B.COM VI SEMESTERMarketing Management Unit -III

By- GULFESHAN ZIAGUEST FACULTY

DEPARTMENT OF COMMERCEKHWAJA MOINUDDIN CHISHTI URDU,ARABI FARSI UNIVERSITY,LUCKNOW

Definition: Pricing is the method of determining the value a producer will get in the exchange of goods and services. Simply, pricing method is used to set the price of producer’s offerings relevant to both the producer and the customer.

While setting the price of a product or service the following points have to be kept in mind:

• Nature of the product/service.

• The price of similar product/service in the market.

• Target audience i.e. for whom the product is manufactured (high, medium or lower class)

• The cost of production viz. Labor cost, raw material cost, machinery cost, inventory cost, transit cost, etc.

• External factors such as Economy, Government policies, Legal issues, etc.

Pricing

Pricing Objectives

Price sensitivity is the degree to which the price of a product affects consumers' purchasing behaviors. Summed up, it's how demand changes with the change in the cost of products.

In economics, price sensitivity is commonly measured using the price elasticity of demand, or the measure of the change in demand based on its price change. For example, some consumers are not willing to pay a few extra cents per gallon for gasoline, especially if a lower-priced station is nearby.

Price Sensitivity

A company has to keep in mind various factors while determining the price of a product. Some such important factors are given here.

1] Cost of the Product

Fixed Cost

Variable Cost

Semi-Variable Costs

2] The Demand for the Product

3] Price of Competitors

4] Government Regulation

Factors Affecting Price Determination

The two methods of pricing are as follows: A. Cost-oriented Method B. Market-oriented Methods.

A. Cost-oriented Method:

Because cost provides the base for a possible price range, some firms may consider cost-oriented methods to fix the price.

Cost-oriented methods or pricing are as follows:

1. Cost plus pricing:

Cost plus pricing involves adding a certain percentage to cost in order to fix the price. For instance, if the cost of a product is Rs. 200 per unit and the marketer expects 10 per cent profit on costs, then the selling price will be Rs. 220. The difference between the selling price and the cost is the profit. This method is simpler as marketers can easily determine the costs and add a certain percentage to arrive at the selling price.

Methods of Pricing

2. Mark-up pricing:

Mark-up pricing is a variation of cost pricing. In this case, mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price. Firms that use cost-oriented methods use mark-up pricing.

Average unit cost/Selling price

3. Break-even pricing:

In this case, the firm determines the level of sales needed to cover all the relevant fixed and variable costs. The break-even price is the price at which the sales revenue is equal to the cost of goods sold. In other words, there is neither profit nor loss.

Contribution = Selling price – Variable cost per unit

4. Target return pricing:

In this case, the firm sets prices in order to achieve a particular level of return on investment (ROI).

Target return price = Total costs + (Desired % ROI investment)/ Total sales in units

5. Early cash recovery pricing:

Some firms may fix a price to realize early recovery of investment involved, when market forecasts suggest that the life of the market is likely to be short, such as in the case of fashion-related products or technology-sensitive products.

Such pricing can also be used when a firm anticipates that a large firm may enter the market in the near future with its lower prices, forcing existing firms to exit. In such situations, firms may fix a price level, which would maximize short-term revenues and reduce the firm’s medium-term risk.

3. Sealed-bid pricing:

This pricing is adopted in the case of large orders or contracts, especially those of industrial buyers or government departments. The firms submit sealed bids for jobs in response to an advertisement.

4. Differentiated pricing:

Firms may charge different prices for the same product or service.

The following are some the types of differentiated pricing:

a. Customer segment pricing

b. Time pricing

c. Area pricingd. Product form pricing

DISTRIBUTION“Distribution channel is the set of firms and individuals that take title or assists transferring title to the particular goods or services as it moves from the producers to the consumers”.

- Prof. Philip Kotler

- “Any order of the institutions from the producers to the consumer in which either one middlemen or any number of them might be there, is know as the channel of distribution”.

Prof. McCarthy

Importance of distribution:

-Providing customer feedback on pricing

-Managing Finance

-Promoting the products

-Satisfying the customers

-Reducing the total number of transactions

Types of channels of distribution:

Direct Channel

In this type of channel, the producer sells directly the final consumer. The producer can adopt any method to reach the consumers like door-to-door selling, or selling through their own retail stores. For example, company owned shoe stores such as Bata, Liberty, etc. Banks, consultancies, telephone service providers, Data services providers use this channel of distribution.

Indirect Channel

In case of a large scale production, it becomes difficult for the producer to manage with a direct channel to distribute the goods. It becomes necessary for the producer to sell the goods through middlemen who may be wholesalers or retailers. A wholesaler usually buys goods in large quantities from the producer whereas a retailer picks up smaller lots. This type of a channel thus becomes an indirect channel of distribution.

One-Level Channel:The producers sells goods directly to the retailer instead of selling it to wholesalers. The type of goods usually are FMCG products. The producers can sell to more than one retailers, who it turn sell to consumers. This type of a channel is effective when the goods cater to a local market and the retailers can buy in bulk and smaller lots to the consumers.Two-Level Channel:The producers sells to a wholesaler who in turn sells to retailer. The consumer buys from the retailer. Wholesaler picks up in bulk from the producer and sells in smaller lots to the retailers. Retailers further supply the quantity as per the requirement of the consumer. This type of a channel becomes effective when the market is scattered and suitable for products that require common channels of distribution. For e.g. food grains, spices, utensils, etc.Three-Level Channel:This type of channel becomes more complex with the addition of agents. An agent performs the function of reducing the distance between the producers and the wholesaler. Companies appoint there agents directly in markets and the agents then perform the function of wholesalers and retailers. When a third intermediary like an agent are roped into the channel along with the wholesaler and the retailer.

MiddlemenThe main objective of marketing is to create valuable exchanges between consumers and producers. The market consists of those consumers who are willing and able to purchase products, hence creating exchanges that satisfy both parties. Middlemen, also referred to as intermediaries, play a vital part in ensuring that the distribution channel between the producer and the consumer is complete. The more intermediaries there are in the supply chain, the higher the distribution channel.

Types of Middlemen:

Examples of middlemen include wholesalers, retailers, agents and brokers. Wholesalers and agents are closer to the producers. Wholesalers buy goods in bulk and sell them to the retailers in large quantities. Retailers and brokers acquire the goods from the wholesalers and sell them in small quantities to the consumers.

Roles of Middlemen:

The core function of intermediaries is to deliver goods to the consumers when and where they want them. To achieve this, they buy the products from the producers, store them as they search for viable markets, and then transport them to the consumers. In the process, they assume any risks facing the goods – for instance, theft, perishability and other potential hazards. In addition, middlemen promote the goods to the consumers on behalf of the producers.

Importance of Intermediaries:

Intermediaries are very important players in the market. Both the consumers and producers gain immensely from the roles of middlemen, who ensure that there is a seamless flow of goods in the market by matching supply and demand. Intermediaries provide feedback to the producers about the market, thus influencing the decisions made by the manufacturers.

Buyers, on the other hand, gain from the services offered by intermediaries, such as promotion and delivery. Buyers can get the right quantity they want, as intermediaries are able to sell in small units.

Effect on Price:

Regardless of the important role they play, there are some disadvantages to having intermediaries in the distribution channel. As the goods are exchanged from one intermediary to the other, their prices inflate. The rationale behind higher prices is to cover expenditures on the goods such as warehousing, insurance and transportation costs.

Intermediaries are also out to make profits, hence they have to include some profit markup in the sales. Consumers then bear the price of having intermediaries in the channel.

Functions of Middlemen:

1. Middlemen are the furnishers of valuable information to the producers about consumer behaviour, the changes in tastes and fashions, etc.

2. Middlemen allow the manufacturers to concentrate on production only and relieve them from the botheration of marketing.

3. Middlemen render financial help to manufacturers.

4. They make available the goods according to the consumers’ needs, fashion, tastes, etc.

5. Middlemen are an important link between the producers and consumers.

Various kinds of Middlemen in Distribution Channel:The distribution channel starts with the producer and ends with the consumer. In between, there are many intermediaries or middlemen. These middlemen are of two types, namely,

• Merchant middlemen and

• Agent middlemen.

A merchant middleman is one who takes title to the goods and later carries out sales. An agent middleman, on the other hand, does not take title to goods. He simply gets orders from the buyers and passes on the same to the producers.

The various kinds of middlemen in the market are:

1. Wholesalers: They are the people who buy in bulk from the producers and sell in small quantities to the retailers.

2. Retailers: They are the people who buy in small quantities from the wholesalers and sell to the ultimate consumers.

3. Agents: They are the middlemen who do not take any title to goods. They render all services required in marketing. They represent either the seller or the buyer. They receive commission for their work.

4. Brokers: Like agents, brokers also represent either the buyer or the seller. They do not usually have physical control over the goods in which they deal. Example: share brokers. They get ‘brokerage’ for their work.

5. Dealers: They are the business houses that resell goods. Example: Viveks, Vasanth & Co. and so on.

6. Distributors: They are the same as wholesalers.

7. Jobbers: They are associated with stock exchanges. A jobber deals in certain securities. He transacts only with a broker and does not deal directly with the public.

8. Branches: These are establishments maintained by manufacturers at different places to promote sales. Example: Bata Shoe company.

9. Consumer Co-operatives: These are owned and managed by the ultimate consumers. Such cooperatives buy and distribute goods mainly to the members.

10. Company show room: A company may run its own show room to sell its goods. Example: Philips, BPL and Thomson have their own showrooms in Chennai.

11. Facilitating Agencies: These agencies are directly or indirectly involved in the performance of certain marketing functions. These are transport organizations, warehouses, banks, insurance companies and so on

Decision involved in setting up the channel:

We have to consider the following factors for the selection of channel of distribution:

(i) Product: Perishable goods need speedy movement and shorter route of distribution. For durable and standardized goods, longer and diversified channel may be necessary. Whereas, for custom made product, direct distribution to consumer or industrial user may be desirable.

(ii) Market:

(a) For consumer market, retailer is essential whereas in business market we can eliminate retailing.

(b) For large market size, we have many channels, whereas, for small market size direct selling may be profitable.

(c) For highly concentrated market, direct selling is preferred whereas for widely scattered and diffused markets, we have many channels of distribution.

(d) Size and average frequency of customer’s orders also influence the channel decision. In the sale of food products, we need both wholesaler and retailer.

(iii) Middlemen:

(a) Middlemen who can provide wanted marketing services will be given first preference.

(b) The middlemen who can offer maximum co-operation in promotional services are also preferred.

(c) The channel generating the largest sales volume at lower unit cost is given top priority.

(iv) Company:

(a) The company’s size determines the size of the market, the size of its larger accounts and its ability to set middlemen’s co-operation. A large company may have shorter channel.

(b) The company’s product-mix influences the pattern of channels. The broader the product- line, the shorter will be the channel.

If the product-mix has greater specialization, the company can favor selective or exclusive dealership.

(c) A company with substantial financial resources may not rely on middlemen and can afford to reduce the levels of distribution. A financially weak company has to depend on middlemen.

(d) New companies rely heavily on middlemen due to lack of experience.

(v) Marketing Environment:

During recession or depression, shorter and cheaper channel is preferred. During prosperity, we have a wider choice of channel alternatives. The distribution of perishable goods even in distant markets becomes a reality due to cold storage facilities in transport and warehousing. Hence, this leads to expanded role of intermediaries in the distribution of perishable goods.

(vi) Competitors:

Marketers closely watch the channels used by rivals. Many a time, similar channels may be desirables to bring about distribution of a company’s products. Sometimes, marketers deliberately avoid channels used by competitors. For example, company may by-pass retail store channel (used by rivals) and adopt door-to-door sales (where there is no competition).

(vii) Customer Characteristics:

This refers to geographical distribution, frequency of purchase, average quantity of purchase and numbers of prospective customers.

Channel management strategies:

1. Analyze the Consumer

2. Establish the Channel Objectives

3. Specify Distribution Tasks

4. Evaluate and Select Among Channel Alternatives

5. Evaluating Channel Member Performance.

Distribution logisticsDistribution logistics (also known as transport logistics or sales logistics) is the link between production and the market. The area comprises all processes involved in the distribution of goods -from manufacturing companies to customers. Customers are either final customers, distributors or processors. In concrete terms, distribution logistics includes goods handling, transport and interim storage. This makes the subject a central component of extra logistics and closely links it with packaging technology (after all, packaging must be adapted to transport requirements in order to be able to deliver the product safely). Sustainably structured information, decision-making and control processes are essential for implementing successful transport logistics.

Distribution logisticians essentially pursue three goals:

1. Availability

2. Cost minimization

3. Influence

Market Logistics Decisions:

Four major decisions must be made with regard to market logistics:

(i) How should orders be handled? (Order Processing).

(ii) Where should stocks be located? (Warehousing).

(iii) How much stock should be held? (Inventory).

(iv) How should goods be shipped? (Transportation).

RetailingDefinition: Retailing is a distribution process, in which all the activities involved in selling the merchandise directly to the final consumer (i.e. the one who intends to use the product) are included. It encompasses sale of goods and services from a point of purchase to the end user, who is going to use that product.

Any business entity which sells goods to the end user and not for business use or for resale, whether it is a manufacturer, wholesaler or retailer, are said to be engaged in the process of retailing, irrespective of the manner in which goods are sold.

Retailer implies any organization, whose maximum part of revenue comes from retailing. In the supply chain, retailers are the final link between the manufacturers and ultimate consumer.

Types of Retail outlets:

a) Department Stores

A department store is a set-up which offers wide range of products to the end-users under one roof. In a department store, the consumers can get almost all the products they aspire to shop at one place only. Department stores provide a wide range of options to the consumers and thus fulfill all their shopping needs.

b) Discount Stores

Discount stores also offer a huge range of products to the end-users but at a discounted rate. The discount stores generally offer a limited range and the quality in certain cases might be a little inferior as compared to the department stores.

c) Supermarket

A retail store which generally sells food products and household items, properly placed and arranged in specific departments is called a supermarket. A supermarket is an advanced form of the small grocery stores and caters to the household needs of the consumer. The various food products (meat, vegetables, dairy products, juices etc) are all properly displayed at their respective departments to catch the attention of the customers and for them to pick any merchandise depending on their choice and need.

d) Warehouse Stores

A retail format which sells limited stock in bulk at a discounted rate is called as warehouse store. Warehouse stores do not bother much about the interiors of the store and the products are not properly displayed.

e) Mom and Pop Store (also called Kirana Store in India)

Mom and Pop stores are the small stores run by individuals in the nearby locality to cater to daily needs of the consumers staying in the vicinity. They offer selected items and are not at all organized. The size of the store would not be very big and depends on the land available to the owner. They wouldn’t offer high-end products.

f) Speciality Stores

As the name suggests, Speciality store would specialize in a particular product and would not sell anything else apart from the specific range.Speciality stores sell only selective items of one particular brand to the consumers and primarily focus on high customer satisfaction.

g) Malls

Many retail stores operating at one place form a mall. A mall would consist of several retail outlets each selling their own merchandise but at a common platform.

h) E Tailers

Now a days the customers have the option of shopping while sitting at their homes. They can place their order through internet, pay with the help of debit or credit cards and the products are delivered at their homes only. However, there are chances that the products ordered might not reach in the same condition as they were ordered. This kind of shopping is convenient for those who have a hectic schedule and are reluctant to go to retail outlets. In this kind of shopping; the transportation charges are borne by the consumer itself.

i) Convenience Retailer

Usually located in residential areas this type of retailer offers a limited range of products at premium prices due to the added value of convenience.

Principles of Retailing:

1. Clear definition of objectives and policies

2. Unity of command

3. Supervision and control

4. Monitoring human resources

5. Division of labour

6. Interest in employees

7. Responsibility and authority

Reasons for retail growth:

1. Emergency of nuclear family and social changes

2. Increased disposal income

3. FDI in retail

4. Changing preferences of Indian consumer

5. Availability of skilled labour

6. Low cost of operations

Challenges in retailing:

• Entry of major giants in the foray

• Use of plastic money

• Increased access to internet

• Brand loyalty

• Advent of supermarkets

• E-retailing

• Need for retailing skills.

WholesalingWholesaling is the sale of merchandise in bulk to a retailer for repackaging and resale in smaller quantities at a higher price.

The buyer of wholesale merchandise sorts, reassembles, and repackages it into smaller quantities for direct retail sale to consumers. Due to the quantities purchased, the wholesaler can charge less per item. The retailer sells at a price that reflects the overall cost of doing business.

Functions of Wholesaling:

(i) Enable manufacturers and service providers to distribute locally without making customer contacts.

(ii) Provide a trained sales force.

(iii) Provide marketing and research supports for manufacturers, service providers and retail or institutional consumers.

(iv) Purchase large quantities, thus reducing total physical distribution costs.

(v) Provide warehousing and delivery facilities.

(vi) Provide credit facilities for retail and institutional customers, whenever required.

(vii) Provide adjustments for defective merchandise.

(viii)Take risks by being responsible for theft, deterioration and obsolescence of inventory. Wholesalers who take title of ownership of products and services usually perform all the above tasks.

Importance of wholesaling:

(i) Assembling:

A wholesaler buys goods from producers who are scattered far and wide and assembles them in his warehouse for the purpose of the retailers.

(ii) Storage:

After arranging and assembling the products from producers, wholesaler stores them in his warehouse and releases them in proper and required quantities as and when they are required by retailers.

(iii) Transportation:

Wholesalers buy goods in bulk from the producers and transport them to their own godowns. Also, they provide transportation facility to retailers’ by transporting the goods from their warehouses to the retailers’ shops. Some wholesalers purchase in bulk, therefore, they can avail the economies of freight on bulk purchases.

(iv) Financing:

A wholesaler provides credit facility to retailers who are in need of financial assistance.

(v) Risk-bearing:

A wholesaler bears all the trade risks arising out of the sudden fall in prices of goods or by way of damage/spoilage or destruction of goods in his warehouse. The risk of bad debt as a result of nonpayment by retailers who have purchased on credit, also falls on the wholesalers. Thus a wholesaler bears all the trade and financial risks of the business.

(vi) Grading and Packing:

A wholesaler sorts out the goods according to their quality and then packs them in appropriate containers. Thus, he performs the marketing function of grading and packing also.

(vii) Providing Marketing Information:

Wholesalers provide valuable market information to retailers and manufacturers. The retailers are informed about the quality and type of goods available in the market for sale, whereas the manufacturers are informed about the changes in tastes and fashions of consumers so that they may produce the goods of the desired level of taste and fashion.

Types of Wholesalers:

(A) On the basis of area covered:

(a) Local wholesalers, who distribute the goods from the producer to the consumer of a particular locality or area.

(b) State wholesalers, who function in a particular state or province.

(c) Country-wide wholesales who are located at the main business centers of the country and who distribute goods throughout the length and breadth of the country.

(B) On the basis of the goods they deal in:

It is the most used grouping of wholesale concerns. According to T.N. Backman, ‘it is not easy to define their limits of operations on any particular basis or criterion, but usually three bases are selected:

(a) Methods of distributing goods: (b) sources of supply; and (c) the use of the goods by the consumers.’

(C) On the basis of methods of operation:

(a) Full-function wholesales-who perform the entire range of wholesale functions, viz., assembling, storage, transportation, packing, financing and risk-bearing.

(b) Limited function wholesalers-who perform only limited or specific functions out of the full range of wholesale functions. They include:

(i) Rack Jobbers-wholesalers who sell special products viz., household wares and cosmetic/toiletries to retailers.

(ii) Truck wholesalers-who combine selling, delivery, and collection in one operation. They carry only specific type of products, usually perishable and semi-perishable goods.

(iii) Cash-and-carry wholesalers-who sell their stocks to retailers on ‘cash and carry’ basis. The retailers come to the wholesalers’ godown, select their requirements and pay cash on the spot and take away the goods.

(c) Merchant wholesalers.

They are of the following types:

(i) Wholesalers proper:

They are those merchants who deal only in the buying and selling activities and do not engage in manufacturing activities. They buy goods in bulk from the manufacturers and sell them in bulk to retailers. They also maintain their own warehouses for storing the goods.

(ii) Manufacturer wholesalers:

They combine the twin functions of manufacturing and selling and operate as both manufacturers and wholesalers. They usually purchase goods in their crude form, and after processing in their plant, sell them in a refined form to retailers. Their production operations are relatively simple and their main activity is that of selling.

(iii) Mill-supply wholesalers/Industrial Distributors:

Such wholesalers sell a wide range of goods to industrial units, who, in turn, use them for their manufacturing operations. These wholesalers buy goods in bulk quantities from producers/growers and sell them to industrial mills. For example, a wholesaler may purchase raw tobacco from growers and sell them to factories which manufacture cigarettes.

(D) On the basis of their line of product:

(a) General merchandise wholesalers:

Wholesalers who deal in a number of items of general merchandise, ranging from food products to household appliances.

(b) General line wholesalers:

Who offer complete stock in one major line, e.g., stationery goods or may be hardware appliances, etc.

(c) Specialised wholesalers:

Who deal only in specialised goods such as food products c: electrical goods, etc. They help those retailers who wish to buy a wide range of goods of the same line.