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Chapter 11Chapter 11

Pricing Issues in

Channel Management 

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2

Major Topics for Ch. 11

1. Pricing

2. Major Considerations

3. Channel Structure and Pricing*4. Channel Pricing Guidelines

5. (Manufacturer) Pricing as a Channel

Incentive*6. Gray market and free riding problems in

marketing channels**

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1. The Pricing Ingredient

• Price: the ultimate measure of value of

a product/service.

• Valuation: simultaneous appraisal bysellers & buyers for economic and

 psychological/social worth of market

offerings.*

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The Importance of PricingThe Importance of Pricing

1111

Pricing decisions cause top-levelmarketing

executives more concern than anyother

strategic marketing decision area.

Pricing decisions cause top-levelmarketing

executives more concern than anyotherstrategic marketing decision area.

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

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11112. Major Considerations:2. Major Considerations:

Anatomy of ChannelAnatomy of Channel

Pricing StructurePricing Structure

Channel participants eachwant a part o the total price*sucient to cover their

costs and provide adesired level o proft.

c! "etail Pricing  #hoelsale

Pricing

Channel participants eachwant a part o the total price*sucient to cover their

costs and provide adesired level o proft.

c! "etail Pricing  #hoelsale

Pricing

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6

An Example of Channel Pricing for

Guitar String

Manufacturer 

Wholesaler 

Retailer 

Customer 

$2.50 Manufacturing cost

$3.40

$5.00

7.50

#holesale price

"etail price

$anuacturer pric

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1111

3. Channel Structure and Pricing Issues*

%Channel Intensity  and Pricing  Channel Control &ssue

% Channel Level and Pricing*  Channel eciency &ssue ' Channel

control issue

% Channel Ownership/function and

Pricing  Channel (exibility &ssue '

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1111

3-1. Channel Pricing in Practice*

%Channel Level and Pricing  )ects channel eciency'channelcontrol issue

% #hen using a +irect Channel, ranser Pricing issue  ouroptions

% #hen /sing an &ndirect Channel,+ouble or riple $arkup &ssue 

% $arket Power and Pricing, #ho

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1111Channel Manager’s RoleChannel Manager’s Role

$a1or areas o consideration in a manuacturer’s pricing decision

Internalcost

considerations

Channel

considerationsCompetitiveconsiderationsTargetmarket

considerations

Channel manager must focus

on the channel considerations

and work to incorporate them

into the firm’s pricing decisions

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1111Channel Manager’s Role*Channel Manager’s Role*

2avechannel members’

viewpoints onpricing issuesincluded as an

integral part o themanuacturer’sprice-making

process

2ave

channel members’viewpoints onpricing issuesincluded as an

integral part o themanuacturer’sprice-making

process

3uch action

anticipatesand hopeully

avoidsproblems that

mayarise ater pricing

decisions havetaken eect

3uch action

anticipatesand hopeully

avoidsproblems that

mayarise ater pricing

decisions havetaken eect4x! "ubbermaid versus #al-$art

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4. Channel Pricing Guidelines4. Channel Pricing Guidelines1111

5. o help those involved in pricing decisionsto

ocus more clearly on the channel implicationso their pricing decisions

5. o help those involved in pricing decisionsto

ocus more clearly on the channel implicationso their pricing decisions

Why?

6. o provide general prescriptions on how toormulate pricing strategies that will help promotechannel member cooperation and minimi7e

con(ict

6. o provide general prescriptions on how to

ormulate pricing strategies that will help promotechannel member cooperation and minimi7e

con(ict

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1111Profit MarginsProfit Margins

Guideline !"  4ach ecient reseller must obtainnit proft margins in excess of  unit operating cost

Guideline !"  4ach ecient reseller must obtainit proft margins in excess of  unit operating costs.

O#

Channel members who believe that the

manuacturer is not allowing themsucient margins are likely to seek outother suppliers or establish and promotetheir own private $rands.

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Different Classes of ResellersDifferent Classes of Resellers1111

Guideline %"  "eseller margins should vary rough proportion to the cost of the functions th

reseller perorms.

Guideline %"  "eseller margins should vary rough proportion to the cost of the functions th

reseller perorms.

1. Do channel members hold inventories?

2. Do they make purchases in large or small quantities?

. Do they provide repair services?

!. Do they e"tend credit to customers?#. Do they deliver?

$. Do they help train the customers’ sales force?

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1111

Guideline &"  )t all points in the vertical chain8channel levels!9 prices charged must be inline with

those charged or comparable rival brands.*

Guideline &"  )t all points in the vertical chain8channel levels!9 prices charged must be inline withthose charged or comparable rival brands.*

Channel managers should attempt to weigh anymargin dierentials between their own andcompetitive brands in terms o what kind o

support their frms oer and what level o supportthey expect rom channel members.

% #hen to :er 2igher $argin than Competitors’ 0

% #hen to :er ;ower $argin than Competitors’ 0

Rival BrandsRival Brands

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1111

Guideline '"  3pecial distributionarrangements should be accompanied bycorresponding variations in fnancial

arrangements.

Guideline '"  3pecial distributionarrangements should be accompanied bycorresponding variations in fnancialarrangements.

 he margin structure should re(ect any changes in

the usual allocation o distribution tasksbetween the manuacturer and the channelmembers.

Special ArrangementsSpecial Arrangements

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1111

Guideline ("  $argins allowed to any type oreseller must conorm to the conventionalpercentage norms unless a very strong case

can be made or departing rom the norms.*

Guideline ("  $argins allowed to any type oreseller must conorm to the conventionalpercentage norms unless a very strong case

can be made or departing rom the norms.*

4xceptions are possible i they can be 1ustifed in

the eyes o the channel members. 2owever9 it isthe 1ob o the channel manager to attempt toexplain to the channel members any marginchanges that deviate downward rom the norm.

Conventional Norms in MarginsConventional Norms in Margins

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1111

Guideline )" 

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1111

Guideline *"  ) price structure shouldcontainoerings at the chief price points9where suchprice points exist.

Guideline *"  ) price structure shouldcontainoerings at the chief price points9where such

price points exist.Price points are specifc prices9 usually at the retail

level9 to which consumers have becomeaccustomed. ailure to recogni7e retail price

points can create problems or the manuactureras well as its channel members i consumersexpect to fnd products at particular price pointsand such products are not oered.

Price PointsPrice Points

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1111

Guideline +"  ) manuacturer’s pricestructuremust re(ect variations in theattractiveness o individual product oerings.

Guideline +"  ) manuacturer’s pricestructuremust re(ect variations in theattractiveness o 

individual product oerings.

& the price dierences are not closely associatedwith visible or identifed product eatures9 thechannel members will have a more dicultselling 1ob.

Product VariationsProduct Variations

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1111

5 & 6: Other Channel Pricing Issues5 & 6: Other Channel Pricing Issues

%4xercising control in channel pricing*

%Changing price policies

%Passing price increases through the channel

%/sing price incentives in the channel*

%+ealing with the gray mar.et  ? with free ridin

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1111Exercising Control in Pricing*Exercising Control in Pricing*

@ecause channel members typically view pricing

as the area over which they have total control. . .

First:  %ule out any type of coercive** approaches

to controlling channel member pricing policies.

Second:  &he 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: (f the manufacturer believes that it is necessary to

  e"ercise some control over member pricing) he or she

should do so through *friendly persuasion.+

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First:  anufacturers should consider the long- and theshort-term implications of such increases versus

maintaining the current prices.

Second:  anufacturers should do whatever possible if   passing on the price increase is unavoidable.

Finally:  anufacturers could change their strategies in

  other areas of the marketing mix to help offset

the effects of such increases.

Passing Price Increases Through thePassing Price Increases Through the

ChannelChannel

3trategies or channel members to use in orderto avoid simply passing along price increases

through the channel,

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1111

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  &he sale of brand'

name products at very

low prices by

unauthori4ed

distributors or dealers

Gray Market & Free Riding*Gray Market & Free Riding*

Free Riding  Describes the behavior of

distributors 5 dealers

who offer e"tremely low

prices but little service to

customers

4ssence o the problem,- >ray $arket, Price gap between dierent channels

- ree riding, >ap between channel tasks and incenti