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Chapter 9Chapter 9

Pricing Issues in Channel Management

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The Importance of The Importance of

PricingPricing

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Objective 1:

Pricing decisions cause top-level marketingexecutives more concern than any other

strategic marketing decision area.

Pricing decisions cause top-level marketingexecutives more concern than any other

strategic marketing decision area.

Pricing is viewed as having a more directlink to the firm’s bottom line.

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1111Anatomy of Channel Anatomy of Channel Pricing StructurePricing Structure

Objective 2:

Channel participants each want a part of the total price sufficient to cover theircosts and provide a desired level of profit.

Channel participants each want a part of the total price sufficient to cover theircosts and provide a desired level of profit.

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1111 The “Golden Rule”The “Golden Rule” of Channel Pricing of Channel Pricing

It is not enough to base pricing decisions solely onthe market, internal cost considerations, and

competitive factors. Rather, for those firms usingindependent channel members, explicit consideration

of how pricing decisions affect channel member behavior is an important part of pricing strategy.

It is not enough to base pricing decisions solely onthe market, internal cost considerations, and

competitive factors. Rather, for those firms usingindependent 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 impacton channel member performance.

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1111Influencing Pricing StrategyInfluencing 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

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1111Channel Manager’s RoleChannel Manager’s Role

Major areas of consideration in a manufacturer’s pricing decision

Internalcost

considerations

Channelconsiderations

Competitiveconsiderations

Targetmarket

considerations

Channel manager must focuson the channel considerationsand work to incorporate them

into the firm’s pricing decisions

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1111Channel Manager’s RoleChannel Manager’s Role

To find out about channel member views and to appraise their effects on channel member performance

To find out about channel member views and to appraise their effects on channel member performance

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1111Channel Manager’s RoleChannel Manager’s Role

Havechannel members’

viewpoints on pricing issues included as an integral part of the

manufacturer’s price-making process

Havechannel members’

viewpoints on pricing issues included as an integral part of the

manufacturer’s price-making process

Such action anticipates

and hopefully avoidsproblems that mayarise after pricing

decisions havetaken effect

Such action anticipates

and hopefully avoidsproblems that mayarise after pricing

decisions havetaken effect

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Channel Pricing GuidelinesChannel Pricing Guidelines1111Objective 4:

1. To help those involved in pricing decisions tofocus more clearly on the channel implications

of their pricing decisions

1. To help those involved in pricing decisions tofocus 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

2. To provide general prescriptions on how to formulate pricing strategies that will help promote

channel member cooperation and minimize conflict

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1111Profit MarginsProfit Margins

Guideline #1: Each efficient reseller must obtainunit profit margins in excess of unit operating costs.

Guideline #1: Each efficient reseller must obtainunit 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.

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.

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Different Classes of ResellersDifferent Classes of Resellers 1111

Guideline #2: Each class of reseller margins should varyin rough proportion to the cost of the functions the

reseller performs.

Guideline #2: Each class of reseller margins should varyin 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?

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Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line with

those charged for comparable rival brands.

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.

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 BrandsRival Brands

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Guideline #4: Special distribution arrangements—variations in functions performed or departuresfrom the usual flow of merchandise—should be

accompanied by corresponding variations infinancial arrangements.

Guideline #4: Special distribution arrangements—variations in functions performed or departuresfrom the usual flow of merchandise—should be

accompanied by corresponding variations infinancial arrangements.

The margin structure should reflect any changes in the usual allocation of distribution tasks

between the manufacturer and the channel members.

The margin structure should reflect any changes in the usual allocation of distribution tasks

between the manufacturer and the channel members.

Special ArrangementsSpecial Arrangements

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Guideline #5: Margins allowed to any type of reseller must conform to the conventional

percentage norms unless a very strong case can bemade for departing from the norms.

Guideline #5: Margins allowed to any type of reseller must conform to the conventional

percentage norms unless a very strong case can bemade 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.

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 MarginsConventional Norms in Margins

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Guideline #6: Variations in margins on individualmodels and styles of a line are permissible andexpected. However, they must vary around the

conventional margin for the trade.

Guideline #6: Variations in margins on individualmodels and styles of a line are permissible andexpected. 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.

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 ModelsMargin Variation on Models

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Guideline #7: A price structure should contain offerings at the chief price points, where such

price points exist.

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 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 PointsPrice Points

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Guideline #8: A manufacturer’s price structuremust reflect variations in the attractiveness of

individual product offerings.

Guideline #8: A manufacturer’s price structuremust 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.

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 VariationsProduct Variations

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1111Guideline CaveatGuideline Caveat

Objective 5:

There is noGuarantee

Particular circumstances and situations existin which these guidelines will not apply or

will be irrelevant.

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Other Channel Pricing IssuesOther Channel Pricing IssuesObjective 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

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1111Exercising Control in PricingExercising 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.”

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Channel members fear such changes because they havebecome accustomed to the strategy, or their own pricingstrategies may be closely tied to those of the manufacturer.

Changing Price PoliciesChanging Price Policies

Changes in manufacturer pricing policiesor related terms of sale cause

reactions amongchannel members.

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First: Manufacturers should consider the long- and theshort-term implications of such increases versusmaintaining 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 Passing Price Increases Through the Channelthe Channel

Strategies for channel members to use in order to avoid simply passing along price increases

through the channel:

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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 strongretailer acceptance and follow-through on

pricing promotions.

Using Price Incentives in the Using Price Incentives in the ChannelChannel

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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 RidingGray Market & Free Riding

Free Riding Describes the behavior of

distributors & dealers who offer extremely low prices but little service to

customers

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Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

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Profit-Oriented Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

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Profit Maximization

Profit MaximizationProfit Maximization

Setting prices so that total revenue is as

large as possible relative to total costs.

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Return on Investment

ROI = ROI = Net Profit after taxesNet Profit after taxes Total assetsTotal assets

Return on InvestmentReturn on InvestmentNet profit after taxes divided by

total assets.

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Elasticity of Demand

Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemand

InelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

UnitaryUnitaryElasticityElasticityUnitaryUnitary

ElasticityElasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

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The Cost Determinant of Price

Deviate with changes in level of output

Deviate with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

Do not deviate as level of output changes

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The Cost Determinant of Price

Target-ReturnPricing

Target-ReturnPricing

Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices

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Break-Even Pricing

Break-EvenQuantity = Total Fixed Costs

Fixed cost Contribution

Fixed costContribution = Price - Avg. Variable Cost