1. 1 Chapter 9 Pricing Issues in Channel Management

2. 2 The Importance of Pricing 11 Objective 1: Pricing decisions cause top-level marketing executives more concern than any other strategic marketing decision area. Pricing is viewed as having a more direct link to the firm’s bottom line.

3. 3 11 Anatomy of Channel Pricing Structure Objective 2: Channel participants each want a part of the total price sufficient to cover their costs and provide a desired level of profit.

4. 4 11 The “Golden Rule” of Channel Pricing The “Golden Rule” of Channel Pricing It is not enough to base pricing decisions solely on the market, internal cost considerations, and competitive factors. Rather, for those firms using independent channel members, explicit consideration of how pricing decisions affect channel member behavior is an important part of pricing strategy. = Pricing decisions can have a substantial impact on channel member performance.

5. 5 11 Influencing Pricing Strategy Objective 3: The major challenge for the channel manager: To help foster pricing strategies that promote channel member cooperation and minimize conflict To help foster pricing strategies that promote channel member cooperation and minimize conflict

6. 6 11 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

7. 7 11 Channel Manager’s Role To find out about channel member views and to appraise their effects on channel member performance

8. 8 11 Channel Manager’s Role Have channel members’ viewpoints on pricing issues included as an integral part of the manufacturer’s price- making process Have channel members’ viewpoints on pricing issues included as an integral part of the manufacturer’s price- making process Such action anticipates and hopefully avoids problems that may arise after pricing decisions have taken effect Such action anticipates and hopefully avoids problems that may arise after pricing decisions have taken effect

9. 9 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

10. 10 11 Profit Margins Guideline #1: Each efficient reseller must obtain unit profit margins in excess of unit operating costs. OR Channel members who believe that the manufacturer is not allowing them sufficient margins are likely to seek out other suppliers or establish and promote their own private brands.

11. 11 Different Classes of Resellers 11 Guideline #2: Each class of reseller margins should vary in rough proportion to the cost of the functions the reseller performs. 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? 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. 12 11 Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line with those charged for comparable rival brands. Channel managers should attempt to weigh any margin differentials between their own and competitive brands in terms of what kind of support their firms offer and what level of support they expect from channel members. Rival Brands

13. 13 11 Guideline #4: Special distribution arrangements— variations in functions performed or departures from the usual flow of merchandise—should be accompanied by corresponding variations in financial arrangements. The margin structure should reflect any changes in the usual allocation of distribution tasks between the manufacturer and the channel members. Special Arrangements

14. 14 11 Guideline #5: Margins allowed to any type of reseller must conform to the conventional percentage norms unless a very strong case can be made for departing from the norms. Exceptions are possible if they can be justified in the eyes of the channel members. However, it is the job of the channel manager to attempt to explain to the channel members any margin changes that deviate downward from the norm. Conventional Norms in Margins

15. 15 11 Guideline #6: Variations in margins on individual models and styles of a line are permissible and expected. However, they must vary around the conventional margin for the trade. Channel members are often amenable to accepting the lower margins associated with promotional products so long as they are convinced of the promotional value of the product in building patronage. Margin Variation on Models

16. 16 11 Guideline #7: A price structure should contain offerings at the chief price points, where such price points exist. Price points are specific prices, usually at the retail level, to which consumers have become accustomed. Failure to recognize retail price points can create problems for the manufacturer as well as its channel members if consumers expect to find products at particular price points and such products are not offered. Price Points

17. 17 11 Guideline #8: A manufacturer’s price structure must reflect variations in the attractiveness of individual product offerings. If the price differences are not closely associated with visible or identified product features, the channel members will have a more difficult selling job. Product Variations

18. 18 11 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. 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. 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. 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. 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. 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. 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

25. 25 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

26. 26 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

27. 27 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs.

28. 28 Return on Investment ROI = Net Profit after taxes Total assets Total assets Return on Investment Return on Investment Net profit after taxes divided by total assets.

29. 29 Elasticity of Demand Elastic Demand  Consumers buy more or less of a product when the price changes Inelastic Demand  An increase or decrease in price will not significantly affect demand Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

30. 30 The Cost Determinant of Price Deviate with changes in level of output Deviate with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not deviate as level of output changes Do not deviate as level of output changes

31. 31 The Cost Determinant of Price Target-Return Pricing Target-Return Pricing Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

32. 32 Break-Even Pricing Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution =Price - Avg. Variable Cost