1. Strategic Marketing, 3rd edition
Chapter 10: Pricing and distribution

2. Learning Objectives
Examine the separate and complementary roles of pricing and distribution to marketing strategy.
Assess pricing mindsets and strategic options.
Evaluate the buyer’s perspective of distribution and its implications for strategy.
Review the role of pricing and distribution amidst the drive towards the commoditisation of products and services.

3. Chapter at a Glance Pricing Strategic Options Online Pricing
Implementing Pricing Strategy
Distribution
Multi-Channel Marketing
Grey Marketing
Price and Distribution Strategies Meet

4. Introduction
Pricing and distribution are distinct yet complementary elements in marketing
Strategically they are difficult to separate
A premium priced watch cannot be sold at a discount jewellers
A tractor producer that wants a specific mark-up is going to find it difficult to control margin if it sells through intermediaries

5. Strategic options
Successful pricing means that prices set have to complement the company’s overall marketing strategy and strike a balance between maximizing revenues and offering customers value
Prices need to be coordinated across any business
Dolan suggests eight stages to pricing strategy

6. Strategic Options Reverse Cost-Plus Variations in Value POS Price
Sensitivity
Successful
Pricing
Competitor
Reaction
Customer
Costs
Emotion
Individual?
Bundled?

7. Reverse cost plus Superior product performance
Easier schedule of doses
Fewer side effects
Taken safely with many other drugs that were not compatible with Tagamet
Perceived value to the customer was very high
Number one ulcer medication and the number one selling drug in the world
Consider how Glaxo introduced its Zantac ulcer medication to the U.S. market in 1983 to compete with SmithKline Beecham Corporation’s Tagamet. . If Glaxo had allowed product cost to drive the price of Zantac, it might have introduced the medication at a lower price than Tagamet; it might have used a “follow the leader” pricing strategy. But Glaxo instead relied on Zantac’s perceived value to the customer, initially pricing the drug at a 50% premium over Tagamet. Within four years, Zantac became the market leader.

8. Reverse cost plus
Northern Telecom’s Norstar competing with Pacific Rim suppliers
Inherent superiority of their product didn’t matter; resellers would value Norstar only at the market price
Northern’s managers decided to introduce the Norstar system at the prevailing market level and then look inward to determine how they could reduce costs in order to make money at that price.
Eventually, Norstar could convince consumers that their system was better than the competition’s
As Northern’s competitors began to fight the commodity battle and lower their prices, Northern was able to maintain its price level, secure a price premium, improve margins increase its share of the market
Northern’s managers knew that over time, they could convince consumers that their system was better than the competition’s; in other words, they knew that Norstar’s perceived value would increase as the system proved itself in the marketplace.
In Glaxo’s case, a conventional “figure cost and take a markup” approach would have resulted in forgone profits; in Northern’s case, the result would have been a noncompetitive price and no sales. By turning the process around and letting value as perceived by the customer be the driver, each company found a better initial price level and the foundation for its future growth.

9. Knorr soup costs Tk. 65/sachet
Knorr soup costs Tk.65/sachet. Radhuni wants to launch a soup which would be superior to Knorr. A market survey shows that superiority doesn’t matter; consumers would not be willing to purchase Radhuni soup at a higher price. So Radhuni launches a soup at the market price. This is an example of
Reverse cost plus
Value based pricing
Multiple pricing
Emotional pricing
Reverse cost plus pricing

10. Value based pricing
Iphone – latest versions are always priced higher than the older ones. The company segments the market over time. Initially, to target those customers who “can’t wait” for the new product. over time, they target the wider market with less than half the price.

11. Value based pricing
Airlines, for example, attempt to treat business and pleasure travelers differently by offering cheaper fares targeting travelers with special rates during holiday seasons

12. Price sensitivity Customer Economics
Will the decision maker pay for the product him or herself?
Does the cost of this item represent a substantial percentage of the total expenditure?
Is the buyer the end user? If not, will the buyer be competing on price in the end-user market?
In this market, does a higher price signal higher quality?

13. Price sensitivity Customer Search and Usage
Is it costly for the buyer to shop around?
Is the time of the purchase or the delivery significant to the buyer?
Is the buyer able to compare the price and performance of alternatives?
Is the buyer free to switch suppliers without incurring substantive costs?

14. Price sensitivity Competition
How is this offering different from competitors’ offerings?
Is the company’s reputation a consideration? Are there other intangibles affecting the buyer’s decision?

15. Single or multiple Cost: $20 What is the optimal price to charge?
At $70, you get revenue of $140 and profit of $100
In this schedule, you get total revenue of $295 and profit of $175
Greater than profit given above
Identify an optimal pricing structure consider a manufacturer that must create a pricing policy given Buyer A and Buyer B, who value successive units of the product differently:
For simplicity, let’s assume that the seller knows these valuations and that one buyer will not resell the product to the other. The naïve pricing manager would say, What is the optimal price to charge? If the producer’s cost is $20 per unit, the answer is $70. At this price, the company would sell one unit to each buyer for a total profit of $100.
The astute pricing manager, on the other hand, asks, What is the optimal pricing schedule? The insight lies in asking the right question. With the given cost and value parameters, the optimal pricing schedule is given. With this pricing schedule, buyer A would purchase one unit at $70, and buyer B would purchase five units—one at $70, one at $50, one at $40, one at $35, and one at $30, for total revenues of $295. Given the $20 cost to produce, the profits on those transactions would total $175—a 75% greater margin than that generated by the naïve pricing manager’s optimal price of $70.

16. You are the pricing manager of Dockers trousers
You are the pricing manager of Dockers trousers. Market research shows that there are two categories of buyers – category Tom and category Jerry. The table below tells you what prices they are willing to pay. How would you price your Dockers trousers? Justify showing revenue and profit calculations. Assume cost per Dockers trousers is $10.
Price willing to pay
Category Jerry
Category Tom
1st pair of Dockers
$50
2th pair of Dockers
$20
3rd pair of Dockers
4th pair of Dockers $5
1st pair to be bought by tom and jerry = 50 x 2 = 100
2nd pair to be bought by tom and jerry = 20 x 2 = 40
3rd pair to be bought by tom and jerry = 20 x 2 = 40
4th pair to be bought by jerry = 20 x 1 = 20
Total revenue = 200
Total cost = 10 x 7 = 70
Profit = 200 – 70 = 130
272761

17. Competitor reaction
Competitors usually react to a lower price by lowering their prices as well
Flanker brands might be introduced
Legal actions can be taken (in case there are any illegal discounts)

18. Point of sales
The total set of pricing terms and conditions a company offers its various customers can be quite elaborate. They include discounts for early payment, rebates based on annual volume, rebates based on prices charged to others, and negotiated discounts, based on which intermediary is being used
If a list price is agreed, it needs to be established whether this price is fixed or open because if prices are subsequently reduced by the intermediary to close a sale, it can lead to confusion

19. Emotion
Research is needed to assess a buyer’s emotional response to a price because over time people develop price points they see as fair.

20. Customer costs
Managers must consider the cost side, being certain to avoid the infamous “strategic accounts”
These accounts demand product customization, just-in-time delivery, small order quantities, training for operators, and installation support while at the same time negotiating price very aggressively, paying late, and taking discounts that they have not earned
These accounts don’t get what they pay for; they get a lot more
Companies need to decide whether the returns justify the cost
Although customer value is crucial in pricing, managers also must consider the cost side, being certain to avoid the infamous “strategic accounts” zone. (See the graph “The Dangerous ‘Strategic Accounts.’”) These accounts—and they are typically very large—demand product customization, just-in-time delivery, small order quantities, training for operators, and installation support while at the same time negotiating price very aggressively, paying late, and taking discounts that they have not earned. These accounts don’t get what they pay for; they get a lot more. They are facetiously called strategic accounts because that’s the justification given when account managers are confronted with the fact that the company is losing money on them.

21. Caterpillar is one of the vendors of Agro K. companies
Caterpillar is one of the vendors of Agro K. companies. While looking over the client-vendor relationship of Caterpillar over the past one year, the CEO found that Agro K’s demand for machinery every year is very low. Moreover they require their purchases Just in Time, seek deep discounts and constantly complains to management regarding small issues. Which one of the following elements do you think Caterpillar is incurring by being on the vendor list of Agro K?
Customer cost
Emotion
Customer reaction
Price senstivity
Customer cost

22. Distribution Strategy

23. Chapter Agenda Significance of Distribution Convenience Construct
Navigation Construct
Multi-channel Marketing
Distribution Options

24. Significance of Distribution
Distribution strategy is about making the supply of a product/service available to the consumers:
It can be physical, such as supplying hard copy of an accounting software package to a customer in a box.
It can be a service such as going to teach at a school.
It can be virtual, such as uploading an accounting package to a customer via the internet.
It can be through marketing intermediaries such as selling soap through retailers and distributors.
Distribution is the pathway through which a product or service is delieverd to the end consumers.

25. Significance of Distribution
Consumers are continuously looking for “convenience” in order to receive a product/service.
This has given rise more innovative distribution strategies.

26. Internet banking and mobile banking makes it convenient for consumers to do their banking tasks at any time, without having to physically be at a bank.

27. Flexible Working Hours: Many banks are open on Saturdays, 24/7 pharmecies, Coffee shops open till 1pm, Fast food shops open all night also, Resturants between two cities should be open, Mechanics open 24/7.

28. Home delievery services are there to make it convenient for consumers to get food.

29. Drive through mail boxes.

30. Drive through fast food shops.

31. High tech car wash services.

32. Flower delievery services.

33. Convenience Construct
Access C O N V E I
Search
Possession
Transaction

34. Convenience Construct
Access: signifies how easily can a consumer reach out to the company, their products and services.
Accessibility factors include: car parking, location, hours of opening, telephone, mail, internet.
Consumers increasingly want access to products and services as fast and direct as possible with very little hassle.

37. Convenience Construct
Search: signifies how easily the consumer can find their desired product/service.
For example: The internet medium has helped search and find their desired product very easily.
Better trained sales staff who understand fashion can act like personal shoppers to help consumers find the right outfit that suits them.
Better organized merchandise can help consumers find products easily. For example, we can use color coded tags to help customers quickly spot their sizes.
Providing signs in the shop can give consumers a direction in terms of where they need to go to find their product.
How LG sales personnel do not have enough information about their products.

39. Convenience Construct
Possession: signifies having merchandise in stock and available on a timely basis so that consumers can possess the product for themselves.
Lens Crafters prepares glasses on the same day, generally in one hour.
Nordstrom clothing store guarantees that advertised products will always be in stock.
FMCG companies such as Unilever and P & G find it difficult to distribute products in rural areas where there are no proper roads to reach to.
Airline services to a specific destination exists everyday.
24/7 hospital services.
Through the internet, search might be easy, but possession can take a few days.

40. Convenience Construct
Transaction: signifies the speed and ease with which consumers can pay money and possess the product or modify transactions before and after the purchase.
Tesco has self service check out boots.
Sainsbury’s use of electronic sensors to track customer traffic to predict checkout requirements.
The utilization of credit and debit card services in different outlets can help in the ease of transaction.
Modifying airline ticket dates, doctor’s appointment, and the return of products.
Pure internet retailers have problems with returns compared to physical shops.

41. Significance of Navigation
At the heart of the buyer’s perspective is navigation. Navigation is the process of helping consumers find direction in a variety of information and choices in both physical and e-commerce platforms in order to satisfy their needs.
If you want to buy a shirt, for instance, you have a million different choices and, to make comparisons among them, you have to hop in your car and drive to malls and downtown department stores. A broad search is time- consuming, difficult, and, inevitably, incomplete.
Navigation is the battlefield on which competitive advantage will be won or lost.
Navigation helps consumers scan different choices, different products, and helps them get their desired product and satisfy their needs. The rise in e-commerice has helped consumers better navigate a range of information, products, services, to finally get what they want, exactly what they want.

42. Ekhanei.com, amazon.com are actually in the navigation business.

43. Chaldal.com is in the navigation business.

44. Significance of Navigation
Navigation is the battlefield on which competitive advantage will be won or lost. The better the navigation, the greater will be the sales because the consumers are able to find what they are looking for very easily.

45. Navigation Construct Navigation Reach Affiliation SUSTAINABLE
COMPETITIVE
ADVANTAGE (SCA)
Navigation
Richness
Range

46. Navigation Construct
Reach: is the ability of the consumers to reach the firm, and also the ability of the firm to reach their products and services to their consumers effectively.
Affiliation is the transparency and trust between retailers and their customers. For example: millions of customers allow amazon.com to store their names, address, and credit card details so that they can make repeat purchases with just a click of the mouse. If they do not trust the company, consumers will shop elsewhere.

47. Foodpanda enables consumers to reach the company through their website, through telephones, and through mobile apps (technology). Furthermore, with their strong distrubution channel, they can make the food reach the consumer‘s home within an hour.

48. Navigation Construct
Range: signifies the degree to which different categories of products/services are provided by the company with each category having depth of different variants/types.
Richness is the degree to which a retailer can match customer’s exact needs and wants. Local marketing and Individual marketing can enhance the richness of a company. Example: travel packages can be customized, tailors, grocery shops.

49. Multi-Channel Marketing
Multi-Channel Marketing occurs when a single firm uses two or more marketing channels to reach customer segments.

50. Philip Van Heusen utilizes multi channel marketing to sells its products to different customer groups.

51. Multi-Channel Marketing
Discussion 1: If you asked to design the channel for a new airline brand in Bangladesh, how are you going to utilize multi-channel marketing?

52. Distribution Options Direct Intermediary Salesforce Internet Telephone
Mail
Catalogue
Own channel
Salesforce
Own
Another firm’s
Contract
Intermediary
Franchise
Wholesaler
Agent/Merchant
Distributor
Partner

53. Principal Channels

54. Grey Marketing
Grey marketing is when distributors purchase goods from authorized dealers or directly from the manufacturer, and resell the same goods in another market at a lower price.

56. Apple 5C was smuggled from Hongkong into Mainland China
Apple 5C was smuggled from Hongkong into Mainland China. They undercut the prices of dealers by 30%.

57. Issues in Grey Marketing
The Company pursuing grey marketing can face legal challenges as unauthorized imports might not meet local import regulations.
Price Discounting can affect the image of the brand and can create loss in profits.
Poor service can also have a negative impact on brand image.