importance of pricing

1. Chapter 11
Pricing Issues in
Channel Management

2. The Importance of Pricing
1-Pricing decisions cause top-level marketing executives
more concern than any other strategic marketing decision
area.
2-Pricing is viewed as having a more direct link to the
firm’s bottom line.

3. Anatomy of Channel Pricing Structure
• Channel participants each want a part of the total price sufficient to
cover their costs and provide a desired level of profit.
• Each channel participant wants a price that provides a gross margin
sufficient to cover its expenses and provide a contribution to profit.
• Therefore, pricing decisions have a substantial impact on channel
member performance. Specifically, if channel members perceive the
manufacturer’s pricing strategy as congruent with their own interests,
they are more likely to provide a higher level of cooperation. If, on
the other hand, the manufacturer’s pricing decisions reflect a lack of
awareness of channel member needs or appear to work against them,
a much lower level of cooperation, or even conflict, is the more likely
result.

4. Anatomy of Channel Pricing Structure The “Golden
Rule” of Channel Pricing
• It is not enough to base pricing decisions solely on the
market, internal cost considerations, and competitive
factors. Rather, for those firms using independent channel
members, explicit consideration of how pricing decisions
affect channel member behavior is an important part of
pricing strategy.
1-Pricing decisions can have a substantial impact
on channel member performance

5. Anatomy of Channel Pricing Structure

6. Influencing Pricing Strategy
1-The major challenge for the channel manager the channel
manager must analyze and think through the channel
implications of pricing decision
2-Channel manager must implement pricing strategies that
promote channel member cooperation and minimize conflict

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Channel Manager’s Role
Major areas of consideration in a
manufacturer’s pricing decision
Internal
cost
considerations
Channel
considerations
Competitive
considerations
Target
market
considerations
Channel manager must focus
on the channel considerations
and work to incorporate them
into the firm’s pricing decisions

8. Channel Pricing Guidelines
11
Objective 4:
1. To help those involved in pricing decisions to
focus more clearly on the channel implications
of their pricing decisions
Why?
2. To provide general prescriptions on how to
formulate pricing strategies that will help promote
channel member cooperation and minimize conflict

9. Channel Pricing Guidelines
1-Profit Margin
2-Different Classes of Resellers
3-Rival Brands
4-Special Arrangements
5-Conventional Norms in Margins
6-Margin Variation on Models

10. Profit Margins
• Channel members who believe that the manufacturer is
not allowing them sufficient margins are likely to seek
out other suppliers or establish and promote their own
private brands.
• Thus, the channel manager should be involved in a
continuous review of channel member margin structures
to determine if they are adequate. Particular attention
should also be paid to changes in the competitive
environment that are likely to influence channel member
perceptions of the existing margin structures.

11. Different Classes of Resellers
Ideally, the channel manager would like to set margins
so that they would vary in direct proportion to
functions performed by different classes of channel
members.
1. Do channel members hold inventories?
2. Do they make purchases in large or small quantities?
3. Do they provide repair services?
4. Do they extend credit to customers?
5. Do they deliver?
6. Do they help train the customers’ sales force?

12. Rival Brands
• The practical question facing the channel manager attempting to
apply this guide line is: What levels of margin differentials are
within tolerable limits? Unfortunately, there is no straightforward
answer to this question. Significant variations in margins may be
quite tolerable in some cases but not in others. A manufacturer that is
well entrenched in many consumer electronics products, such as
Sony, can depend on its mass advertising and sales promotion to
establish strong consumer preference to pull its products through the
channel. At the retail level, promotion by the retailer in the form of
local advertising and strong personal selling are relatively minor
factors in achieving high sales of Sony products. Accordingly,
relatively low margins granted to the retailer are feasible.

13. Special Arrangements
• Special pricing deals offered by a manufacturer to channel
members can take many forms including higher discounts,
rebates, free goods, enhanced quantity discounts, and others.
The purpose behind such special pricing offers is, of course, to
stimulate sales of the manufacturer’s product during the period
of special pricing promotion.

14. Conventional Norms in Margins
• In most trades, resellers have come to regard some
particular percentage margin as normal, fair, and
proper. They may not obtain that margin on most of
the items they sell; even when it is indeed a typical
margin, they may not receive it all of the time. But
although the conventional margin may not be an
economic reality in the marketplace.

15. Margin Variation on Models
• Variations in margins on individual models and
styles in a product line are common. Manufacturers
frequently include in the product line items whose
main purpose is to build traffic in the retailers’ stores
or to serve as “door openers” for wholesalers’ field
sales forces. These products (often referred to as
promotional products) are usually the lowest priced
in the line and yield relatively low margins for both
the manufacturer and channel members.

16. Price Points
• Price points are specific prices, usually at the retail
level, at which consumers expect to find products. In
some cases certain price points may become
entrenched so that consumers almost always expect to
find products at those points. Price points can exist for
items of very low unit value, such as the McDonald’s
“Value Menu” Mc Double $1.00. all the way to luxury
products of very high unit value, such as the over
$75,000 Mercedes Benz S Class, BMW 7 series,
Jaguar XJ and several others.

17. Product Variations
When a manufacturer attaches prices to the various models
within a given product line, it should be careful to associate
price differences with differences in product features.18 If the
price differences are not closely associated with visible or
identified product features, the channel members will have a
more difficult selling job. For example, a sporting goods retailer
handling a line of five models of tennis rackets would like to
have an easy “handle” in the form of specific product features
that salespeople can use to explain price differences to
customers.

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Guideline Caveat
Objective 5:
There is no
Guarantee
Particular circumstances and situations exist
in which these guidelines will not apply or
will be irrelevant.

19. 11
Other Channel Pricing Issues
Objective 6:
Exercising control in channel pricing
Changing price policies
Passing price increases through the channel
Using price incentives in the channel
Dealing with the gray market & with free riding

20. 11
Exercising Control in Pricing
Because channel members typically view pricing
as the area over which they have total control. . .
First: Rule out any type of coercive approaches
to controlling channel member pricing policies.
Second: The manufacturer should encroach on the
domain of channel member pricing policies only if
the manufacturer believes that it is in his or her
vital long-term strategic interest to do so.
Finally: If the manufacturer believes that it is necessary to
exercise some control over member pricing, he or she
should do so through “friendly persuasion.”

21. 11
Channel members fear such changes because they have
become accustomed to the strategy, or their own pricing
strategies may be closely tied to those of the manufacturer.
Changing Price Policies
Changes in
manufacturer pricing policies
or related terms of sale cause
reactions among
channel members.

22. 11
First: Manufacturers should consider the long- and the
short-term implications of such increases versus
maintaining the current prices.
Second: Manufacturers should do whatever possible if
passing on the price increase is unavoidable.
Finally: Manufacturers could change their strategies in
other areas of the marketing mix to help offset
the effects of such increases.
Passing Price Increases Through the
Channel
Strategies for channel members to use in order
to avoid simply passing along price increases
through the channel:

23. 11
Possible Solutions:
• Make pricing promotions as simple and
straightforward as possible.
• Design price-promotion strategies to be at least as
attractive to retailers as they are to consumers.
Manufacturers face difficulties gaining strong
retailer acceptance and follow-through on
pricing promotions.
Using Price Incentives in the Channel

24. 11
Channel design decisions that result in closely controlled
channels and selective distribution as well as changing
buyer preferences may help limit the growth of the gray
market and free riding.
Gray Market
The sale of brand-
name products at
very low prices by
unauthorized
distributors or
dealers
Gray Market & Free Riding
Free Riding
Describes the behavior of
distributors & dealers
who offer extremely low
prices but little service to
customers