MARKETING MANAGEMENT (20MBA15)

Unit – 4

Pricing decisions – Meaning of Pricing – Significance of Pricing – Factors influencing pricing

(Internal and External Factor) – Objectives of Pricing – Pricing Strategies and Methods (Value
Based, Cost Based, Market Based and Competitor Based) – Pricing Procedure.

Marketing Channels – Meaning – Purpose – Factors affecting channel Choice – Channel Design
– Channel Management Decisions – Channel Conflict – Designing a physical Distribution
system – Network Marketing.

PRICING

Pricing is the process whereby a business sets the price at which it will sell its products and
services, and may be part of the business's marketing plan. In setting prices, the business will
take into account the price at which it could acquire the goods, the manufacturing cost, the
market place, competition, market condition, brand, and quality of product.
Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing
mix, the other three aspects being product, promotion, and place. Price is the only revenue
generating element amongst the four Ps, the rest being cost centers. However, the other Ps of
marketing will contribute to decreasing price elasticity and so enable price increases to drive
greater revenue and profits.
Pricing is the method of determining the value a producer will get in the exchange of goods and
services. Simply, pricing method is used to set the price of producer’s offerings relevant to both
the producer and the customer.

Setting the right price is an important part of effective marketing. It is the only part of the
marketing mix that generates revenue (product, promotion and place are all about marketing
costs). Price is also the marketing variable that can be changed most quickly, perhaps in response
to a competitor price change.

DEFINITION
“Price is the amount of money or goods for which a thing is bought or sold”.

The price of a product may be seen as a financial expression of the value of that product. For a
consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a
product, as compared with other available items.

The concept of value can therefore be expressed as:

(Perceived) VALUE = (perceived) BENEFITS – (perceived) COSTS
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SIGNIFICANCE OF PRICING
More flexible marketing mix
variable fixing the right price
Trigger of first impressions
important aspects of sales promotion
Supply and demand
Position
Sales Volume
Loss Leader

FACTORS AFFECTING PRICING (Internal and External)

Internal factors affecting pricing

1. Organizational Factors:
Pricing decisions occur on two levels in the organization. Over-all price strategy is dealt with by
top executives. They determine the basic ranges that the product falls into in terms of market
segments. The actual mechanics of pricing are dealt with at lower levels in the firm and focus on
individual product strategies. Usually, some combination of production and marketing specialists
are involved in choosing the price.

2. Marketing Mix:
Marketing experts view price as only one of the many important elements of the marketing mix.
A shift in any one of the elements has an immediate effect on the other three—Production,
Promotion and Distribution. In some industries, a firm may use price reduction as a marketing
technique.

Other firms may raise prices as a deliberate strategy to build a high-prestige product line. In
either case, the effort will not succeed unless the price change is combined with a total marketing
strategy that supports it. A firm that raises its prices may add a more impressive looking package
and may begin a new advertising campaign.

3. Product Differentiation:
The price of the product also depends upon the characteristics of the product. In order to attract
the customers, different characteristics are added to the product, such as quality, size, colour,
attractive package, alternative uses etc. Generally, customers pay more prices for the product
which is of the new style, fashion, better package etc.

4. Cost of the Product:

Cost and price of a product are closely related. The most important factor is the cost of
production. In deciding to market a product, a firm may try to decide what prices are realistic,
considering current demand and competition in the market. The product ultimately goes to the
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Public and their capacity to pay will fix the cost, otherwise product would be flapped in the
market.

5. Objectives of the Firm:

A firm may have various objectives and pricing contributes its share in achieving such goals.
Firms may pursue a variety of value-oriented objectives, such as maximizing sales revenue,
maximizing market share, maximizing customer volume, minimizing customer volume,
maintaining an image, maintaining stable price etc. Pricing policy should be established only
after proper considerations of the objectives of the firm.

6. Promotional activity:
The promotional activity undertaken by the firm also determines the price. If the firm incurs
heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in
order to recover the cost.

7. The predetermined objectives:

While fixing the prices of the product, the marketer should consider the objectives of the firm.
For instance, if the objective of a firm is to increase return on investment, then it may charge a
higher price, and if the objective is to capture a large market share, then it may charge a lower
price.

8. Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance,
during the introductory stage the firm may charge lower price to attract the customers, and
during the growth stage, a firm may increase the price.

External factors affecting pricing

1. Demand:
The market demand for a product or service obviously has a big impact on pricing. Since
demand is affected by factors like, number and size of competitors, the prospective buyers, their
capacity and willingness to pay, their preference etc. are taken into account while fixing the
price.

2. Competition:
Competitive conditions affect the pricing decisions. Competition is a crucial factor in price
determination. A firm can fix the price equal to or lower than that of the competitors, provided
the quality of product, in no case, be lower than that of the competitors.
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3. Suppliers:
Suppliers of raw materials and other goods can have a significant effect on the price of a product.
If the price of cotton goes up, the increase is passed on by suppliers to manufacturers.
Manufacturers, in turn, pass it on to consumers.

4. Economic Conditions:
The inflationary or deflationary tendency affects pricing. In recession period, the prices are
reduced to a sizeable extent to maintain the level of turnover. On the other hand, the prices are
increased in boom period to cover the increasing cost of production and distribution. To meet the
changes in demand, price etc.

5. Buyers:
The various consumers and businesses that buy a company’s products or services may have an
influence in the pricing decision. Their nature and behaviour for the purchase of a particular
product, brand or service etc. affect pricing when their number is large.

6. Government:
Price discretion is also affected by the price-control by the government through enactment of
legislation, when it is thought proper to arrest the inflationary trend in prices of certain products.
The prices cannot be fixed higher, as government keeps a close watch on pricing in the private
sector. The marketers obviously can exercise substantial control over the internal factors, while
they have little, if any, control over the external ones.

7. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their expectations. The
longer the chain of intermediaries, the higher would be the prices of the goods.

OBJECTIVES OF PRICING

 To maximize profit: One of the objectives of pricing is to maximize the profit. It is very
important to maximize the profit to run the organization. Some company set price to their
products or services with a view of maximizing profit. It is very important to focus on profit
maximization.

 Achieving target return: Another objective of pricing is to achieve target Return. Some
Company may determine the price of their goods or services to achieve a certain return on
investment or on sales. This is the desired profit. It is necessary to have target return in the
pricing process.
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 Achieving target return on sales: It is necessary to achieve target return on sales in

pricing. Mostly resellers manage their pricing to achieve a target return on sales. For example,
10% of sales. If there is not more competition this objectives can be used.

 Achieving target return on investment: Pricing should focus on achieving target return
on investment too. Manufacturing company manages pricing in order to achieve specified return
on investment in manifesting, research and development, establishment and commercialization.
For example, 5% on investment.

 Sales volume increase: One of the pricing objectives may be determined in terms of
increasing sales volumes over the certain period of time. For example, 10% increase annually.
This does not mean that profit should be avoided. Organization believes that higher sales volume
will lead to lower unit costs and higher long run profit. It is necessary to focus in the increment
in sales volume of the company.

 Maintain market share: Pricing should have the basic objectives in maintaining market
share. Market share is really a meaningful measure of the success of a firm's marketing strategy.
A market share price objective can be either to maintain the market share, to increase it or
sometimes to decrease it. The company uses the price as an input to enjoy a target market share.
This market share is normally expressed as a percentage of the total industry sales.

 Stabilization of price: Pricing should have the objectives in stabilizing the price of a
product. Some organization may set their pricing objective in order to maintain or stabilize price
and prevent from market uncertainty. These objectives are adopted for minimizing the risk of
loss. Small organizations in market adopt these objectives. These objectives build up their status
and goodwill.

 Meet competition: The objective of pricing is to meet the competition in the market.
Now there is big competition in the market. In highly competitive market some organization may
set the meet competition. Under this objective organization set the prevailing market price. It is
important to meet the competition in the market. Without it, market cannot achieve its objectives.

PRICING METHODS ((Value Based, Cost Based, Market Based, Competitor Based)

 Value Based Pricing - Value-based pricing (or value pricing) is the most highly
recommended pricing technique by consultants and academics. The basic idea is to set a
price that's based on what your customers are willing to pay.

Value-Based Pricing (VBP) means to charge what your customers are willing to pay (WTP).
This is a simple concept to understand and probably impossible to implement. Every buyer has a
different WTP. Perfect VBP implies we can read each buyer’s mind and charge them that one
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Price exactly equal to their WTP. Using today’s technology, this is still impossible. A better
meaning of VBP is implementing strategies and tactics to price closer to your buyer’s WTP than
you are today.

Value-based pricing is a technique for setting the price of a product or service based on the
economic value it offers to customers. This pricing strategy allows companies to capture the
maximum amount that a customer is willing to pay in order to significantly improve company
profits.

 Cost Based Pricing – Cost based pricing is one of the pricing methods of determining
the selling price of a product by the company, wherein the price of a product is determined by
adding a profit element (percentage) in addition to the cost of making the product. It uses
manufacturing costs of the product as its basis for coming to the final selling price of theproduct.
In Cost Based Pricing, either a fixed amount or a percentage of the total product manufacturing
cost is added as profit to the cost of the product to arrive at its selling price.

Cost-plus pricing is a method used by companies to maximize their profits. There are several
varieties, but the common thread is that one first calculates the cost of the product, and then adds
a proportion of it as markup. Basically, this approach sets prices that cover the cost of production
and provide enough profit margins to the firm to earn its target rate of return. It is a way for
companies to calculate how much profit they will make.

 Market Based Pricing - A market-based pricing strategy is also known as a competition-

based strategy. In this pricing strategy, the company will evaluate the prices of similar products
that are on the market. It is important to only consider those products that are similar to the
product being offered. Depending on if the product has more or less features than the
competition, the company sets the price higher or lower than the competitor pricing. For
example, if this product has an extra feature over the competitor’s product, the company could
either decide to price it the same, therefore making it the better value or could price it slightly
higher to account for the additional feature.

Is defined as a process of setting prices of goods/services based on the current market conditions.
Here, the competitor’s products are compared with one’s products and then prices are
accordingly determined. If the features of a product are more than that of competitor’s, then
company may set prices same to provide better value to the customers or may set high to account
for additional feature.
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While proceeding for Market Based Pricing, following things are kept under consideration:
1. Customer Needs
2. Competition
3. Price Sensitivity

 Competition Based Pricing - Competition-based pricing is a pricing method that makes

use of competitors' prices for the same or similar product as basis in setting a price. The price of
competing products is used a benchmark. The business may sell its product at a price above or
below such benchmark. Setting a price above the benchmark will result in higher profit per unit
but might result in less units sold as customers would prefer products with lower prices. On the
other hand, setting a price below the benchmark might result in more units sold but will cause
less profit per unit. In a perfectly competitive market, sellers almost have no control over prices.
It is solely determined by the supply and demand, and products are sold at the market
price or going rate

Competitive pricing is the process of selecting strategic price points to best take advantage of a
product or service based market relative to competition. This pricing method is used more often
by businesses selling similar products, since services can vary from business to business, while
the attributes of a product remain similar. This type of pricing strategy is generally used once a
price for a product or service has reached a level of equilibrium, which occurs when a product
has been on the market for a long time and there are many substitutes for the product

PRICING PROCEDURE

1) Selecting the pricing Objective – You would agree that the foremost step is identifying
pricing objectives. The company first decides where it wants to position its marketing offering.
The clearer a firm’s objectives, the easier it is to set price. What are pricing objectives? A
company can pursue any of five major objectives through pricing: survival, maximum current
profit, maximum market share, maximum market skimming, or product-quality leadership.
Companies pursue survival, as their major objective if they are plagued with overcapacity intense
competition, or changing consumer wants. As long as prices cover variable costs and some fixed
costs, the company stays in business. Survival is a short-run objective: in the long run, the firm
must learn how to add value or face extinction.

2) Determining the demand – Following the identification of objectives, the firm needs to
determine demand. Each price will lead to a different level of demand and therefore have a
different impact on a company’s marketing objectives. In the normal case, demand and price are
inversely related: the higher the price, the lower the demand .In the case of prestige goods, the
demand curve sometimes slopes upward. E.g. Perfume Company raised its price and sold more
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Perfume rather than less! Some consumers take the higher price to signify a better
product. However if the price is too high, the level of demand may fall.

3. Estimating Costs – Demand sets a ceiling on the price the company can charge for its
product. Can you discuss this statement in detail? Costs set the floor. The company wants to
charge a price that covers its cost of producing, distribution and selling the product, including a
fair return for its effort and risk.

4. Analyzing competitor’s costs, prices and offers – You would agree that analyzing
competitor’s costs, prices and offers is also important factor in setting prices. Within the range of
possible prices determined by market demand and company costs, the firm must take the
competitor’s costs, prices and possible price reactions into account. While demand sets a ceiling
and costs set a floor to pricing, competitors’ prices provide an in between point you must
consider in setting prices. Learn the price and quality of each competitor’s product or service by
sending out comparison shoppers to price and compare. Acquire competitors’ price lists and buy
competitors’ products and analyze them. Also ask customers how they perceive the price and
quality of each competitor’s product or service. If your product or service is similar to a major
competitor’s product or service, then you will have to price close to the competitor or lose sales.
If your product or service is inferior, you will not be able to charge as much as the competitor.
Be aware that competitors might even change their prices in response to your price.

5. Selecting a pricing method – Do you know any pricing methods? As consumers have you
been able to distinguish between pricing strategies? Let us have a look at various pricing
methods

WHAT ARE VARIOUS PRICING METHODS?

Value Based
Market Based
Competitor Based
Cost Based

6. Selecting the final Price – Pricing methods narrow the range from which the company must
select its final price. In selecting that price, the company must consider additional factors,
including psychological pricing, gain and risk pricing, the influence of other marketing -mix
elements on price, company -pricing policies, and the impact of price on other parties.
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PRICING STRATEGIES

Penetration Pricing - The price charged for products and services is set artificially low in order
to gain market share. Once this is achieved, the price is increased. This approach was used by
France Telecom and Sky TV. These companies need to land grab large numbers of consumers to
make it worth their while, so they offer free telephones or satellite dishes at discounted rates in
order to get people to sign up for their services. Once there are a large number of subscribers
prices gradually creep up. Taking Sky TV for example, or any cable or satellite company, when
there is a premium movie or sporting event prices are at their highest – so they move from a
penetration approach to more of a skimming/premium pricing approach.
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Economy Pricing - This is a no frills low price. The costs of marketing and promoting a product
are kept to a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Budget airlines are famous for keeping their overheads as low as possible and then giving the
consumer a relatively lower price to fill an aircraft. The first few seats are sold at a very cheap
price (almost a promotional price) and the middle majority is economy seats, with the highest
price being paid for the last few seats on a flight (which would be a premium pricing strategy).
During times of recession economy pricing sees more sales. However it is not the same as a
value pricing approach which we come to shortly.

Price Skimming - Price skimming sees a company charge a higher price because it has a
substantial competitive advantage. However, the advantage tends not to be sustainable. The high
price attracts new competitors into the market, and the price inevitably falls due to increased
supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other
manufacturers were tempted into the market and the watches were produced at a lower unit cost,
other marketing strategies and pricing approaches are implemented. New products were
developed and the market for watches gained a reputation for innovation.

Psychological Pricing - This approach is used when the marketer wants the consumer to respond
on an emotional, rather than rational basis. For example Price Point Perspective (PPP) 0.99 Cents
not 1 US Dollar. It’s strange how consumers use price as an indicator of all sorts of factors,
especially when they are in unfamiliar markets. Consumers might practice a decision avoidance
approach when buying products in an unfamiliar setting, an example being when buying ice
cream. What would you like, an ice cream at $0.75, $1.25 or $2.00? The choice is yours. Maybe
you’re entering an entirely new market. Let’s say that you’re buying a lawnmower for the first
time and know nothing about garden equipment. Would you automatically by the cheapest?
Would you buy the most expensive? Or, would you go for a lawnmower somewhere in the
middle? Price therefore may be an indication of quality or benefits in unfamiliar markets.

Product Line Pricing - Where there is a range of products or services the pricing reflects the
benefits of parts of the range. For example car washes; a basic wash could be $2, a wash and
wax
$4 and the whole package for $6. Product line pricing seldom reflects the cost of making the
product since it delivers a range of prices that a consumer perceives as being fair incrementally –
over the range. If you buy chocolate bars or potato chips (crisps) you expect to pay X for a single
packet, although if you buy a family pack which is 5 times bigger, you expect to pay less than
5X the price. The cost of making and distributing large family packs of chocolate/chips could be
far more expensive. It might benefit the manufacturer to sell them singly in terms of profit
margin, although they price over the whole line. Profit is made on the range rather than single
items.
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Optional Product Pricing - Companies will attempt to increase the amount customers spend
once they start to buy. Optional ‘extras’ increase the overall price of the product or service. For
example airlines will charge for optional extras such as guaranteeing a window seat or reserving
a row of seats next to each other. Again budget airlines are prime users of this approach when
they charge you extra for additional luggage or extra legroom.

Product Bundle Pricing - Here sellers combine several products in the same package. This also
serves to move old stock. Blue-ray and videogames are often sold using the bundle approach
once they reach the end of their product life cycle. You might also see product bundle pricing
with the sale of items at auction, where an attractive item may be included in a lot with a box of
less interesting things so that you must bid for the entire lot. It’s a good way of moving slow
selling products, and in a way is another form of promotional pricing.

Promotional Pricing - Pricing to promote a product is a very common application. There are
many examples of promotional pricing including approaches such as BOGOF (Buy One Get One
Free), money off vouchers and discounts. Promotional pricing is often the subject of controversy.
Many countries have laws which govern the amount of time that a product should be sold at its
original higher price before it can be discounted. Sales are extravaganzas of promotional pricing!

Geographical Pricing - Geographical pricing sees variations in price in different parts of the
world. For example rarity value, or where shipping costs increase price. In some countries there
is more tax on certain types of product which makes them more or less expensive, or legislation
which limits how many products might be imported again raising price. Some countries tax
inelastic goods such as alcohol or petrol in order to increase revenue, and it is noticeable when
you do travel overseas that sometimes goods are much cheaper, or expensive of course.

Value Pricing - This approach is used where external factors such as recession or increased
competition force companies to provide value products and services to retain sales e.g. value
meals at McDonalds and other fast-food restaurants. Value price means that you get great value
for money i.e. the price that you pay makes you feel that you are getting a lot of product. In
many ways it is similar to economy pricing. One must not make the mistake to think that there
is added value in terms of the product or service. Reducing price does not generally increase
value.

Premium Pricing - Use a high price where there is a unique brand. This approach is used where
a substantial competitive advantage exists and the marketer is safe in the knowledge that they
can charge a relatively higher price. Such high prices are charged for luxuries such as Canard
Cruises, Savoy Hotel rooms, and first class air travel.
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Marketing Channels – Meaning – Purpose – Factors affecting channel Choice – Channel

Design – Channel Management Decisions – Channel Conflict – Designing a physical
Distribution system – Network Marketing.

MARKETING CHANNELS MEANING

A marketing channel is the people, organizations, and activities necessary to transfer the
ownership of goods from the point of production to the point of consumption. It is the way
products get to the end-user, the consumer; and is also known as a distribution channel. A
marketing channel is a useful tool for management and is crucial to creating an effective and
well-planned marketing strategy

Creating a customer is a major task of marketing but delivering the goods to the customer so
created is the most critical task. Physical distribution is a marketing activity that concerns the
handling and the movement of goods. It is a major component of marketing mix and cost area of
business.

It involves the coordination of activities to place the right quantity of right goods at the desired
Place and time. Like any other marketing mix component, physical distribution has two broad
objectives to attain, namely, consumer satisfaction and profit maximization. Physical distribution
is not only a cost but a powerful tool of competitive marketing.

A channel of distribution is an organized network or system of agencies and institutions, which,

in combination, perform all the activities required to link producers with users and users with
producers to accomplish the marketing task.

MARKETING CHANNELS DEFINITION

According to Phillip Kotler,” It is a set of independent organizations involved in the process of

making a product or service available for use or consumption.” Thus, a channel of distribution is
a path way directing the flow of goods and services from producers to consumers composed of
intermediaries through their functions and attainment of the mutual objectives.

In the words of Phillip Kotler, “Physical distribution involves planning, implementing and
controlling the physical flow of materials, and final goods from the point of origin of use to meet
customer needs at a profit.”
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PURPOSE OF MARKETING CHANNELS

 To ensure the proper availability of desired products

The major purpose of any distribution channel is to provide the desired product at the
desired marketplace. For this, organization first identity the relevant market place having
significant demand for the concerned products.

 To improve the sales outlook

In a particular retail store the sale of organizational products depends on its display. The
purpose of distribution channels is to arrange a proper display of organizational products
in the retail store so that the sales outlook of that particular retail store as well as
organization can be improved.

 To establish cooperation between distribution factors

Various factors affect the distributors system like, type of unit loads, delivery time limits,
order sixe, delivery access, handling aids or tools, nature of product handling etc. a strong
cooperation between these factors is required for efficient distribution.

 To achieve and maintain a level of service

Another purpose of distribution channels is to achieve and maintain a level of service
towards both customers and suppliers. This is important for the customers. They observe
the services performance of different suppliers so as to compare them and to determine
the future purchase decisions.

 To minimize logistics and total cost

Cost of production is included in the price of a given product. This cost is very important
for pricing. Therefore, distribution channels of an organization are focused to minimize
the logistics and total cost of the product. A particular cost reflected by selected
distribution channel must be evaluated in terms of type of product served and the required
service level.

 To collect accurate information

Another purpose of distribution channels is to collect accurate information. An efficient
distribution system requires sound flow of information. Sales trends, cost monitoring,
service levels, damage reports, inventory levels etc are helpful in getting required
information.
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LEVLES OF CHANNELS
This indicates the number of intermediaries between the manufactures and consumers.
Mainly there are four channel levels. They are

1. Zero level channel:- Here the goods move directly from producer to consumer. That is,
no intermediary is involved. This channel is preferred by manufactures of industrial and
consumer durable goods

2. One level channel: In this case there will be one sales intermediary ie, retailer. This is
the most common channel in case of consumer durable such as textiles, shoes, ready
garments etc.

3. Two level channel: This channel option has two intermediaries, namely wholesaler and
retailer. The companies producing consumer non durable items use this level.

4. Three level channel: This contains three intermediaries. Here goods move from
manufacture to agent to wholesalers to retailers to consumers. It is the longest indirect
channel option that a company has.

FACTORS AFFECTING CHANNEL CHOICE

A. Factors Pertaining to the Product: Keeping in view the nature, qualities and peculiarities of
the product, could only the channel for distribution be properly made. The following factors
concerning the product, affect the selection of the channel of distribution:

1. Price of the Product: The products of a lower price have a long chain of distributors. As
against it, the products having higher price have a smaller chain. Very often, the producer
himself has to sell the products to the consumers directly.

2. Perishability: The products which are of a perishable nature need lesser number of the
intermediaries or agents for their sale. Under this very rule, most of the eatables (food items),
and the bakery items are distributed only by the retail sellers.

3. Size and Weight: The size and weight of the products too affect the selection of the
middlemen. Generally, heavy industrial goods are distributed by the producers themselves to the
industrial consumers.
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4. Technical Nature: Some products are of the nature that prior to their selling, the consumer is
required to be given proper instructions with regard to its consumption. In such a case less of the
middlemen arc) required to be used.

5. Goods Made to Order: The products that are manufactured as per the orders of the customers
could be sold directly and the standardized items could be sold off only by the middlemen.

6. After-Sales Service: The products regarding which the after-sales service is to be provided
could be sold off either personally or through the authorized agents.

B. Factors pertaining to the Consumer or Market: The following are the main elements
concerned with the consumer or the market:
1. Number of Customers: If the number of customers is large, definitely the services of the
middlemen will have to be sought for. As against it, the products whose customers are less in
number are distributed by the manufacturer himself.

2. Expansion of the Consumers: The span over which are the customers of any commodity
spread over, also affects the selection of the channel of distribution. When the consumers are
spread through a small or limited sphere, the product is distributed by the producer himself or his
agent. As against it, the goods whose distributors are spread throughout the whole country, for
such distributors, services of wholesaler and the retailer are sought.

3. Size of the Order: When bulk supply orders are received from the consumers, the producer
himself takes up the responsibility for the supply of these goods. If the orders are received piece-
meal or in smaller quantities, for it the services of the wholesaler could be sought. In this way,
the size of the order also influences the selection of the channel of the distribution.

4. Objective of Purchase: If the product is being purchased for the industrial use; its direct sale
is proper or justified. As against it, if the products are being purchased for the general
consumption, the products reach the consumers after passing innumerable hands.

5. Need of the Credit Facilities: If, for the sale of any product, it becomes necessary to grant
credit to any customer, it shall be helpful for the producer that for its distribution, the services of
the wholesaler and retailer businessmen be sought. In this way, the need of the credit facilities
too influences the selection of the channel of distribution.
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C. Factors Pertaining to the Middlemen: The following are the main factors concerned with
the middlemen:

1. Services Provided by Middlemen: The selection of the middlemen is made keeping in view
their services. If some product is quite new and there is the need of its publicity and promotion of
sales, then instead of adopting the agency system, the work must be entrusted to the
representatives.

2. Scope or Possibilities of Quantity of Sales: The same channel should be selected by means
of which there is the possibility of more sales.

3. Attitude of Agents towards the Producers' Policies: The producers generally prefer to select
such middlemen who go by their policies. Very often when the distribution and supply policies
of the producers being disliked by the middlemen, the selection of middlemen becomes quite
limited.

4. Cost of Channel of Distribution: While selecting the channel of distribution, the cost of
distribution and the services provided by the middlemen or agents too must be kept into
consideration. The producers generally select the most economical channel.

D. Factors Pertaining to the Producer Or Company: The following factors, concerning the
producer, affect the selection of the channel of distribution:

1. Level of Production: The manufacturers who are financially sound and are of a larger
category, are able to appoint the sales representatives in a larger number and thug could
distribute the commodities (products) in larger quantities. As against it, for the smaller
manufacturers, it becomes necessary to procure the services of the wholesellers and the retail
traders.

2. Financial Resources of the Company: From the financial point of view, the stronger
company needs less middlemen.

3. Managerial Competence and Experience: If some producer lacks in the necessary

managerial experience or proficiency, he will depend more upon the middlemen. The new
manufacturers in the beginning remain more dependent upon the middlemen.

E. Other Factors
1. Distribution Channel of Competitors: While determining the channel of distribution, the
channels of distribution of the competitors too must be borne in mind.
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2. Social Viewpoint: What is the attitude of society towards the distribution, this fact too must
be kept into consideration while selecting the middlemen.

3. Freedom of Altering: While selecting the agents, this fact too must be kept into mind that in
case of need, there must be the liberty of changing or replacing the agents (middlemen).

CHANNEL DESIGN

Channel design: Those decisions involving the development of new marketing channels where
none had existed before, or the modification of existing channels.

Channel design is presented as a decision faced by the marketer, and it includes either setting up
channels from scratch or modifying existing channels. This is sometimes referred to as
reengineering the channel and in practice is more common than setting up channels from scratch.

The term design implies that the marketer is consciously and actively allocating the distribution
tasks to develop an efficient channel, and the term selection means the actual selection of
channel members.
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Defining the customer needs - In designing the market channel, the marketer must understand
the service output levels its target customer want. It is essential to capture customer requirements
while designing marketing channel.
It includes the following:
 Product information
 Product customization
 Product quality assurance
 Lot size
 Product variety
 Spatial convenience / availability
 Waiting and delivery time
 After sales service
 Logistics

When a marketer designs a marketing channel, he must understand the service output levels
desired by the target customers. Different customers have different levels of service
requirements. A high potential customer needs to be offered effective and professional service
backup, ensured availability of varied products compared to the low potential customer. The
marketing channel designer has to know at this stage itself that providing superior service
output means increased channel costs and higher prices for customers.

Defining the channel objective - The channel objective vary with product characteristics:
 Perishable products require more direct marketing.
 Bulky products, such as building materials, require channels that minimize the shipping
distance and amount of handling
 Non- standard products, such as custom-built machinery and specialized business
forms, are sold directly by company sales representatives.
 High- unit- value products such as generators and turbines are often sold through
a company sales force rather than intermediaries.

Channel objectives are a part of and result from the company’s marketing objectives that need to
be stated in terms of targeted service output levels. Profit considerations and asset utilization
must be reflected in channel objectives and the resultant design. It should be the endeavor of the
channel members to minimize the total channel costs and still provide with the desired level of
service outputs. Channel objectives keep varying depending on the characteristics of the
products. For example, while a customized non-standard product requires company sales force to
sell directly, products like HVAC (Heating, Ventilation and Air-conditioning) are either sold by
the company or its franchised dealers.
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Channel Alternative - A company looks at alternatives for its distribution channel after it
has decided on the targeted customers and the customer service deliverables it desires from its
channel partners to reach these customers. At the time of deciding the company will scan for:
Type of intermediaries
 Distributors or re-distribution stock list
 Carrying and forwarding agents
 Logistics service providers.
 Manufacturer’s agents, stock list, guarantors
 Financing agencies
 Wholesalers and semi wholesalers
 Retailers and service centers

Evaluation of Major Alternative - The major problem before the producer is to decide which
of the alternatives would be best satisfy the long term objectives of the firm taking in view the
factors which would affect the channel decision. For this purpose, each alternative must be rated
against economic; control and adequate criteria

There are several channel alternatives available to the industrial markets. They have to determine
the best among the alternatives by evaluating them based on the following criteria:

1. Economic Performance
2. Degree of control
3. Degree of adaptability of channel members

Ideal Channel Structure - With the completion of forgoing steps, the number of alternatives
would have narrowed down considerably. The firm must evaluate design and choose the best
among them.

CHANNEL MANAGEMENT DECISIONS

The term Channel Management is widely used in sales marketing parlance. It is defined as a
process where the company develops various marketing techniques as well as sales strategies to
reach the widest possible customer base. The channels are nothing but ways or outlets to market
and sell products. The ultimate aim of any organization is to develop a better relationship
between the customer and the product.

Channel management helps in developing a program for selling and servicing customers within a
specific channel. The aim is to streamline communication between a business and the customer.
To do this, you need to segment your channels according to the characteristics of your
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customers: their needs, buying patterns, success factors, etc. and then customize a program that
includes goals, policies, products, sales, and marketing program (1). The goal of channel
management is to establish direct communication with customers in each channel. If the
company is able to effectively achieve this goal, the management will have a better idea which
marketing channel best suits that particular customer base. The techniques used in each channel
could be different, but the overall strategy must always brand the business consistently
throughout the communication

A business must determine what it wants out of each channel and also clearly define the
framework for each of those channels to produce desired results. Identifying the segment of the
population linked to each channel also helps to determine the best products to pitch to those
channels.

Steps in channel management decision

1. Selecting channel members

2. Training channel partners
3. Motivating channel members
4. Evaluating channel members
5. Modifying channel arrangements

Channel Conflict

Meaning - Channel conflict occurs when manufacturers (brands) dis-intermediate their channel
partners, such as distributors, retailers, dealers, and sales representatives, by selling their
products directly to consumers through general marketing methods and/or over the Internet.

Refers to a Situation when a producer or supplier bypasses the normal channel of distribution
and sells directly to the end user. Selling over the internet while maintaining a physical
distribution network is an example of channel conflict. See also disintermediation.

The Channel Conflict arises when the channel partners such as manufacturer, wholesaler,
distributor, retailer, etc. compete against each other for the common sale with the same brand.

TYPES OF CHANNEL CONFLICT

1. Vertical channel conflict

2. Horizontal channel conflict
3. Multi channel conflict
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1. Vertical Channel Conflict: This type of conflict arises between the different levels in
the same channel.
E.g. The conflict between the manufacturer and the wholesaler regarding price,
quantity, marketing activities, etc.

2. Horizontal Channel Conflict: This type of conflict arises between the same level in the
same channel.
E.g. The conflict between two retailers of the same manufacturer faces disparity in terms of
sales target, area coverage, promotional schemes, etc.

3. Multichannel Conflict: This type of conflict arises between the different market channels
participating in the common sale for the same brand.
E.g. If a manufacturer uses two market channels, first is the official website through which the
products and services are sold. The second channel is the traditional channel i.e. through
wholesaler and retailer. If the product is available at a much lower price on a website than is
available with the retailer, the multichannel conflict arises.

CAUSES OF CHANNEL CONFLICT

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 Goal incompatibility: Different partners in the channel of distribution have different

goals that may or may not coincide with each other and thus result in conflict.
E.g. The manufacturer wants to achieve the larger market share by adopting the market
penetration strategy i.e. offering a product at low price and making the profits in the long run,
whereas the dealer wants to sell the product at a high cost i.e. market skimming strategy and earn
huge profits in the short run.

 Ambiguous Roles: The channel partners may not have a clear picture of their role i.e.
what they are supposed to do, which market to cater, what pricing strategy is to be adopted, etc.
E.g. The manufacturer may sell its products through its direct sales force in the same area where
the authorized dealer is supposed to sell; this may result in the conflict.

 Different Perceptions: The channel partners may have different perceptions about the
market conditions that hamper the business as a whole thereby leading to the conflict.
E.g. The manufacturer is optimistic about the change in the price of the product whereas the
dealer feels the negative impact of price change on the customers.

 Manufacturer dominating the Intermediaries: The intermediaries such as the

wholesaler, distributor, retailer, etc. carry the process of distribution of goods and services for the
manufacturer. And if the manufacturer makes any change in the price, product, marketing
activity the same has to be implemented with an immediate effect thereby reflecting the huge
dependence of intermediaries on the manufacturer.
E.g. If the manufacturer changes the promotional scheme of a product with the intention to cut
the cost, the retailer may find it difficult to sell the product without any promotional scheme and
hence the conflict arises.

 Lack of Communication: This is one of the major reasons that lead to the conflict
among the channel partners. If any partner is not communicated about any changes on time will
hamper the distribution process and will result in disparity.
E.g. If retailer urgently requires the stock and the wholesaler didn’t inform him about the
availability of time may lead to the conflict between the two.

MANAGING CHANNEL CONFLICT

 Subordinate Goals: The channel partners must decide a single goal in terms of increased
market share, survival, profit maximization, high quality, customer satisfaction, etc. with the
intention to avoid conflicts.
 Exchanging employees: one of the best ways to escape channel conflict is to swap
employees between different levels i.e. two or more persons can shift to a dealer level from the
manufacturer level and from wholesale level to the retailer level on a temporary basis. By doing
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so, everyone understands the role and operations of each other thereby reducing the role
ambiguities.
 Trade associations: Another way to overcome the channel conflict is to form the
association between the channel partners. This can be done through joint membership among the
intermediaries. Every channel partner works as one entity and works unanimously.
 Co-optation: Under this, any leader or an expert in another organization is included in
the advisory committee, board of directors, or grievance redressal committees to reduce the
conflicts through their expert opinions.
 Diplomacy, Mediation and Arbitration: when the conflict becomes critical then
partners have to resort to one of these methods.
In Diplomacy, the partners in the conflict send one person from each side to resolve the conflict.

In Mediation, the third person is involved who tries to resolve the conflict through his skills of
conciliation.

In Arbitration, when both the parties agree to present their arguments to the arbitrator and agree
to his decision.

 Legal resource: When the conflict becomes crucial and cannot be resolved through any
above mentioned ways, the channel partners may decide to file a lawsuit.

DESIGNING A PHYSICAL DISTRIBUTION SYSTEM

Meaning - Physical distribution is the group of activities associated with the supply of finished
product from the production line to the consumers. The physical distribution considers many
sales distribution channels, such as wholesale and retail, and includes critical decision areas like
customer service, inventory, materials, packaging, order processing, and transportation and
logistics.

The planning, implementation, and controlling of the physical flow of material or product from
one point to another to meet the customer requirements in the market is known as physical
distribution.

Physical distribution is responsible for delivering to the customer what is wanted on time and at
minimum cost. The objective of distribution management is to design and operate a distribution a
system that attains the required level of customer service and does so at least cost. To reach this
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Objective, all activities involved in the movement and storage of goods must be organized into
an integrated system (physically).

Steps in Designing a Physical Distribution System

To design a physical distribution system for a product, following steps need to be followed −
 Step 1 − Defining distribution objective and services required for product distribution
 Step 2 − Articulating customer requirement
 Step 3 − Comparing the strategy with market competitors
 Step 4 − Managing the cost of distribution to decrease cost without compromising on
the quality of service
 Step 5 − Building physical distribution system that is flexible for implementation
of changes, if required

Components of a Physical Distribution System

Physical distribution can be controlled and monitored by its different components. Each
component should be evaluated and managed in order to accomplish physical distribution
without any problems.
The following are the different components of the physical distribution system −
 Planning of physical distribution system
 Storage planning in plant
 Logistics
 Warehousing on field
 Receiving
 Handling
 Sub distribution of product
 Management of inventory at various levels
 Execution of order
 Accounting transactions
 Communication at different levels
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NETWORK MARKETING

Meaning - Network marketing is a business model that depends upon a network of distributors
for growth, such as in multilevel marketing. It is a direct selling method that features
independent agents that make up a distribution network for goods and services. Some network
marketing systems are based on tiers that denote how many levels deep a sales and distribution
network goes.

Network marketing, also known as multi-level marketing, is a business model which involves a
pyramid structured network of people who sell a company’s products.

Network marketing involves the direct sale of products to consumers. While network marketers
don't need a specified amount of education, individuals interested in network marketing can take
advantage of degree programs that focus on business administration, marketing, and sales
management.

CONTEMPORARY CHANNEL SCENARIO IN INDIA

o
o More and more Firms take to a Multi –Channel Model
o Outsourcing of Channel Arrangement Become more Pronounced
o Radical changes are taking place on the retailing front
o Conventional Whole sale – retail trade continue as the mainstay
o Image and profile of the distributive trade undergo a change
o Trade margins Escalate as cost of distribution keep growing
o Power equation among Distribution Triumvirate now favor lower
o Distributors are becoming choosy

PRODUCT DISTRIBUTION LOGISTICS

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Marketing Communication

Marketing communications uses different marketing channels and tools in combination: Marketing
communication channels focuses on any way a business communicates a message to its desired market, or
the market in general.

A marketing communication tool can be anything from: advertising, personal selling, direct
marketing, sponsorship, communication, promotion and public relations.[1]

Marketing communications are made up of the marketing mix which is made up of 4P's: Price,
Promotion, Place and Product, for a business selling goods, and made up of 7P's: Price, Promotion, Place,
Product, People, Physical evidence and Process, for a service based business.

Marketing communications includes advertising, promotions, sales, branding and online promotion. The
process allows the public businesses use to know or understand a brand. Successful branding involves
targeting audiences who appreciate the organization's marketing program. Advertising is a small but
important part of marketing communications; the marketing communications mix is a set of tools that can be
used to deliver a clear and consistent message to target audiences. It is also commonly called the
promotional mix. Crosier (1990) states that all terms have the same meaning in the context of the 4ps:
Product, price, place and promotion.
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