Chapter 8

Marketing Mix Elements and Distribution Channels

• Pricing Strategy in Channels

Channel Management 1
 Learning Outcome

• To discuss the different types of pricing objectives and the

implications on channel strategies.
• To understand how manufacturers adapt their pricing strategies to
channel requirements.

Channel Management 2
The Importance of Pricing

Pricing decisions cause top-level marketing

executives more concern than any other
strategic marketing decision area.

Pricing is viewed as having a more direct

link to the firm’s bottom line.

Channel Management 3
 Anatomy of Channel
Pricing Structure

Channel participants each

want a part of the total price
sufficient to cover their
costs and provide a
desired level of profit.

Channel Management 4
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.

=
Pricing decisions can have a
substantial impact
on channel member performance.

Channel Management 5
 Influencing Pricing Strategy

The major challenge for the channel manager:

To help foster pricing strategies that

promote channel member cooperation and
minimize conflict

Channel Management 6
 Channel Manager’s Role
Major areas of consideration in a
manufacturer’s pricing decision

Internal Target Competitive Channel

cost market considerations considerations
considerations considerations

Channel manager must focus

on the channel considerations
and work to incorporate them
into the firm’s pricing decisions

Channel Management 7
 Channel Manager’s Role

To find out about channel member views

and to appraise their
effects on channel
member performance

Channel Management 8
 Channel Manager’s Role

Have Such action anticipates

channel members’ and hopefully avoids
viewpoints on pricing issues included as an integral problems that may
part of the manufacturer’s price-making process arise after pricing
decisions have
taken effect

Channel Management 9
 Pricing objectives

• S a l e s b a s e d p r i c i n g • Competitor based pricing

objectives:
❖Emphasis on increasing the ❖F o l l o w t h e i n d u s t r y
sales.
❖It is set for specific product
lines, market or
geographical areas.
• Profit based pricing
objectives:
❖B a s e d o n p r o f i t
maximization or to achieve
satisfaction levels of profit.
objectives:
p ra c t i c e o r w h a t t h e
competitors are doing in
setting the price.
• Integrate all three pricing
objectives or use a
combination of the
objectives in their pricing
objectives.

Channel Management 10
 Discounts and terms
• Tr a d e a n d f u n c t i o n a l
discounts.
❖Trade discounts is based on
the level of trade in which
they operate.
❖Functional discounts is
discount offered for
performing a function that is
commonly performed by the
manufacturer.
Channel Management
• Quantity discounts.
❖Based on amount bought
by channel members.
• Terms.
❖When payment is due from
the channel members.
❖Example: 5 net 30 means
that a 5% discount if
payment is made within
one month from the date
delivery.
11
Objective
Channel Pricing Guidelines

1. To help those involved in pricing decisions to focus more clearly on the

channel implications of their pricing decisions

2. To provide general prescriptions on how to

formulate pricing strategies that will help promote channel member cooperation
and minimize conflict

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Profit Margins

Guideline #1: Each efficient reseller must obtain unit profit margins in excess of
unit operating costs.

Channel members who believe that the

manufacturer is not allowing them sufficient
margins are likely to seek out other suppliers
or establish and promote their own private
brands.
Different Classes of Resellers
Guideline #2: Each class of reseller margins should vary in rough proportion to the
cost of the functions the reseller performs.

1. Do channel members hold inventories?

2. Do they make purchases in large or small quantities?
3. Do they provide repair services?
4. Do they extend credit to customers?
5. Do they deliver?
6. Do they help train the customers’ sales force?
Rival Brands
Guideline #3: At all points in the vertical chain
(channel levels), prices charged must be in line with those charged for comparable rival
brands.

Channel managers should attempt to weigh any margin

differentials between their own and competitive brands in
terms of what kind of support their firms offer and what
level of support they expect from channel members.
Special Arrangements
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.

The margin structure should reflect any changes in the usual allocation of distribution tasks
between the manufacturer and the channel members.
Conventional Norms in Margins

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.

Exceptions are possible if they can be justified in the eyes of the channel members. However, it is the
job of the channel manager to attempt to explain to the channel members any margin changes
that deviate downward from the norm.
Margin Variation on Models

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.

Channel members are often amenable to accepting the lower margins associated with
promotional products so long as they are convinced of the promotional value of the product
in building patronage.
Price Points

Guideline #7: A price structure should contain

offerings at the chief price points, where such
price points exist.

Price points are specific prices, usually at the retail level, to which consumers have become
accustomed. Failure to recognize retail price points can create problems for the manufacturer
as well as its channel members if consumers expect to find products at particular price points
and such products are not offered.
Product Variations

Guideline #8: A manufacturer’s price structure

must reflect variations in the attractiveness of
individual product offerings.

If the price differences are not closely associated

with visible or identified product features, the
channel members will have a more difficult selling
job.
Objective
Guideline Caveat

Particular circumstances and situations exist

in which the prior guidelines will not apply or
will be irrelevant.

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Objective
Other Channel Pricing Issues

Exercising control in channel pricing

Changing price policies

Passing price increases through the channel

Using price incentives in the channel

Dealing with the gray market & with free riding

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exercising Control in Pricing
Because channel members typically view pricing
as the area over which they have total control. . .

First: Rule out any type of coercive approaches to controlling

channel member pricing policies.

Second: The 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.

Third: If the manufacturer believes that it is necessary to

exercise some control over member pricing, he or
she should do so through “friendly persuasion.”
 Changing Price Policies

Changes in

manufacturer pricing policies

or related terms of sale cause

reactions among

channel members.

Channel members fear such changes because they have

become accustomed to the strategy, or their own pricing
strategies may be closely tied to those of the manufacturer.
Passing Price Increases Through
the Channel
Strategies for channel members to use in order
to avoid simply passing along price increases
through the channel:

First: Manufacturers should consider the long- and the

short-term implications of such increases versus
maintaining the current prices.

Second: Manufacturers should do whatever possible if

passing on the price increase is unavoidable.

Third: Manufacturers could change their strategies in

other areas of the marketing mix to help offset
the effects of such increases.
Using Price Incentives in the Channel

Manufacturers face difficulties gaining strong

retailer acceptance and follow-through on
pricing promotions.

Possible Solutions:

• Make pricing promotions as simple and

straightforward as possible.

• Design price-promotion strategies to be at least as

attractive to retailers as they are to consumers.
 Gray Market & Free Riding

Gray Market
The sale of brand-name products at very low prices by unauthorized
distributors or dealers

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.
Changes in government policies and
regulations
• In Malaysia, the prices of certain consumer and
industrial goods are subjected to government
policies especially for controlled goods.
• This is to ensure that no advantage taken by
distributors who may want to cash in on the high
prices.
• It will have direct impact on the pricing policies set
by the suppliers.

Channel Management 28
The extent of control that manufacturers want

• Manufacturers who want an amount of control over

the channel of distribution may dictate the pricing
strategies that they want to employ.
• This aspect of control can be effective if the
manufacturer has the power to dominate.
• Example: Nestlé's.

Channel Management 29
 Past Semester Questions
• Oxenfeldt offers a set of eight guidelines for developing
pricing strategies that incorporate channel considerations.
Using relevant examples, discuss any three (3) pricing
guidelines in channels management (JAN 2018, 15 marks)
• Explain any two (2) issues in channel pricing. Provide
relevant examples (DEC 2015, 10 marks)
• Discuss any six (6) possible reactions of channel member
responses to a manufacturer price cut (DEC 2014, 18 marks)

Channel Management 30
 Continue
• Price has a profound impact on marketing channel design. It
is most properly viewed as the value placed on the
combination of product, communication and distribution
functions that each firm performs in channel arrangement.
a) List and explain four (4) types of discounts and allowances
that are commonly used in the negotiations between buyers
and sellers (JUNE 2013, 16 marks)
b) Since pricing in distribution channel will also take into
consideration other factors that relate to environment,
discuss three (3) of these major factors (JUNE 2013, 9marks)
• Explain two (2) issues that may arise in channel pricing.
Justify your answer by giving examples (JAN 2012, 10 marks)

Channel Management 31
Thank You

Channel Management 32