Unit iv pricing and distribution

Unit IV
Pricing and Distribution Strategies
Types of Pricing And Pricing Issues - Pricing
Process - Role Of Marketing Channels -
Types Of Distribution Channels, Choice Of
Channels And Logistics In Marketing

The Importance of Price
To the consumer...
Price is the cost
of something
In the broadest sense, price allocates
resources in a free-market economy
What is Price?
To the seller...
Price is revenue
and profit source
1

Chapter 16 Version 3e 3
What is Price? 1
Price is that which is given up in
an exchange to acquire a good
or service.

to Marketing Managers
Revenue
The price charged to customers multiplied by the
number of units sold.
Profit Revenue minus expenses
1

Revenue =Unit Price  Number of units sold
 Revenue pays for every activity.
 What’s left over is Profit.
Marketers must select a price
that is not too high
or not too low,
a price that equals
the perceived value to target consumers
1

Trends Influencing Price Setting
Trends
in the
Market
High rate of
new product introduction
Increased availability of
bargain-priced dealer and
generic brands
Price cutting as a strategy to
maintain or regain
market share
More efficient and better
informed buyers
1

Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
2

Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
2

Profit Maximization 2
Setting prices so that
total revenue is as large
as possible relative
to total costs.

Return on Investment
Net profit after taxes divided by
total assets.
2
ROI = Net Profit after taxes
Total assets

Market
Share
Sales
Maximization
2

Market Share
A company’s product sales as a
percentage of total sales for that
industry.
2

Sales Maximization 2
• Short-term objective to maximize sales
• Ignores profits, competition, and the marketing
environment
• May be used to sell
off excess inventory

Maintain
existing
prices
Meet
competition’s
prices
2

Demand and Supply
Demand
The quantity of a product that
will be sold in the market at various prices for a specified
period.
Supply
The quantity of a product
that will be offered to the market
by a supplier at various prices
for a specific period.
3

The Cost Determinant of Price
Deviate with changes
in level of output
Types of Costs
Variable
Costs
Fixed Costs
Do not deviate
as level of output changes
5

The Cost Determinant of Price
5
Markup pricing
Methods used to set price
Break-even pricing

Markup Pricing
Markup
Pricing
The cost of buying the product from the producer plus
amounts for
profit and for expenses not
otherwise accounted for.
Example:
If a pen costs $1.80 and sells for is $2.20, the markup is $.40,
or 22% of cost
5

Break-Even Pricing 5
Quantity
Price
2,000
0 1,000 2,000 3,000 4,000 5,000 6,000
4,000
Fixed costs
Total Revenue
Total Costs
Break-even point

Other Determinants of Price 6
Perceived Quality
Promotion Strategy
Distribution Strategy
Competition
Stages of the
Product Life Cycle
Other Factors
That
Influence
Price

Stages in the Product Life Cycle
Introductory
Stage
Growth
Stage
Decline
Stage
$
High
$
Stable
$
Decrease
Maturity
Stage
$
Decrease
Stable
High
6

Distribution Strategy
Offer a larger
profit margin
Convincing Distributors
to Carry Product
Give dealers a large
trade allowance
6

The Impact of the Internet 6
• Allows price and product comparisons
• Prices are coming down
• Data collection allows sellers to tailor products and
prices

Extranet 6
A private electronic network that
links a company
with its suppliers
and customers.

Prestige Pricing 6
Charging a high price to help
promote a high-quality image.

Indicators of Quality 6
Brand Name
Price
Appearance
Retailer
Reputation

Steps in Setting the Right Price
Results lead to the right price
Fine tune with pricing tactics
Choose a price strategy
Estimate demand, costs, and profits
Establish pricing goals
7

Pricing Objectives
7

Price Strategy 7
A basic, long-term pricing
framework, which establishes
the initial price for a product and
the intended direction for
price movements over the
product life cycle.

Choosing a Price Strategy
Basic Strategies
for
Setting Prices
Status Quo Pricing
Price Skimming
Penetration Pricing
7

Price Skimming
Situations
when
Price
Skimming
is Successful
Superior Product
Legal Protection of Product
Limited Production
Technological Breakthrough
Inelastic Demand
7

Penetration Pricing 7
A pricing policy whereby
a firm charges a relatively low
price for a product initially as a
way to
reach the mass market.

Penetration Pricing
Advantages
 Discourages or blocks
competition from market
entry
Disadvantages
 Requires gear up for mass
production
 Selling large volumes at
low prices
 Strategy to gain market
share may fail
7

Status Quo Pricing
Advantages
 Simplicity
 Safest route to long-term
survival for small firms
Disadvantages
 Strategy may ignore
demand or cost
7

The Legality and Ethics of
Price Strategy
Issues
That Limit
Pricing
Decisions
Unfair Trade Practices
Price Fixing
Price Discrimination
Predatory Pricing
8

Unfair Trade Practice Acts
Laws that prohibit wholesalers
and retailers from selling below
cost.
8

Price Fixing
An agreement between two or
more firms on the
price they will charge
for a product.
8

Price Discrimination 8
The Robinson-Patman Act of 1936:
• Prohibits any firm from selling to two or more
different buyers at different prices if the result
would lessen competition

Robinson-Patman Act Defenses 8
Seller Defenses
Cost
Market
Conditions
Competition

Predatory Pricing
The practice of charging a very
low price for a product with the
intent of driving competitors out
of business or out of a market.
8

Tactics for Fine-Tuning
the Base Price
9
Fine-Tuning
Pricing
Tactics
Special Pricing
Tactics
Discounts
Geographic Pricing

Tactics for Fine-Tuning
the Base Price
Common
Tactics
for
Fine-Tuning
the Base Price
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Promotional Allowances
Rebates
Value-Based Pricing
9

Value-Based Pricing
The price is set at a level that
seems to the customer to be a
good price compared to the
prices of other options.
9

Trade Loading
The practice of temporarily
lowering the price to
induce wholesalers and retailers
to buy more
goods than can be sold
in a reasonable time.
9

Geographic Pricing
Basing-Point
Pricing
Freight Absorption
Pricing
Zone Pricing
Uniform Delivered
Pricing
FOB Pricing
Common
Methods of
Geographic
Pricing
9

Geographic Pricing
FOB Origin
Pricing
The buyer absorbs the freight
costs from the shipping point
(“free on board”).
Uniform
Delivered
Pricing
The seller pays the freight charges
and bills the purchaser an
identical flat freight charge.
9

Geographic Pricing 9
Zone Pricing
The U.S. is divided into zones and
a flat freight rate is charged to customers in a given zone.
Freight
Absorption
Pricing
The seller pays for all or part of
the freight charges and does not
pass them on to the buyer.
Basing-Point
Pricing
The seller designates a location as
a basing point and charges all buyers the freight costs from
that point.

Special Pricing Tactics
Single-Price Tactic
Flexible Pricing
Professional
Services Pricing
Leader Pricing
Bait Pricing
Odd-Even Pricing
Price Bundling
Two-Part Pricing
All goods offered at the same price
Different customers pay different price
Used by professionals with experience,
training or certification
Sell product at near or below cost
Lure customers through false or misleading
price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a
single package
Two separate charges to consume a single good
9

Consumer Penalties 9
An irrevocable
loss of revenue
is suffered
Additional
transaction costs
are incurred
Businesses Impose
Consumer Penalties if...

Distribution Channels
• A distribution channel is a set of independent
organizations involved in the process of making a
product or service available to the consumer or
business user
• Used to move the customer towards the product

Why Use Marketing Intermediaries?
• Selling through wholesalers and retailers
usually is much more efficient and cost
effective than direct sales

Distribution Channel Functions
• Information: gathering and distributing
marketing research and intelligence
information about the marketing
environment
• Promotion: developing and spreading
persuasive communications about an offer

• Contact: finding and communicating with
prospective buyers
• Matching: shaping and fitting the offer to
the buyer’s needs, including such activities
as manufacturing, grading, assembling, and
packaging

• Negotiation: agreeing on price and other
terms of the offer so that ownership or
possession can be transferred
• Physical distribution: transporting and
storing goods

• Financing: acquiring and using funds to cover
the costs of channel work
• Risk taking: assuming financial risks such as
the inability to sell inventory at full margin

Number of Channel Levels
• Channel level can be described as distribution
channels
• Direct marketing channel
• Retailer
• Wholesaler

Customer Marketing ChannelsCustomer Marketing Channels

Marketing Intermediaries
• Travel Agents
• Tour Wholesalers
• Specialists
• Hotel Reps
• Concierges
• National, State, and
Local Agencies
• Consortia and
Reservation Systems
• Global Distribution
Systems
• Internet

Travel Agents Tour Wholesalers
Concierges Specialists:
Brokers & Junket Reps
Internet Hotel Representatives
Consortia & Reservations
Systems
Global Distribution
Systems
National, State,
and Local Tour Agencies
Marketing Intermediaries

Channel Behavior
• Channel members are dependent upon one
another and must work together for the
channel to operate successfully
• Members should understand and accept
their roles, coordinate their goals and
activities, and cooperate to attain overall
channel goals

Channel Conflict
• Horizontal conflict is conflict between firms
at the same level of the channel
– i.e. retailer to retailer
• Vertical conflict, which is more common,
refers to conflicts between different levels
of the same channel
– i.e. retailer to wholesaler

Channel Organization
• A vertical marketing system (VMS) consists
of producers, wholesalers, and retailers
acting as a unified system
• One channel member either owns the
others, has contracts with them, or wields
so much power that they all cooperate

Conventional vs. Vertical Marketing
Channels

Vertical Marketing Systems
• Corporate VMS combines successive stages of
production and distribution under single
ownership
• Administered VMS coordinates successive stages
of production and distribution through the size
and power of the parties
• Contractual VMS consists of independent firms at
different levels of production and distribution
who join through contracts to obtain economies
or sales impact

Franchising
• Granting the right to engage in offering, selling, or
distributing goods or services under a marketing
format which is designed by the franchisor
• The franchisor permits the franchisee to use its
trademark, name, and advertising
• Higher survival rates

Disadvantages – Franchiser
• Distribution system – other systems can add conflict, Little
Caesars going into K-marts cases conflict with other Little
Caesars in the area.
• Consistency
• Changing operation – Pizza Hut adding delivery
• Advertising expenditures

Franchisee – Advantages
Brand Name
Marketing
Support
Plans and
Systems
Reservation systems-
Customers
Contracts

Franchisee – Disadvantages
• Value of brand name determined by franchiser
• Introduction of new products determined by
franchiser
• Your reliability tied to the rest of the system

A Franchise is Only as Strong as –
Brand Name
Competitive Advantage
system
Market demand for
the product

Channel Organization
• Alliances are developed to allow two
organizations to benefit from each other’s
strengths
• Horizontal marketing systems are two or more
companies at one level that join to follow a new
marketing opportunity
• Multichannel marketing occurs when a single
firm sets up two or more marketing channels to
reach one or more customer segments

Selecting Channel Members
• Customer Needs
• Attracting Channel Members
• Evaluating Major Channel Alternatives
– Economic Feasibility of the Channel Member
– Control Criteria

Business Location
1. Understand the marketing strategy and target
market of the company
2. Conduct a regional analysis, which involves the
selection of geographic market areas
3. Select an area within that region
4. Choose individual sites

Best Practices
• Expedia
• Orbitz
• Priceline
• Travelocity
• Trip

Key Terms
• Administrative VMS
• Agent
• Alliances
• Broker

Key Terms
• Channel conflict
• Channel level
• Contractual VMS
• Corporate VMS

Key Terms
• Direct marketing channel
• Franchise organization
• Horizontal conflict
• Horizontal marketing systems (HMS)

Key Terms
• Multichannel marketing
• Retailer
• Vertical conflict
• Vertical marketing system (VMS)
• Wholesaler

Major Issues/Challenges
• Costs have risen as has competition
• Global differences in systems
– Technology also flattening this
• System hard to change and complex to manage
– Historical controls of GDS, OTA
• Diversity of travel “parts” makes all of the distribution
points part of the experience and if an intermediary
fails, so does the experience

Major Issues/Challenges
• Fragmented owner-manager relationships
• Capital costs for technology and talent
• Travel agents reinvention imperative remains
• Battle of the brands—brand channels that is!
• Big data: not new
• Proliferation: more more more more
• Mobile?
• Monetizing social media

Evaluation of Channels
• Control and cost of each channel
• Tracking of statistics to better negotiate
contracts in the future
• Understand when and why to use a channel
• Good channel management ensures
customer satisfaction AND revenue
optimization AND profit maximization

Goal for hotels in distribution
• Q: What is the definition of revenue
management?
• A: Selling the right product to the right
customer at the right time for the right (read:
maximum) price!…by the right channel!

References
• Cullen, Kathleen and Caryl Helsel, Defining Revenue Management,
Top Line to Bottom Line, HSMAI Foundation, Bethesda, MD, 2006
• Green, Cindy Estis, Demystifying Distribution, HSMAI Foundation,
Bethesda, MD, 2005.
• Ho, Alfred, Importing, Exporting and Investing in China, World
Trade, March 2007, pp 20-22.
• Kotler, Bowen, Makens, Marketing for Hospitality and Tourism, 4th
Edition, Pearson, Upper Saddle River, NJ, 2006
• PricewaterhouseCoopers, Hospitality Directions Europe Edition,
Briefing Paper, November 2007
• Electronic Design, The Cell Phone Simply Irresistible, January 12,
2006, p90-91.
• PhoCusWright, Inc, European Online Travel Overview, March 2006.

Unit iv pricing and distribution

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