PRICING

&
Channels of Distribution

by;
Prof. Shikhar
(UGC NET, MBA, M.Com, MPM)
 Pricing
Price is the money received in return for Value.
Value is the ratio of what customer receive ( the
perceived benefit of the products and services offered
by the retailer) to what they have to pay for it;
Value = Perceived Benefits / Price
The 4 major factors the marketers consider in setting
prices are
(i) the price sensitivity of consumers
(ii) the cost of the merchandise and services
(iii) competition
(iv) Legal restrictions
 Pricing Objectives
Some of the more common pricing objectives are:
maximize long-run profit
maximize short-run profit
increase sales volume (quantity)
increase monetary sales
increase market share
obtain a target rate of return on investment (ROI)
company growth
maintain price leadership
desensitize customers to price
discourage new entrants into the industry
match competitors prices
encourage the exit of marginal firms from the industry
survival
avoid government investigation or intervention
obtain or maintain the loyalty and enthusiasm of distributors and other
sales personnel
enhance the image of the firm, brand, or product
 Designing Pricing Strategy

Price
High Medium Low
1. Premium 2. High value 3. Superb
Q
High strategy. strategy. value
A
strategy.
L
4. Overcharging 5. Average 6. Good value
I
Medium strategy. strategy. strategy.
T
Y
7. Rip off 8. False economy 9. Economy
Low strategy. strategy. strategy.
 General Pricing Approaches
Product costs set a floor to the price; consumer
perceptions of the product's value set
the ceiling. The company must consider competitors'
prices and other external and internal factors
to find the best price between these two extremes.
Companies set prices by selecting a general
pricing approach that includes one or more of three
sets of factors.
(I) the cost-based approach (cost-plus pricing, break-
even analysis, and target profit pricing);

(II) value-based pricing  (the buyer-based approach);

&

(III) the competition-based approach (going-rate and

sealed-bid pricing).
 (I) Cost-Based Pricing
1) Cost-Plus Pricing- Its other name is “Mark-
up pricing”. The simplest
pricing method is cost-plus pricing-adding a “standard
markup” to the cost of the product. Construction
companies, for example, submit job bids by estimating
the total project cost and adding a standard markup
for profit. Lawyers, accountants, and other
professionals typically price by adding a standard
markup to their costs.
The manufacturer's markup price is given by:
Markup Price = Unit Cost *
--------------------
(1-desired return on sale)
Eg. A manufacturer identified per unit cost of
material @ Rs.16/-, & expected a desired rate of
return @ 20%. What would be the final mark-up
price?
A: Markup price = Unit cost
--------------------------------

(1 – desired return on sales)

16/-
= ------------- = 20/-
(1- 0.2)

variable Cost + Fixed Cost

*Unit Cost = ----------------------------------------
Price - Variable Cost
2) Target Return Pricing: Another cost-
oriented pricing approach is Target return
pricing (or break even pricing). In this, firm tries
to determine the price at which it will break
even or make the target profit it is seeking. This
pricing method is also used by public utilities,
which are constrained to make a fair return on
their investment. Target pricing uses the
concept of a break-even chart, which shows the
total cost and total revenue expected at
different sales volume levels.
 Target return P = Unit cost + Desired return x Invested capital
------------------------------------------

Unit sales

Eg. A manufacturer invested a capital of Rs.10,00,000 in

the business, he identified per unit cost of material @
Rs.16/-, & expected a desired rate of return @ 20%
with 50,000 sales unit. What would be the final mark-
up price?
: T.R.P = = 16 + 0.20 x 1000000 = 20/-
-------------------------

50000
 (2) Value-Based Pricing
An increasing number of companies are basing
their prices on the product's perceived value.
Value-based pricing uses buyers' perceptions
of value, not the seller's cost. The company
sets its target price based on customer
perceptions of the product value (Value-based
pricing means that the marketer cannot design a
product and marketing program and then set the
price). The targeted value and price get fix first
then drive decisions about product design and
what costs can be incurred.
(2) Competitors-Based Pricing
Consumers will base their judgments of a product's
value on the prices that competitors charge for similar
products.
One form of competition-based pricing is going-rate
pricing, in which a firm bases
its price largely on competitors' prices, with less
attention paid to its own costs or to demand.
The firm might charge the same, more, or less than its
major competitors. In oligopolistic industries that sell a
commodity such as steel, paper, or fertilizer, firms
normally charge the same price. The smaller firms
follow the leader: They change their prices when the
market leader's prices change, rather than when their
own demand or costs change.
Using sealed-bid pricing, a firm bases
its price on how it thinks competitors will price
rather than on its own costs or on the demand.
The firm wants to win a contract, and winning
the contract requires pricing less than other
firms.
Yet the firm cannot set its price below a certain
level. It cannot price below cost without
harming
its position. In contrast, the higher the company
sets its price above its costs, the lower its
chance of getting the contract.
 Pricing Strategies
A company can use pricing strategies in case of two
situation ;
(i) New-Product Pricing Strategies
(ii) Product Mix Pricing Strategies

A )New-Product Pricing Strategies: Pricing strategies

usually change as
the product passes through its life cycle. The
introductory stage is especially challenging. They can
choose between two broad strategies: market-
skimming pricing and market penetration pricing.
 a) Market-Skimming Pricing : Many companies that
invent new products
initially set high prices to "skim" revenues layer by layer
from the market. Intel is a prime user of this strategy,
called market-skimming pricing. Market
skimming makes sense only under certain conditions.
1. First, the product's quality and image must support its
higher price, and enough buyers must want the product
at that price.
2. Second, the costs of producing a smaller volume
cannot be so high that they cancel the advantage of
charging more.
3. Finally, competitors should not be able to enter the
market easily and undercut the high price.
 b) Market-Penetration Pricing: Rather than setting

a high initial price

to skim off, some companies use market-penetration
pricing. They set a low initial price in order
to penetrate the market quickly and deeply—to
attract a large number of buyers quickly and win a
large market share. The high sales volume results in
falling costs, allowing the company to cut its price
even further. Several conditions must be met for this
low-price strategy to work.
1. First, the market must be highly price sensitive.

2. Second, production and distribution costs must fall

as sales volume increases.   
B ) Product Mix Pricing Strategies: The
strategy
for setting a product's price often has to be
changed when the product is part of a
product mix. In this case, the firm looks for a
set of prices that maximizes the profits on the
total
product mix. Pricing is difficult because the
various products have related demand and
costs and face different degrees of
competition.
Look at the 5 product mix pricing situations
a) Product Line Pricing
b) Optional-Product Pricing
c) Captive-Product Pricing
d) By-Product Pricing
e) Product Bundle Pricing

a) Product Line Pricing :Companies usually

develop product lines
rather than single products. In product line
pricing, management must decide on the price
steps to set between the various products in a
line. The price steps should take into account
cost differences between the products in the
line, customer evaluations of their different
features, and competitors' prices.
b) Optional-Product Pricing: Many
companies
use optional-
product pricing—offering to sell optional or
accessory products along with their main
product. For example, a car buyer may choose
to order power windows, Auto Pilot, and a CD
changer. Pricing these options is a sticky
problem. Automobile companies have to decide
which items to include in the base price and
which to offer as options. 
c) Captive-Product Pricing: Companies that make
products that must be
used along with a main product
are using captive product pricing. Examples of captive products
are razor blades, camera film, video games, and computer
software. Producers of the main products (razors, cameras,
video game consoles, and computers) often price them low and
set high markups on the supplies. Thus, camera manufactures
price its cameras low because they make its money on the film
it sells.
In the case of services, this strategy is called two-part
pricing. The price of the service is broken into a fixed fee plus a
variable usage rate. Thus, a telephone company charges a
monthly rate—the fixed fee—plus charges for calls beyond
some minimum number—the variable usage rate. Amusement
parks charge admission plus fees for food, midway attractions,
and rides over a minimum. The service firm must decide how
much to charge for the basic service and how much for the
variable usage. The fixed amount should be low enough to
induce usage of the service; profit can be made on the variable
fees.
d) By-Product Pricing :In producing
processed meats,
petroleum products, chemicals, and other
products, there are often by-products. If the by-
products have no value and if getting rid of
them is costly, this will affect
the pricing of the main product. Using by-
product pricing, the manufacturer will seek a
market for these by-products and should accept
any price that covers more than the cost of
storing and delivering them. 
Eg. For example, many Timber mills have
begun to sell bark chips and sawdust profitably
as decorative mulch for home and commercial
landscaping.
e) Product Bundle Pricing :Using product
bundle pricing,
sellers often combine several of their products
and offer the bundle at a reduced price. Like
hotels sell specially priced packages that
include room, meals, and entertainment. Price
bundling can promote the sales of products
consumers.
CHANNEL OF DISTRIBUTION
A channel of distribution comprises
a set of institutions which perform
all of the activities utilised to move
a product and its title from
production to consumption
The Importance of Marketing Channels

Intermediaries make distribution and

selling processes more efficient.

Intermediaries offers supply chain

partners more than they could achieve on
their own.
– Market Exposure
– Technical Knowledge/Information Sharing
– Operational Specialization
– Scale of operation
Channel Efficiency: How Intermediaries Reduce the Number of
Channel Transactions
Other Key Channel Functions

Matching Needs with Products

Physical distribution & Logistics
Financing
Risk taking
Consumer and Business Marketing
Channels
Channel Cooperation & Conflict

Channels are most effective when:

– Each member performs the tasks it does best.
– Channel members cooperate to attain overall channel goals.
Channel Conflict
– Horizontal Conflict: conflict among channel partners at the
same level of the channel (e.g., retailer to retailer).
Example: Two retailers compete to carry a supplier’s “exclusive” product.

– Vertical Conflict: conflict between different levels of the same

channel (e.g., wholesaler to retailer).
Example: Manufacturer competes with retailer in selling product to target market.

Some conflict can be healthy competition.

Channel Conflict: Goodyear

Goodyear’s conflicts
with its independent
dealers have
decimated the firm’s
replacement tire
sales.
 Factors affecting the channel
distribution

• Product or Market characteristics factors – (i) Number of customers

(ii) Cost of the product
(iii) Type of the product

•Company characteristic factors - (i) Degree of channel control desired

(ii) Financial Resources
(iii) Ability of Management

• Middleman consideration - (i) Services provided by the middleman

(ii) Availability of desired middleman
(iii) Attitude of middleman towards
manufacturer’s Policy

• Environmental characteristics factors.

 Vertical Marketing System

When producers,
wholesalers, and retailers
act as a unified system.

Can happen through

– Outright ownership of channel
member
– Contracts
– “Channel power”
 Franchise Organizations
Powerful force in U.S. Retail
(40%+ of all sales)
Franchise Structures
Compensation Arrangements
Advantages
– Brand Name Recognition
– Standardized Processes and Procedures
– Avoids startup hassles – safer bet
– Quick access to capital and huge
expansion potential

Disadvantages
– Over-saturation and territorial issues
– Marketing fund disputes
– Quality (vs. Company-owned)
– Little room for “entrepreneurial creativity”
 Channel Innovations
Horizontal Marketing System
– Two or more companies at one channel level join
together to achieve a marketing goal.
Joint Ventures
Alliances and Partnerships
Co-Marketing, Co-Distribution and Co-Branding

Multi-channel Distribution System

– Reaching customer segments through multiple
marketing channels. (i.e. hybrid system)
Example: You can buy Starbucks coffee from Starbucks’
stores or from the Supermarket
Problems with MDSs?
 Disintermediation

Occurs when producers sidestep

intermediaries and sell directly to final
buyers, or when radically new types of
channel intermediaries displace
traditional ones.

The Internet has made the disintermediation of

many traditional retailers possible.
Disintermediation Example
Calyx & Corolla
sells fresh flowers
and plants direct to
consumers over the
phone and via the
Web, drastically
reducing the time it
takes flowers to
reach consumers
via conventional
retail channels.
 Distribution Strategy
Alternatives
How many intermediaries?
– Intensive distribution
Stock product in as many outlets as possible.
– Exclusive distribution
Granting a limited number of outlets the exclusive
right to sell product.
– Selective distribution
Somewhere in between Intensive and Exclusive
Distribution.

Does the company always get to choose?

 Marketing Logistics
Definition: The physical flow of goods,
services, and related information from
points of origin to points of consumption.
Includes:
– Inbound distribution
– Outbound distribution
– Reverse distribution
 Inventory Management
Must strike a balance
between
– too much and too little
inventory
– buffers and shortages
– carrying costs and
ordering/setup costs

Just-in-time inventory
systems
RFID technology promises to
automate the entire distribution
RFID or Smart Tag chain, resulting in significant cost
technology savings.
RFID – Radio-Frequency-identification
The Wave of the Future?
Key benefits
fewer stock-outs
reduced logistics labor
costs
more accurate inventory
information
more efficient flow of
goods
happier customers

Retailers may soon mandate

supplier use of RFID.
Transportation
Trucks
Railroads
Ships
Pipelines
Air
Internet
Intermodal
transportation
 Inter-modal Transportation

Intermodal transportation combines two or more

modes of transportation.
Fishyback = water and trucks;
Piggyback = trucks and rail;
Trainship = water and rail;
Airship = air and water.
Third-Party Logistics

Most small and medium

size companies
outsource
transportation to UPS
or other logistics
providers.
 MEANING OF RETAILER
SELLING ARTICLES IN SMALL QUANTITIES
AND THE PERSON WHO DO RETAILING
ACTIVITY IS CALLED RETAILER.
RETAILING CONSIST OF SALE OF
MERCHANDISE FROM ANY FIXED
LOCATION.
RETAILING ALSO INCLUDE SUB-
ORDINATED SERVICES LIKE DELIVERY
RETAILERS ARE AT THE END OF SUPPLY
CHAIN.
 TYPES OF RETAILERS
I-FOOD RETAILERS
 SUPER-MARKETS- 1. SELF SERVICE
2.DEALS IN FOOD ITEMS
3. MEAT AND PERISHABLE…
4. CONVENTIONAL S.M. CARRY 30,000 SKUs…
5. EXTREME VALUE FOOD RETAILERS ONLY STOCK 1,250
SKUs…
 SUPER CENTERS- 1. LARGE STORES ( 1.5 lakh-

2 lakh sq.ft.)
2. COMB. OF SUPER MARKET AND FULL LINE
DISC. STORE
 HYPER-MARKET: 1. LARGE STORES
(1lkh- 3lkh sq.ft.) AND COMB.
OF FOOD(60-70%) AND GENERAL
MERCHANDISE(20-40%).
2. CREATED IN FRANCE( AFT.WW-II).
Eg. In India Hyper City operating as H.M.

 WAREHOUSE CLUBS: 1.LIMITED ASSORT.

OF FOOD AND GENERAL
MERCHANDISE…
2. LITTLE SERVICE AT LOW PRICES( as use low cost
locations, inexpensive store design, low inventory..)

 CONVENIENCE STORES: 1.LIMITED VARIETY AND

ASSORT. OF GOODS AT A CONVENIENT..
 II GENERAL MERCHA.RETAILER
 DEPARTMENT STORE- 1. ATTRACTS CUSTOMERS BY
OFFERING WIDE VARIETY, SERVICE, AMBIENCE…
2. SOLD BOTH “SOFT GOODS (apparel)” AND “HARD GOODS
(appliances, furniture)…
3.1st tier- upscale, high-fashioned chains like Bloomingdale’s
2nd tier- upscale traditional store with low prices and customer
service..
3rd tier- caters more price cautious customers.. E.g.. J C Penney,
Kohl’s
 FULL LINE DISCOUNTS STORES-
1. OFFER BROAD VARIETY,LIMITED SERVICE, LOW
PRICE
2. PRIVATE LABELS & NATIONAL BRANDS
 SPECIALITY STORES- 1. LIMITED
NUMBER OF COMPLEMENTARY GOODS
2. HIGH LEVEL OF SEVICE IN SMALL
RETAIL ..eg. WILLS Lifestyle, ZODIAC,
Tanishq, WOODLAND

 DRUG STORES- SPECIALITY STORE

CONCENTRATE ON HEALTH AND
PERSONAL GROOMING PRODUCTS
 CATEGORY SPECIALIST- 1.BIG-BOX DISCOUNT
STORES THAT OFFERS NARROW BUT DEEP
ASSORTMENT OF GOODS.
2. KOUTONS,PLANET-M, HOME DEPOT (home
improvement centre)
 t
 OFF PRICE STORE- 1. DESIGNER LABEL
MERCHANDISE AT LOW PRICES (unique buying
style)
2. BOUGHT EXCESS INVENTORY AT THE END OF
SEASON (opportunity buying)
3. “CLOSE OUT RETAILERS” OR “FACTORY
OUTLET” (inconsistent assortment of goods)…

III NON-STORE RETAILERS

 ELECTRONIC RETAILER- ALSO CALLED “E-
TAILING” i.e. INTERNET RETAILING/ONLINE
RETAILING..

 DIRECT MAIL AND CATALOG ORDER-

 DIRECT SELLING- CONTACT CUSTOMERS
DIRECTLY IN CONVENIENT LOCATIONS LIKE
HOME, OFFICE (demonstrate, order, placement)…

 TELEVISION AND HOME SHOPPING-

1. CABEL CHANNEL SHOPPING
2. DIRECT RESPONSE ADVERTISING
3. I NFOMERCIALS(30 min long prog.)

 VENDING MACHINE RETAILING- It is a non-store

format in which merchandise are stored in a machine
and dispensed to customers when they deposit cash
or use a credit card
IV SERVICE RETAILING
Service Retailers, firms selling primarily services rather than
merchandise, are a large and growing part of the retail industry.
E.g. Airlines, Automobile, Banks, Education,
Entertainment Parks, Financial services,
Fitness, Hotels, Insurance, Movie theater
 RETAIL FORMATS

INDEPENDENT/ SINGLE STORES : Single store

retailers can tailor their offerings to their customers
needs and can more effectively negotiate lower price
for merchandise and advertising due to their larger
size. Single store retailers typically have to rely on
their mangers capabilities to make the broad range of
necessary retail decisions.

CORPORATE RETAIL CHAINS: A retail chain is a

company that operates multiple retail under common
ownership and usually has centralized decision
making for defining and implementing its strategy. Like
Wal-Marts, Target, JC Penney.
FRANCHISING :FRANCHISING IS THE
CONTRACTUAL AGREEMENT BETWEEN A
FRANCHISOR AND A FRANCHISEE THAT ALLOWS THE
FRANCHISEE TO OPERATE A RETAIL OUTLET USING A
NAME AND FORMAT DEVELOPED AND SUPPORTED BY
FRANCHISOR.
In a Franchise contract, the franchisee pays a lump
sum plus a royalty on all sales for the right to operate
a store in a specific location.
The franchisee also agrees to operate the outlet in
accordance with procedures prescribed by the
franchisor.
Franchisor provides assistance in locating and
building the store, developing the products or service
sold, training managers, and advertising.
E.g. Haldiram, Vadilal KFC, Lilliput, Koutons
 Private Label

The Private Label Marketing Association

defines store brand products as ‘all
merchandise sold under a retail store’s private
label’.
That label can be the store's own name or a
name created exclusively by that store. In some
cases a store may belong to a wholesale
buying group that owns labels, which are
available to the members of the group. These
wholesaler-owned labels are referred to as
controlled labels.
 Thus a private label can be classified as
under:
(i) STORE Brand: which carries the retailer’s
name, such as Westside, Food World, Big
Bazaar.
(ii) Individual Brands: Where specific brand
names are created for specific market
segments and categories. Retailers have
realized that while consumers can buy a
national brand anywhere; they can only buy
their store brand at their store eg: DJ&C,
Marks & Spencer.
(iii) An Umbrella Brand: Where a common brand
name is used across multiple categories.
Eg: Splash (lifestyle), Bare (pantaloon)
 Assignment

Current Trends in Wholesale