Chapter 11Chapter 11

Pricing Issues in Channel Management

• Pricing decisions cause more concern of top-level executives than any other marketing mix area because…

Pricing is viewed as having the most direct link to the firm’s bottom line.

1111The Importance of PricingThe Importance of Pricing

Objective 1:

• All channel participants want a “share of the profits”

• Generally, members will only carry those products that offer a GM sufficient to cover costs and generate a sufficient profit.

1111Anatomy of Anatomy of

Channel Pricing StructureChannel Pricing Structure

Objective 2:

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.

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

• Channel managers must…

– Determine pricing strategies that will foster or promote channel member cooperation and minimize conflict.

• While not always feasible, channel managers must focus on incorporating members’ concerns/needs into future pricing decisions.

1111Influencing Pricing StrategyInfluencing Pricing Strategy

Objective 3:

• Some possible reactions by members to a “cut” in price include…

• May expect the “cut” to increase sales volume and profitability

• May be reluctant to deal with product because of possible negative effects on product’s image

• May be reluctant to deal with product because of possible negative effects on their own store image

• May resent “cut” because of a likely decrease in margins realized

• May be concerned about a loss in value on their existing inventory of the product

1111Member Reactions Member Reactions NotNot Always Always

ClearClear(A Priori(A Priori))

• Why are guidelines necessary?

– To help focus more clearly on the channel implications of one’s pricing decisions.

– To provide general prescriptions on how to minimize conflict potential and promote cooperation through one’s pricing decisions.

1111Channel Pricing GuidelinesChannel Pricing Guidelines

Objective 4:

• Guideline #1:

Each efficient reseller must obtain unit profit margins in excess of unit

operating costs

1111Profit Margin GuidelineProfit Margin Guideline

• Guideline #2:

Each class of reseller margins should vary in rough proportion to the cost of the functions the reseller performs.

1111Different Classes of Resellers Different Classes of Resellers

GuidelineGuideline

• Guideline #3:

At all points in the vertical chain

(channel levels), prices charged must be in line with those charged for

comparable rival brands

1111Rival Brands GuidelineRival Brands Guideline

• 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.

1111Special Arrangements GuidelineSpecial Arrangements Guideline

• 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.

1111Conventional Norms GuidelineConventional Norms Guideline

• 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.

1111Variation on Models GuidelineVariation on Models Guideline

• Guideline #7:

A price structure should contain

offerings at the chief price points,

where such price points exist.

1111Price Points GuidelinePrice Points Guideline

• Guideline #8:

A manufacturer’s price structure

must reflect variations in the attractiveness of individual product offerings.

1111Product Variations GuidelineProduct Variations Guideline

• There is no guarantee on effectiveness

• Particular circumstances and situations exist in which these guidelines will not apply or will be irrelevant.

1111Caveat on GuidelinesCaveat on Guidelines

Objective 5:

• Exercising control in channel pricing

• Changing pricing policies

• Passing price increases on through channel

• Using price incentives in the channel

• Dealing with gray marketing, diverting* and free riding

1111Other Issues in Channel PricingOther Issues in Channel Pricing

Objective 6:

• Given members often view pricing as an area over which they have total control, channel managers…

1. Must rule out any type of coercive power approaches to controlling member pricing policy

2. Should encroach on the pricing domain of a member only if it believes that it is in its vital, long-term strategic interest to do so.

3. Must, if necessary to possess control, enact “friendly persuasion”

1111Exercising Control in PricingExercising Control in Pricing

• Changes in the channel manager’s pricing policies or related terms of sale are likely to cause reactions among channel members.

• Thus,

– One must understand that fears of such changes are likely they result of becoming accustomed to the existing strategy, as well as concerns about their strategies being “tied” to those of the channel manager.

1111Changing Price PoliciesChanging Price Policies

• Channel managers must be sensitive not to simply “pass” price increases on to the channel. Instead, they should…

1. Consider the long- and short-term implications of such increases versus maintaining current prices.

2. If price increases are necessary, change strategies in other areas to assist in offsetting the effects of such increases.

1111Passing Price IncreasesPassing Price Increases

on Through Channelon Through Channel

• Channel managers may face difficulties in gaining strong retailer acceptance or follow-through on pricing promotions.

• Thus, channel managers must…

– Make promotions as simple & straightforward as possible

– Design price promotion strategies to be at least as attractive to the retailer as they are to the customer

1111Using Price Incentives in the Using Price Incentives in the

ChannelChannel

• Diverting*• Occurs when unauthorized members of a channel

buy/sell excess merchandise to/from authorized members.*

• Gray marketing• Occurs when branded merchandise flows through

unauthorized channels that cross national boundaries*

• Free riding• Occurs when customers seek product information

etc. from full service firms then purchase from a limited service discounter or over the Internet.*

1111Gray Marketing Vs. DivertingGray Marketing Vs. Diverting**