Module 2

Pricing Issues in
Channel Management
Objective 1:
11
The Importance of Pricing

• 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.
Objective 2:
11
Anatomy of
Channel Pricing Structure

• 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.
 Anatomy of channel pricing
structure

trade discount cost dollar markup

manufacturer $2.50 $0.90
wholesaler 66% $3.40 $1.60
retailer 50% $5.00 $2.50
consumer 25% $7.50
List price of $10.00, a set of guiter string
 11
The “Golden Rule”
of Channel Pricing

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.
Objective 3:
11
Influencing Pricing Strategy

• 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.
 11
Member Reactions Not Always Clear
(A Priori)

• 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
Objective 4:
11
Channel Pricing Guidelines

• 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.
 11
Profit Margin Guideline

• Guideline #1:

Each efficient reseller must obtain unit

profit margins in excess of unit
operating costs
 11
Different Classes of Resellers
Guideline

• Guideline #2:

Each class of reseller margins should

vary in rough proportion to the cost of
the functions the reseller performs.
 11
Rival Brands Guideline

• Guideline #3:

At all points in the vertical chain

(channel levels), prices charged must be
in line with those charged for
comparable rival brands
 11
Special Pricing Deals

• Guideline #4:
It includes higher discounts, rebates, free
goods, enhanced quantity discounts, and
others. Channel members may expect the
company to offer regularly. From the stand
point of the manufacturer it is problem of
channel pricing and brand equity.
 11
Conventional Norms 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.
 11
Variation on Models 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.
 11
Price Points Guideline

• Guideline #7:

A price structure should contain

offerings at the chief price points,
where such price points exist.
 11
Product Variations Guideline

• Guideline #8:

A manufacturer’s price structure

must reflect variations in the
attractiveness of individual product
offerings.
Objective 6:
11
Other Issues in Channel Pricing

• 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
 11
Exercising Control in Pricing

• 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”
 11
Changing Price Policies

• 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 the result of becoming accustomed to
the existing strategy, as well as concerns about
their strategies being “tied” to those of the
channel manager.
 11
Passing Price Increases
on Through Channel

• 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.
 11
Using Price Incentives in the 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
 11
Gray Marketing Vs. Diverting*

• 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.*
 Increasingly this is referred to as “Showrooming” in industry*
 Chapter 2

Promotion Through the

Marketing Channel
 Imagine these three scenarios
• You are a producer of ‘Grand Pens’ a brand of
fountain pens.
• A customer seeks advice from a pen shop on
which pen to buy and the retailer strongly
recommends yours.
• The retailer recommends and offers your pen as
superior.
• A retailer actively solicits business for you by
asking customers buying other products to come
and have a look at the exquisite ‘Grand Pen’.
Why Channel Member support is
important?
• The direct selling industry in India is estimated to
be Rs.74 billion (2015), and forms only around
0.4 per cent of the total retail sales. This is far
lower than other comparable economies (one-half
of China and one-tenth of Malaysia).
 12
Channel Member Support

Why is channel member support one of the major

tools of the manufacturer’s promotional mix?

Most products and services are not sold

directly
to final customers.
 Pull Strategy & 12
Push Strategy

Pull Strategy Push Strategy

Manufacturer builds strong Manufacturer promotes products

consumer demand for a by working directly with members
product to “force” members to develop strong & viable
to automatically promote promotional support.
the manufacturer’s product
 Promotional Strategies 12

Pull Strategy Push Strategy

Manufacturer Manufacturer

Channel members Channel members

Final users Final users

(consumer or industrial) (consumer or industrial)

Promotion flow
Negotiation flow
Product flow
 12
Basic Push Promotional
Strategies

1. Cooperative Advertising
2. Promotional Allowances
3. Slotting Fees
4. Displays & Selling Aids
5. In-store Promotions
6. Contests & Incentives
7. Special Promotional Deals & Merchandising
Campaigns
 12
Cooperative Advertising

Typical A sharing in the cost on a 50–50

Strategy: basis up to some percentage of
the retailer’s purchases from
the manufacturer
 12
Promotional Allowances

Typical Manufacturer offers channel member

Strategy: a direct cash payment or a certain
percentage of the purchases on
particular products
 12
Slotting Fees

Typical Payments by manufacturers to

Strategy: persuade channel members, especially
retailers, to stock, display, and
support new products

http://www.indiaretailing.com/2009/04/02/progressive-
grocer/turf-wars/
 12
Displays & Selling Aids

Typical Include point-of-purchase (POP)

Strategy: displays, dealer identification signs,
promotional kits, special in-store
displays, & mailing pieces
 12
In-Store Promotions

Typical Short-term events designed to create

Strategy: added interest and excitement
for the manufacturer’s products

https://www.youtube.com/watch?v=Ymvz9SXQNC
k
 Special Promotional Deals & 12
Merchandising Campaigns

Typical Include a variety of push-type

promotional deals such as discounts
Strategy:
to channel members to encourage
them to order more products
 12
Kinder and Gentler Push Promotion
strategies in marketing

Training Programs

Quota Specification

Missionary Selling

Trade Shows
 Training Programs 12

Wholesale: Help wholesalers’ knowledge, selling techniques,

and skill in counseling customers they call on

Retail: Help retailer’s product knowledge, selling techniques,

and counseling customers on product usage

Pro
• Manufacturers can
assist wholesalers
& retailers by helping
to offset the cost.
Con
• There is often little
time for training.
 Quota Specification 12

Sales volumes that manufacturers specify for channel

members to generate during a certain time period

Pros
• Can amount to a
substantial sum and can
make a major difference in
the dealers’ overall profit
picture
• Can be effective in
improving channel member
promotional support
Cons
• If presented in a coercive
fashion, it can produce ill will
and conflict rather than
support
• Channel members may
ignore quota if manufacturer’s
line does not make up an
important part of the
member’s product mix
 Missionary Selling 12

Manufacturer’s salespeople who are specially assigned

to supplement the selling activities of channel members

Pros
• A useful strategy when
channel members lack
sales capacity or
competence to handle
tasks assigned to them
• Useful when channel
members desire this
service
Cons
• Expensive
• Can cause conflicts in the
channel
• Some members view these
salespeople as intruding on
the time of their own sales
force
 Trade Shows 12

Annual events organized by associations in

particular industries

Pros
• Opportunity for manufacturer to sell existing & new channel
members substantial quantities of new products face-to-face
• A chance for manufacturers to socialize with channel
members
• Creates a sense of pride and belonging in channel
members that sell its products
https://10times.com/bangalore-fashion-week