change of a product—that is, they buy more of it at

low prices and less of it at high prices—the demand for it is price elastic. Durable goods such as

TVs, stereos, and freezers are more price elastic than necessities. People are more likely to buy

them when their prices drop and less likely to buy them when their prices rise. By contrast, when

the demand for a product stays relatively the same and buyers are not sensitive to changes in its

price, the demand is price inelastic. Demand for essential products such as many basic food

and first-aid products is not as affected by price changes as demand for many nonessential goods.

The number of competing products and substitutes available affects the elasticity of demand.

Price elasticity is also affected by whether a person considers a product a necessity or a luxury as

well as the percentage of a person's budget allocated to different products and services. Some

products, such as cigarettes, tend to be relatively price inelastic since most smokers keep

purchasing them regardless of price increases and the fact that other people see cigarettes as

unnecessary. Service providers, such as utility companies in markets in which they have a

monopoly (only one provider), face more inelastic demand since no substitutes are available.

Competitors How competitors price and sell their products will affect a firm's pricing decisions. If you wanted

to buy a certain pair of shoes, but the price was 30 percent less at one store than another, what

would you do? Because companies want to establish and maintain loyal customers, they will often

match their competitors' prices. Some retailers, such as Home Depot, will give you an extra

discount if you find the same product for less somewhere else. Similarly, if one company offers

you free shipping, you might discover other companies will, too. With so many products sold

online, consumers can compare the prices of many merchants before making a purchase decision.

Elastic demand Price goes down as

demand goes up

Inelastic demand Price goes up when demand

goes up

The availability of substitute products affects a company's pricing decisions as well. If you can

find a similar pair of shoes selling for 50 percent less at a third store, would you buy them?

There's a good chance you might.

The Economy and Government Laws and Regulations The economy also has a tremendous effect on pricing decisions. In Week 1, we noted that factors

in the economic environment include interest rates and unemployment levels. When the economy

is weak and many people are unemployed, companies often lower their prices. In international

markets, currency exchange rates also affect pricing decisions.

Pricing decisions are affected by federal and state regulations. Regulations are designed to protect

consumers, promote competition, and encourage ethical and fair behavior by businesses. For

example, the Robinson-Patman Act limits a seller's ability to charge different customers

different prices for the same products. The intent is to protect small businesses from larger

businesses that try to extract special discounts and deals for themselves to eliminate their

competitors. However, cost differences, market conditions, and competitive pricing by other

suppliers can justify price differences in some situations. In other words, the practice isn't illegal

under all circumstances. You have probably noticed that restaurants offer senior citizens and

children discounted menus. Movie theaters also charge different people different prices based on

their ages and charge different amounts based on the time of day, with matinees usually less

expensive than evening shows. These price differences are legal.

Price fixing, which occurs when firms get together and agree to charge the same prices, is

illegal. Usually, price fixing involves setting high prices so consumers must pay a high price

regardless of where they purchase a good or service. Video systems, LCD (liquid crystal display)

manufacturers, auction houses, and airlines are examples of offerings in which price fixing

existed. When a company is charged with price fixing, it is usually ordered to take some type of

action to reach a settlement with buyers.

Price fixing has occurred over the years. Nintendo and its distributors in the European Union

were charged with price fixing and increasing the prices of hardware and software. Sharp, LG, and

Chungwa collaborated and fixed the prices of the LCDs used in computers, cell phones, and other

electronics. Virgin Atlantic Airways and British Airways were also involved in price fixing for their

flights. Sotheby's and Christie's, two large auction houses, used price fixing to set their

commissions.

By requiring sellers to keep a minimum price level for similar products,

unfair trade laws protect smaller businesses. Unfair trade laws are state laws preventing large

businesses from selling products below cost (as loss leaders) to attract customers to the store.

When companies act in a predatory manner by setting low prices to drive competitors out of

business, it is a predatory pricing strategy.

Similarly, bait-and-switch pricing is illegal in many states. Bait and switch, or bait advertising,

occurs when a business tries to "bait," or lure customers with an incredibly low-priced product.

Once customers take the bait, sales personnel attempt to sell them more expensive products.

Sometimes the customers are told the cheaper product is no longer available.

Product Costs The costs of the product—its inputs—including the amount spent on product development,

testing, and packaging required have to be considered when a pricing decision is made. So do the

costs related to promotion and distribution. For example, when a new offering is launched, its

promotion costs can be very high because people need to be made aware that it exists. Thus, the

offering's stage in the product life cycle can affect its price.

The point at which total costs equal total revenue is known as the breakeven point (BEP). For

a company to be profitable, a company's revenue must be greater than its total costs. If total costs

exceed total revenue, the company suffers a loss.

Total costs include both fixed costs and variable costs. Fixed costs, or overhead expenses, are

costs that a company must pay regardless of its level of production or level of sales. A company's

fixed costs include items such as rent, leasing fees for equipment, contracted advertising costs,

and insurance. As a student, you may also incur fixed costs such as the rent you pay for an

apartment. You must pay your rent whether you stay there for the weekend or

not. Variable costs are costs that change with a company's level of production and sales. Raw

materials, labor, and commissions on units sold are examples of variable costs. You, too, have

variable costs, such as the cost of gasoline for your car or your utility bills, which vary depending

on how much you use.

Consider a small company that manufactures specialty DVDs and sells them through different

retail stores. The manufacturer's selling price (MSP) is $15, which is what the retailers pay for the

DVDs. The retailers then sell the DVDs to consumers for an additional charge. The manufacturer

has the following charges:

Copyright and distribution charges for the titles $150,000

Package and label designs for the DVDs $10,000

Advertising and promotion costs $40,000

Reproduction of DVDs $5 per unit

Labels and packaging $1 per unit

Royalties $1 per unit

In order to determine the breakeven point, you must first calculate the fixed and variable costs.

To make sure all costs are included, you may want to highlight the fixed costs in one color and the

variable costs in another color. Then, using the formulas below, calculate how many units the

manufacturer must sell to break even.

The formula for BEP is as follows:

BEP = total fixed costs (FC) ÷ contribution per unit (CU)

contribution per unit = MSP – variable costs (VC)

BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to break even

To determine the breakeven point in dollars, you simply multiply the number of units to break

even by the MSP. In this case, the BEP in dollars would be 25,000 units times $15, or $375,000.

6 . 9 K E Y T A K E A W A Y

In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. These factors include the offering's costs, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the stage of its product life cycle, and its promotion and distribution. In international markets, firms must look at environmental factors and customers' buying behavior in each market. For a company to be profitable, revenues must exceed total costs.

6.10 Pricing Strategies

LEARNING OBJECTIVES

1. Understand introductory pricing strategies. 2. Understand the different pricing approaches that businesses use.

Once a firm has established its pricing objectives and analyzed the factors that affect how it

should price a product, the company must determine the pricing strategy (or strategies) that will

help it achieve those objectives. As we have indicated, firms use different pricing strategies for

their offerings. And often, the strategy depends on the customer or the stage of life cycle the

offerings are in. Next, we'll examine three strategies businesses often consider when a product is

introduced and then look at several different pricing approaches that companies use during the

product life cycle.

Customer-Focused Pricing Strategies

In many instances, it is the customer who is the ultimate determiner of the correct price. The

customer may want a price that is based on his or her perception of the value of the benefits

received from the offering, and therefore the company needs to find the price that represents

that value. This is called value-based pricing. So long as that price exceeds the company’s

costs and allows the company to make the appropriate return or profit, value-based pricing

represents a good match between the customer’s needs and the company’s pricing objectives. It

is important to note that a value-based price is not necessarily a low price. It may be that the

value price greatly exceeds the company’s costs and allows it to make a high rate of return.

A company might consider good-value pricing, especially in times of economic uncertainty.

Good-value pricing strategy offers a right combination of benefits at a fair price. When the

economy is not strong, customers might be more willing to accept a lesser degree of quality in

goods and services so long as the price is right. The fast food industry was quick to pick up on

the needs of consumers after 2008 by offering dollar menus. Retailer outlet malls are also an

outgrowth of the concept of good-value pricing. Good-value pricing is so popular with many

consumers that some retailers have adopted everyday low price policies where their

consumers can always expect their stores to have the lowest prices available on brand

merchandise. Walmart is a prominent example of a retailer known for its everyday low price policy.

Another consumer-focused pricing strategy is value-added pricing, where a consumer pays a

regular price for a product but receives something "extra" with the purchase. This is a

commonly used strategy when dropping a price may have long-term consequences for the

brand and its image, so the company delivers more value that the customer is not expecting.

For example, it is common for high-end cosmetics companies to include samples of the

company's other products with purchase, or high-end automobile dealerships to include free

service with each car purchase. Value-added pricing can also create a competitive advantage.

Introductory Pricing Strategies Think of products that have been introduced in the last decade and how products were priced

when they entered the market. Remember when the iPhone was introduced, its price was almost

$700. Since then, the price has dropped considerably even for new models. The same is true for

DVD players, LCD televisions, digital cameras, and many high-tech products. As we mentioned in

Week 5 as part of our discussion on offerings, a skimming price strategy is when a company

sets a high initial price for a product. The idea is to go after consumers who are willing to pay a

high price (top of the market) and buy products early. This way, a company recoups its

investment in the product faster.

The easy way to remember a skimming approach is to think of the turkey gravy at Thanksgiving.

When the gravy is chilled, the fat rises to the top and is often "skimmed" off before serving. Price

skimming is a pricing approach designed to skim that top part of the gravy, or the top of the

market. Over time, the price of the product goes down as competitors enter the market and more

consumers are willing to purchase the offering.

In contrast to a skimming approach, a penetration pricing strategy is one in which a low

initial price is set. Often, many competitive products are already in the market. The goal is to get

as much of the market as possible to try the product. Penetration pricing is used on many new

food products, health and beauty supplies, and paper products sold in grocery stores and mass

merchandise stores such as Walmart, Target, and Kmart.

Other Pricing Approaches Companies can choose many ways to set their prices. Many stores use cost-plus pricing, in

which they take the cost of the product and then add a profit to determine a price. The

strategy helps ensure that a company's products' costs are covered and the firm earns a

certain amount of profit. When companies add a markup, or an amount added to the cost of

a product, they are using a form of cost-plus pricing. When products go on sale, companies

mark down the prices, but they usually still make a profit. Potential markdowns or price

reductions should be considered when deciding on a starting price.

Many pricing approaches have a psychological appeal. Odd-even pricing occurs when a

company prices a product a few cents or a few dollars below the next dollar amount. For

example, instead of being priced $10.00, a product will be priced at $9.99. Likewise, a

$20,000 automobile might be priced at $19,998, although the product will cost more once

taxes and other fees are added. See Figure 6.10 for an example of odd-even pricing.

Figure 6.10

Walmart uses a combination of odd-even pricing and

everyday low pricing in this store in Gladstone, Missouri.

Source: Photo by Walmart. (2011). Flickr. Used under the terms of the Creative Commons Attribution 2.0 Generic license.

Prestige pricing occurs when a higher price is used to give an offering a high-quality image.

Some stores have a quality image, and people perceive that perhaps the products from those

stores are of higher quality. Many times, two different stores carry the same product, but one

store prices it higher because of the store's perceived higher image. Neckties are often priced

using a strategy known as price lining, or price levels. In other words, there may be only a

few price levels ($25, $50, and $75) for the ties, but a large assortment of them at each level.

Movies and music often use price lining. You may see a lot of movies and CDs for $15.99,

$9.99, and perhaps $4.99, but you won't see a lot of different price levels.

Remember when you were in elementary school and many students bought teachers little

gifts before the holidays or on the last day of school. Typically, parents set an amount such as

$5 or $10 for a teacher's gift. Knowing that people have certain maximum levels that they are

willing to pay for gifts, some companies use demand backward pricing. They start with the

price demanded by consumers (what they want to pay) and create offerings at that price. If

you shop before the holidays, you might see a table of different products being sold for $5

(mugs, picture frames, ornaments) and another table of products being sold for $10 (mugs

with chocolate, decorative trays). Similarly, people have certain prices they are willing to pay

for wedding gifts—say, $25, $50, $75, or $100—so stores set up displays of gifts sold at these

different price levels. IKEA also sets a price for a product—which is what the company

believes consumers want to pay for it—and then, working backward from the price, designs

the product.

Leader pricing involves pricing one or more items low to get people into a store. The

products with low prices are often on the front page of store ads and "lead" the promotion.

For example, prior to Thanksgiving, grocery stores advertise turkeys and cranberry sauce at

very low prices. The goal is to get shoppers to buy many more items in addition to the low-

priced items. Leader or low prices are legal; however, as you learned earlier, loss leaders, or

items priced below cost in an effort to get people into stores, are illegal in many states.

Sealed bid pricing is the process of offering to buy or sell products at prices designated in

sealed bids. Companies must submit their bids by a certain time. The bids are reviewed all at

once, and the most desirable one is chosen. Sealed bids can occur on either the supplier or

the buyer side. Via sealed bids, oil companies bid on land for potential drilling purposes, and

the highest bidder is awarded the right to drill. Similarly, consumers sometimes bid on lots to

build houses. The highest bidder gets the lot. On the supplier side, contractors often bid on

different jobs and the lowest bidder is awarded the job. The government often makes

purchases based on sealed bids. Projects funded by stimulus money were awarded based on

sealed bids.

Bids are also being used online. Online auction sites such as eBay give customers the

chance to bid and negotiate prices with sellers until an acceptable price is agreed upon. When

a buyer lists what he or she wants to buy, sellers may submit bids. This process is known as

a forward auction. If the buyer not only lists what he or she wants to buy but also states

how much he or she is willing to pay, a reverse auction occurs. The reverse auction is

finished when at least one firm is willing to accept the buyer's price.

Going-rate pricing occurs when buyers pay the same price regardless of where they buy the

product or from whom. Going-rate pricing is often used on commodity products such as wheat,

gold, or silver. People perceive the individual products in markets such as these to be largely the

same. Consequently, there's a "going" price for the product that all sellers receive.

Price bundling occurs when different offerings are sold together at a price that's typically lower

than the total price a customer would pay by buying each offering separately. Combo meals and

value meals sold at restaurants are an example. Companies such as McDonald's have promoted

value meals for a long time in many different markets. Other products such as shampoo and

conditioner are sometimes bundled together. Automobile companies bundle product options. For

example, power locks and windows are often sold together, regardless of whether customers want

only one or the other. The idea behind bundling is to increase an organization's revenues.

Captive pricing is a strategy firms use when consumers must buy a given product because they

are at a certain event or location or they need a particular product because no substitutes will

work. Concessions at a sporting event or a movie provide examples of how captive pricing is used.

Maybe you didn't pay much to attend the game, but the snacks and drinks were extremely

expensive. Similarly, if you buy a razor and must purchase specific blades for it, you have

experienced captive pricing. The blades are often more expensive than the razor because

customers do not have the option of choosing blades from another manufacturer.

Pricing products consumers use together (such as blades and razors) with different profit margins

is also part of product mix pricing. Recall from Week 5 that a product mix includes all the

products a company offers. If you want to buy an automobile, the base price might seem

reasonable, but the options such as floor mats might earn the seller a much higher profit. While

consumers can buy floor mats at stores like Walmart for $30, many people pay almost $200 to

get the floor mats that go with the car from the dealer.

Nearly everyone has a cell phone. Are you aware of how many minutes you spend talking or

texting and what it costs if you go over the limits of your phone plan? Maybe not if your plan

involves two-part pricing. Two-part pricing means there are two different charges customers

pay. In the case of a cell phone, a customer might pay a charge for one service such as 1,000

minutes, and then pay a separate charge for each minute over 1,000. Get out your cell phone and

look at how many minutes you have used. Many people are shocked at how many minutes they

have used or the number of messages they have sent in the last month.

Have you ever seen an ad for a special item only to find out it is much more expensive than what

you recalled seeing in the ad? A company might advertise a price such as $25*, but when you read

the fine print, the price is really five payments of $25 for a total cost of $125. Payment pricing,

or allowing customers to pay in installments, is a strategy that helps customers break their

payments into smaller amounts, which can persuade customers to buy higher-priced products.

Promotional pricing is a short-term tactic designed to get people into a store or to purchase

more of a product. Examples of promotional pricing include back-to-school sales, rebates,

extended warranties, and going-out-of-business sales. Rebates are a great strategy for companies

because consumers think they're getting a great deal. Many consumers forget to request the

rebate. Extended warranties have become popular for all types of products, including

automobiles, appliances, electronics, and even athletic shoes. If you buy a vacuum for $35, and it

has a one-year warranty from the manufacturer, does it really make sense to spend an additional

$15 to get another year's warranty? However, when it comes to automobiles, repairs can be

expensive, so an extended warranty often pays for itself following one repair. Buyers must look at

the costs and benefits and determine if the extended warranty provides value.

We have discussed price discrimination, or charging different customers different prices for

the same product. In some situations, price discrimination is legal. As we explained, you have

noticed that certain customer groups (students, children, and senior citizens) are sometimes

offered discounts at restaurants and events. However, the discounts must be offered to all senior

citizens or all children within a certain age range, not just a few. Price discrimination is used to

get more people to use a product or service. Similarly, a company might lower its prices in order

to get more customers to buy an offering when business is slow. Matinees are often cheaper than

movies at night; bowling might be less expensive during nonleague times.

Price Adjustments Organizations must also decide what their policies are when it comes to making

price adjustments, or changing the listed prices of their products. Some common price

adjustments include quantity discounts, which involves giving customers discounts for larger

purchases. Discounts for paying cash for large purchases and seasonal discounts to get rid of

inventory and holiday items are other examples of price adjustments. Other price adjustments

might be related to FOB (free on board) origin, meaning the title changes at the origin and buyer

pays the shipping; or FOB (free on board) destination, meaning that the seller pays the shipping.

Uniform-delivered pricing, also called postage-stamp pricing, means buyers pay the same

shipping charges regardless of where they are located. If you mail a letter across town, the postage

is the same as when you mail a letter to a different state. A manufacturer might give a retail store

a trade allowance such as funds to advertise the product in local media, or a discount to restock

the manufacturer's products. Reciprocal agreements are agreements in which merchants

agree to promote each other to customers. Customers who patronize a particular retailer might

get a discount card to use at a certain restaurant, and customers who go to a restaurant might get

a discount card to use at a specific retailer.

Figure 6.11

In this promotion at a California shopping mall,

participants received transit tokens.

Source: Southern California Rapid Transit District Metro Library and Archive. (1985). Used under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic license.

A bounce back is a promotion in which a seller gives customers discount cards or coupons after

purchasing. Consumers can then use the cards and coupons on their next shopping visits. The

idea is to get the customers to return to the store or online outlets later and purchase additional

items. Some stores set minimum amounts that consumers have to spend to use the card.

6 . 1 0 K E Y T A K E A W A Y

Both external and internal factors affect pricing decisions. Companies use many different pricing strategies and price adjustments. However, the price must generate enough revenues to cover costs in order for the product to be profitable. Cost-plus pricing, odd-even pricing, prestige pricing, price bundling, sealed bid pricing, going-rate pricing, and captive pricing are just a few of the strategies used. Organizations must also decide what their policies are when it comes to making price adjustments, or changing the listed prices of their products. Some companies use price adjustments as a short-term tactic to increase sales.

W E E K 7 P R E V I E W

Thus far, we have explored offerings, distribution, and price, the first three elements of the marketing mix. Finally, we get to marketing communications in Week 7, the most visible element of marketing and the element most frequently referred to as "marketing." However, by now we hope you clearly understand that marketing is much more involved than the communication function of the marketing discipline. The overarching concept is integrated marketing communications (IMC), a strategic approach to ensuring that the right message is delivered to the right audience in the right media and at the right time. The tools marketers use to develop IMC programs are called the promotion mix, which includes advertising, personal selling, public relations, sales promotion, and direct marketing. Throughout the week, we will emphasize the role new media such as social networks play in the design of an IMC program.

Week 6 References Section 6.1 Austin, J. (2009, November 27). Pop-up stores offer long-term strategy. Fort Worth Star-Telegram, 1C–2C. CBSNews.com. (2007, November 16). Developing a channel strategy. Retrieved April 13, 2012, from http://www.cbsnews.com/8301-505125_162-51168339/developing-a-channel- strategy/?tag=mncol;lst;1 Lancaster, G., & Withey, F. (2007). Marketing fundamentals (p. 173). Burlington, MA: Butterworth- Heinemann. Littleson, R. (2007, February 6). Supply chain trends: What's in, what's out. Manufacturing.net. Retrieved April 13, 2012, from http://www.manufacturing.net/articles/2007/02/supply-chain-trends-whats-in- whats-out Lyons, D. (2009, November 9). The lost decade. Newsweek, 27. Section 6.2 Birchall, J. (2010, January 4). Walmart aims to cut supply chain cost. Financial Times, 4. Fitzpatrick, M. (2005, October 1). The seven myths of channel integration. Chief Marketer. Retrieved December 12, 2009, from http://chiefmarketer.com/multi_channel/myths_integration_1001

Kraemer, K. L., & Dedrick, J. (2002). Dell computer: Organization of a global production network. Center for Research on Information Technology and Organizations, University of California, Irvine. Retrieved April 13, 2012, from http://escholarship.org/uc/item/89x7p4ws#page-2 Wilson, J., & Blas, J. (2009, June 17). Machines with Midas touch swap chocolate for gold bars. Financial Times. Retrieved December 12, 2009, from http://www.ft.com/cms/s/0/5232dc6c-5ad4-11de-8c14- 00144feabdc0.html?nclick_check=1

Section 6.3 Frazier, G. L., Maltz, E., Antia, K. D., & Rindfleisch, A. (2009, July 1). Distributor sharing of strategic information with suppliers. Journal of Marketing, 73(4). Retrieved December 12, 2009, from http://www.atypon-link.com/AMA/doi/abs/10.1509/jmkg.73.4.31?cookieSet=1&journalCode=jmkg (

Section 6.4 Burrows, P. (2008, February 12). Inside the iPhone gray market. BusinessWeek. Retrieved December 12, 2009, from http://www.businessweek.com/technology/content/feb2008/tc20080211_152894.htm The Food Channel. (2008, May 21). Pizza Hut's online ordering called 'virtual waiter.' Retrieved December 12, 2009, from http://www.foodchannel.com/stories/421-pizza-hut-s-online-ordering-called-virtual- waiter Section 6.5 Daszkowski, D. (n.d.). What is a franchise? About.com. Retrieved December 12, 2009, from http://franchises.about.com/od/franchisebasics/a/what-franchises.htm Gelles, D. (2009, March 31). Skype expands mobile push. Financial Times, 20. Hitt, M., Black, S., & Porter, L. (2009), Management, 2nd ed. (Chapter 5). Upper Saddle River, NJ: Prentice Hall. IrieAuctions.com. (2009). Ten mistakes to avoid with channel partners. Excerpted from J. Addison, Revenue rocket: New strategies for selling with partners. Retrieved December 12, 2009, from http://www.irieauctions.com/Alternate_Distribution_Channel.htm Neff, J. (2009, June 8). P&G acquires the upscale Art of Shaving retail chain. Advertising Age, 80 (2118), 2. Smith, J. N. (2008). Fast fashion. World Trade, 21(12), 54.

Section 6.6 EPCglobal. (n.d.). FAQs. Retrieved from http://www.epcglobalinc.org/consumer_info/faq Kumar, S., & Craig, S. (2007). Dell, Inc.'s closed loop supply chain for computer assembly plants. Information Knowledge Systems Management, 6(3), 197–214. Weisenthal, J. (2009, May 6). Slammed KFC scrambling to source more chicken. The Business Insider. Retrieved December 2, 2009, from http://www.businessinsider.com/kfc-2009-5 Section 6.7 BusinessDictionary.com. (n.d.). Stock-keeping unit (SKU). Retrieved December 2, 2009, from http://www.businessdictionary.com/definition/stock-keeping-unit-SKU.html

De Lollis, B. (2008, March 23). CEO profile: At Goya, it's all in la familia. USA Today. Retrieved February 18, 2015, from http://usatoday30.usatoday.com/money/companies/management/2008-03-23-bob- unanue-goya-foods_n.htm Specter, S. P. (2009). Industry outlook: Mostly cloudy, with a few bright spots. Modern Materials Handling, 64(3), 22–26. Thirumalai, S., & Sinha, K. K. (2005). Customer satisfaction with order fulfillment in retail supply chains: Implications of product type in electronic B2C Transactions. Journal of Operations Management, 23(3–4), 291–303. Wikipedia. (n.d.). Distribution center. Retrieved April 13, 2012, from http://en.wikipedia.org/wiki/Distribution_center Winnett, R. (2004, September 12). Soaring prices: Speculators hijack the oil market. TimesOnline. Retrieved December 2, 2009, from http://business.timesonline.co.uk/tol/business/article481363.ece(accessed December 2, 2009).