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Unit iv pricing and distribution

Discusses about Pricing and Distribution in Marketing

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Unit iv pricing and distribution

  1. 1. 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
  2. 2. 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
  3. 3. 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.
  4. 4. Chapter 16 Version 3e 4 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses 1
  5. 5. Chapter 16 Version 3e 5 The Importance of Price 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
  6. 6. Chapter 16 Version 3e 6 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
  7. 7. Chapter 16 Version 3e 7 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2
  8. 8. Chapter 16 Version 3e 8 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment 2
  9. 9. Chapter 16 Version 3e 9 Profit Maximization 2 Setting prices so that total revenue is as large as possible relative to total costs.
  10. 10. Chapter 16 Version 3e 10 Return on Investment Net profit after taxes divided by total assets. 2 ROI = Net Profit after taxes Total assets
  11. 11. Chapter 16 Version 3e 11 Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives 2
  12. 12. Chapter 16 Version 3e 12 Market Share A company’s product sales as a percentage of total sales for that industry. 2
  13. 13. Chapter 16 Version 3e 13 Sales Maximization 2 • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory
  14. 14. Chapter 16 Version 3e 14 Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives 2
  15. 15. Chapter 16 Version 3e 15 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
  16. 16. Chapter 16 Version 3e 16 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
  17. 17. Chapter 16 Version 3e 17 The Cost Determinant of Price 5 Markup pricing Methods used to set price Break-even pricing
  18. 18. Chapter 16 Version 3e 18 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
  19. 19. Chapter 16 Version 3e 19 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
  20. 20. Chapter 16 Version 3e 20 Other Determinants of Price 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Other Factors That Influence Price
  21. 21. Chapter 16 Version 3e 21 Stages in the Product Life Cycle Introductory Stage Growth Stage Decline Stage $ High $ Stable $ Decrease Maturity Stage $ Decrease Stable High 6
  22. 22. Chapter 16 Version 3e 22 Distribution Strategy Offer a larger profit margin Convincing Distributors to Carry Product Give dealers a large trade allowance 6
  23. 23. Chapter 16 Version 3e 23 The Impact of the Internet 6 • Allows price and product comparisons • Prices are coming down • Data collection allows sellers to tailor products and prices
  24. 24. Chapter 16 Version 3e 24 Extranet 6 A private electronic network that links a company with its suppliers and customers.
  25. 25. Chapter 16 Version 3e 25 Prestige Pricing 6 Charging a high price to help promote a high-quality image.
  26. 26. Chapter 16 Version 3e 26 Indicators of Quality 6 Brand Name Price Appearance Retailer Reputation
  27. 27. Chapter 16 Version 3e 27 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
  28. 28. Chapter 16 Version 3e 28 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 7
  29. 29. Chapter 16 Version 3e 29 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.
  30. 30. Chapter 16 Version 3e 30 Choosing a Price Strategy Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing 7
  31. 31. Chapter 16 Version 3e 31 Price Skimming Situations when Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand 7
  32. 32. Chapter 16 Version 3e 32 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.
  33. 33. Chapter 16 Version 3e 33 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
  34. 34. Chapter 16 Version 3e 34 Status Quo Pricing Advantages  Simplicity  Safest route to long-term survival for small firms Disadvantages  Strategy may ignore demand or cost 7
  35. 35. Chapter 16 Version 3e 35 The Legality and Ethics of Price Strategy Issues That Limit Pricing Decisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 8
  36. 36. Chapter 16 Version 3e 36 Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost. 8
  37. 37. Chapter 16 Version 3e 37 Price Fixing An agreement between two or more firms on the price they will charge for a product. 8
  38. 38. Chapter 16 Version 3e 38 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
  39. 39. Chapter 16 Version 3e 39 Robinson-Patman Act Defenses 8 Seller Defenses Cost Market Conditions Competition
  40. 40. Chapter 16 Version 3e 40 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
  41. 41. Chapter 16 Version 3e 41 Tactics for Fine-Tuning the Base Price 9 Fine-Tuning Pricing Tactics Special Pricing Tactics Discounts Geographic Pricing
  42. 42. Chapter 16 Version 3e 42 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
  43. 43. Chapter 16 Version 3e 43 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
  44. 44. Chapter 16 Version 3e 44 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
  45. 45. Chapter 16 Version 3e 45 Geographic Pricing Basing-Point Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing FOB Pricing Common Methods of Geographic Pricing 9
  46. 46. Chapter 16 Version 3e 46 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
  47. 47. Chapter 16 Version 3e 47 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.
  48. 48. Chapter 16 Version 3e 48 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
  49. 49. Chapter 16 Version 3e 49 Consumer Penalties 9 An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties if...
  50. 50. 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
  51. 51. Why Use Marketing Intermediaries? • Selling through wholesalers and retailers usually is much more efficient and cost effective than direct sales
  52. 52. 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
  53. 53. Distribution Channel Functions • 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
  54. 54. Distribution Channel Functions • Negotiation: agreeing on price and other terms of the offer so that ownership or possession can be transferred • Physical distribution: transporting and storing goods
  55. 55. Distribution Channel Functions • 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
  56. 56. Number of Channel Levels • Channel level can be described as distribution channels • Direct marketing channel • Retailer • Wholesaler
  57. 57. Customer Marketing ChannelsCustomer Marketing Channels
  58. 58. Marketing Intermediaries • Travel Agents • Tour Wholesalers • Specialists • Hotel Reps • Concierges • National, State, and Local Agencies • Consortia and Reservation Systems • Global Distribution Systems • Internet
  59. 59. 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
  60. 60. 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
  61. 61. 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
  62. 62. 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
  63. 63. Conventional vs. Vertical Marketing Channels
  64. 64. 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
  65. 65. 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
  66. 66. 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
  67. 67. Franchisee – Advantages Brand Name Marketing Support Plans and Systems Reservation systems- Customers Contracts
  68. 68. 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
  69. 69. A Franchise is Only as Strong as – Brand Name Competitive Advantage system Market demand for the product
  70. 70. 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
  71. 71. Selecting Channel Members • Customer Needs • Attracting Channel Members • Evaluating Major Channel Alternatives – Economic Feasibility of the Channel Member – Control Criteria
  72. 72. 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
  73. 73. Best Practices • Expedia • Orbitz • Priceline • Travelocity • Trip
  74. 74. Key Terms • Administrative VMS • Agent • Alliances • Broker
  75. 75. Key Terms • Channel conflict • Channel level • Contractual VMS • Corporate VMS
  76. 76. Key Terms • Direct marketing channel • Franchise organization • Horizontal conflict • Horizontal marketing systems (HMS)
  77. 77. Key Terms • Multichannel marketing • Retailer • Vertical conflict • Vertical marketing system (VMS) • Wholesaler
  78. 78. 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
  79. 79. 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
  80. 80. 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
  81. 81. 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!
  82. 82. 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.