Unit 3

Pricing Strategy Objectives & Pricing Methods

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue
because it is related to product positioning. Furthermore, pricing affects other marketing mix
elements such as product features, channel decisions, and promotion. While there is no single recipe
to determine pricing, the following is a general sequence of steps that might be followed for
developing the pricing of a product:
Develop Marketing Strategy perform marketing analysis, segmentation, targeting, and
positioning.
Make Marketing Mix Decisions define the product, distribution, and promotional tactics.
Estimate the Demand Curve understand how quantity demanded varies with price.
Calculate Cost include fixed and variable costs associated with the product.
Understand Environmental Factors evaluate likely competitor actions, understand legal
constraints, etc.
Set Pricing Objectives for example, profit maximization, revenue maximization, or price
stabilization (status quo).
Determine Pricing using information collected in the above steps, select a pricing method,
develop the pricing structure, and define discounts. Marketing Strategy and the Marketing
Mix Before the product is developed, the marketing strategy is formulated, including target
market selection and product positioning. There usually is a tradeoff between product quality
and price, so price is an important variable in positioning. Because of inherent tradeoffs
between marketing mix elements, pricing will depend on other product, distribution, and
promotion decisions.
Estimate the Demand Curve Because there is a relationship between price and quantity
demanded, it is important to understand the impact of pricing on sales by estimating the
demand curve for the product. For existing products, experiments can be performed at prices
above and below the current price in order to determine the price elasticity of demand.
Inelastic demand indicates that price increases might be feasible.
Calculate Costs If the firm has decided to launch the product, there likely is at least a basic
understanding of the costs involved, otherwise, there might be no profit to be made. The unit
cost of the product sets the lower limit of what the firm might charge, and determines the
profit margin at higher prices. The total unit cost of a producing a product is composed of the
variable cost of producing each additional unit and fixed costs that are incurred regardless of
the quantity produced. The pricing policy should consider both types of costs.

Environmental Factors Pricing must take into account the competitive and legal
environment in which the company operates. From a competitive standpoint, the firm must
consider the implications of its pricing on the pricing decisions of competitors.

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 For example, setting the price too low may risk a price war that may not be in the best
interest of either side. Setting the price too high may attract a large number of competitors
who want to share in the profits. From a legal standpoint, a firm is not free to price its
products at any level it chooses. For example, there may be price controls that prohibit
pricing a product too high. Pricing it too low may be considered predatory pricing or
"dumping" in the case of international trade. Offering a different price for different
consumers may violate laws against price discrimination. Finally, collusion with competitors
to fix prices at an agreed level is illegal in many countries.

Pricing Objectives
The firm's pricing objectives must be identified in order to determine the optimal pricing.
Common objectives include the following:
Current Profit Maximization seeks to maximize current profit, taking into account
revenue and costs. Current profit maximization may not be the best objective if it
results in lower long-term profits.
Current Revenue Maximization seeks to maximize current revenue with no regard
to profit margins. The underlying objective often is to maximize long-term profits by
increasing market share and lowering costs.
Maximize Quantity seeks to maximize the number of units sold or the number of
customers served in order to decrease long-term costs as predicted by the experience
curve.
Maximize Profit Margin attempts to maximize the unit profit margin, recognizing
that quantities will be low.
Quality Leadership use price to signal high quality in an attempt to position the
product as the quality leader.
Partial Cost Recovery an organization that has other revenue sources may seek
only partial cost recovery.
Survival in situations such as market decline and overcapacity, the goal may be to
select a price that will cover costs and permit the firm to remain in the market. In this
case, survival may take a priority over profits, so this objective is considered
temporary.
Status Quo the firm may seek price stabilization in order to avoid price wars and
maintain a moderate but stable level of profit.

For new products,

the pricing objective often is either to maximize profit margin or to

maximize quantity (market share). To meet these objectives, skim pricing and penetration pricing
strategies often are employed.
Skim Pricing attempts to "skim the cream" off the top of the market by setting a high price
and selling to those customers who are less price sensitive. Skimming is a strategy used to
pursue the objective of profit margin maximization. Skimming is most appropriate when:
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Demand is expected to be relatively inelastic; that is, the customers are not highly
price sensitive.
Large cost savings are not expected at high volumes, or it is difficult to predict the
cost savings that would be achieved at high volume.
The company does not have the resources to finance the large capital expenditures
necessary for high volume production with initially low profit margins.
Penetration Pricing pursues the objective of quantity maximization by means of a low
price. It is most appropriate when:
Demand is expected to be highly elastic; that is, customers are price sensitive and
the quantity demanded will increase significantly as price declines.
Large decreases in cost are expected as cumulative volume increases.
The product is of the nature of something that can gain mass appeal fairly quickly.
There is a threat of impending competition. As the product lifecycle progresses,
there likely will be changes in the demand curve and costs. As such, the pricing
policy should be reevaluated over time.The pricing objective depends on many
factors including production cost, existence of economies of scale, barriers to entry,
product differentiation, rate of product diffusion, the firm's resources, and the
product's anticipated price elasticity of demand.

Pricing Methods To set the specific price level that achieves their pricing objectives,
managers may make use of several pricing methods.
These methods include:
Cost-Plus Pricing set the price at the production cost plus a certain profit margin.
Target Return Pricing set the price to achieve a target return-on-investment.
Value-Based Pricing base the price on the effective value to the customer relative to
alternative products.
Psychological Pricing base the price on factors such as signals of product quality, popular
price points, and what the consumer perceives to be fair.
In addition to setting the price level, managers have the opportunity to design innovative
pricing models that better meet the needs of both the firm and its customers. For example,
software traditionally was purchased as a product in which customers made a one-time
payment and then owned a perpetual license to the software. Many software suppliers have
changed their pricing to a subscription model in which the customer subscribes for a set
period of time, such as one year. Afterwards, the subscription must be renewed or the
software no longer will function. This model offers stability to both the supplier and the
customer since it reduces the large swings in software investment cycles.
Price Discounts The normally quoted price to end users is known as the list price. This price
usually is discounted for distribution channel members and some end users. There are
several types of discounts, as outlined below.
Quantity Discount offered to customers who purchase in large quantities.

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Cumulative Quantity Discount a discount that increases as the cumulative quantity

increases. Cumulative discounts may be offered to resellers who purchase large
quantities over time but who do not wish to place large individual orders.
Seasonal Discount based on the time that the purchase is made and designed to
reduce seasonal variation in sales. For example, the travel industry offers much
lower off-season rates. Such discounts do not have to be based on time of the year;
they also can be based on day of the week or time of the day, such as pricing offered
by long distance and wireless service providers.
Cash Discount extended to customers who pay their bill before a specified date.
Trade Discount a functional discount offered to channel members for performing their
roles. For example, a trade discount may be offered to a small retailer who may not purchase
in quantity but nonetheless performs the important retail function.
Promotional Discount a short-term discounted price offered to stimulate sales.

Distribution Strategy Distribution (Marketing) Channels, Functions

of Distribution Channels & Type of Distribution Channels
Distribution of the products or services produced by a firm is an
important part of managing a business. Distribution refers to the process by which products or
services flow from the manufacturer or factory to reach its target consumers. The products can be
distributed through direct channels of distribution in which the manufacturers deliver their products
to the consumers by establishing their own distribution networks. There are also indirect channels of
distribution which involve the services of one or more
intermediaries (individuals and organisations) which link the manufacturers with their consumers.
These intermediaries or middlemen specialise in performing distribution activities. Wholesalers and
retailers are the two important forms of middlemen who act as a communication channel through
exchange of product information and feedback between the producers and consumers. The proper
selection of a distribution channel depends on several factors such as the nature of the products
involved, nature of the market, number of types of middlemen, competitive environment, legal
constraints and the nature and size of the company. The choice of a suitable channel of distribution is
very important for a business firm because:
it affects the time and costs of distribution;

it affects the volume of sales;

it influences pricing and promotional efforts. Such a decision will determine the
profitability of the business of the entrepreneur and also the long term sustainability
of these profits.

Channels of Distribution

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A channel of distribution or trade channel is defined as the path or route along which goods move
from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a
distribution network through which producer puts his products in the market and passes it to the
actual users. This channel consists of producers, consumers or users and the various middlemen like
wholesalers, selling agents and retailers (dealers) who intervene between the producers and
consumers. Therefore, the channel serves to bridge the gap between the point of production and the
point of consumption thereby creating time, place and possession utilities.
A channel of distribution consists of three types of flows:
Downward flow of goods from producers to consumers
Upward flow of cash payments for goods from consumers to producers
Flow of marketing information in both downward and upward direction i.e., Flow of
information on new products, new uses of existing products, etc from producers to
consumers. And flow of information in the form of feedback on the wants, suggestions,
complaints, etc from consumers/users to producers. The main function of a distribution
channel is to provide a link between production and consumption. A distribution channel can
be very simple, with just two layers (producer and consumer). A distribution channel can
also be very complicated, with several levels. Each layer of marketing intermediaries that
performs some work in bringing the product to its final buyer is a "channel level". The figure
below shows some examples of channel levels for consumer marketing channels

In the figure above, the first two channels are "indirect-marketing channels"
Channel 1 contains two intermediary levels - a wholesaler and a retailer. A wholesaler
typically buys and stores large quantities of several producers' goods and then breaks into the
bulk deliveries to supply retailers with smaller quantities. For small retailers with limited
order quantities, the use of wholesalers makes economic sense. This arrangement tends to
work best where the retail channel is fragmented - i.e. not dominated by a small number of
large, powerful retailers who have an incentive to cut out the wholesaler. A good example of
this channel arrangement in is the distribution of drugs.
Channel 2 contains one intermediary. In consumer markets, this is typically a retailer. The
consumer electrical goods market is typical of this arrangement whereby producers such as
Sony, Panasonic, Canon etc. sell their goods directly to large retailers and e-tailers such as
Flipkart, Snapdeal and Amazon which then sell onto the final consumers.

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 Channel 3 is called a "direct-marketing" channel, since it has no intermediary levels. In this

case the manufacturer sells directly to customers. An example of a direct marketing channel
would be a factory outlet store. Many holiday companies also market direct to consumers,
bypassing a traditional retail intermediary - the travel agent.

Functions of Distribution Channels

Distribution channels perform a number of functions that make possible the flow of goods
from the producer to the customer. These functions must be handled by someone in the
channel.
Channels provide time, place, and ownership utility. They make products available when,
where, and in the sizes and quantities that customers want.
Distribution channels provide a number of logistics or physical distribution functions that
increase the efficiency of the flow of goods from producer to customer.
Distribution channels create efficiencies by reducing the number of transactions necessary for
goods to flow from many different manufacturers to large numbers of customers. This occurs
in two ways. The first is called breaking bulk. Wholesalers and retailers purchase large
quantities of goods from manufacturers but sell only one or a few at a time to many different
customers. Second, channel intermediaries reduce the number of transactions by creating
assortments, providing a variety of products in one location. So that customers can
conveniently buy many different items from one seller at one time.
The transportation and storage of goods is another type of physical distribution function.
Retailers and other channel members move the goods from the production site to other
locations where they are held until they are wanted by customers. Channel intermediaries also
perform a number of facilitating functions, functions that make the purchase process easier
for customers and manufacturers.
Intermediaries often provide customer services such as offering credit to buyers and
accepting customer returns. Customer services are oftentimes more important in B2B markets
in which customers purchase larger quantities of higher-priced products. Some wholesalers
and retailers assist the manufacturer by providing repair and maintenance service for products
they handle.
Channel members also perform a risk-taking function. If a retailer buys a product from a
manufacturer and it doesnt sell, it is stuck with the item and will lose money.
Last, channel members perform a variety of communication and transaction functions.
Wholesalers buy products to make them available for retailers and sell products to other
channel members.
Retailers handle transactions with final consumers.
Channel members can provide two-way communication for manufacturers.
They may supply the sales force, advertising, and other marketing communications necessary
to inform consumers and persuade them to buy. And the channel members can be invaluable
sources of information on consumer complaints, changing tastes, and new competitors in the
market.

Types of Distribution Channels

One of the main strategic decisions to be taken in relation to the distribution channel is deciding on
the intensity of the distribution channels. At one end, there is the exclusive distribution option, while
at the other end, there is the intensive option. Even though there are a lot of reasons to go for an
exclusive channel strategy, most entrepreneurs do not consider that option seriously.
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1. Exclusive Distribution gives the retailer an exclusive right to sell your product in a defined
area for a period of time. There are several advantages of offering an exclusive distributorship. Some
of them are given here:
It is usually easier to find a distributor by offering territorial exclusivity.
An exclusive dealership implies greater control over the activities of the retailer.
With exclusivity, it is easier to maintain higher margins for all.
There is less competition at the point of sale.
The retailer will be willing to exert effort on pushing your products to the consumers.

There are also some of the following disadvantages that have to be considered:

The product receives less coverage in the target markets.

The image of the retailer has an impact on the customers image of the brand.
By being your exclusive seller in a region, some bargaining power shifts in favour of the
retailer.
Some minimum guarantees have to be given to the retailer regarding local advertising spend
and contributing towards the establishment cost by promising minimum sales.
One hybrid method is to give territorial exclusivity to a retailer and the retailer continues to
stock competitors products. This is not a very good idea as it leaves your product very
vulnerable.
2. Intensive Distribution This is the opposite extreme of exclusivity. Anyone who wishes to
stock your product is encouraged to do so. The objective is to reach the customer in as many ways as
possible. This strategy is best suited for many fast moving consumer goods (FMCG) and for many
fads. If an FMCG is widely available, the likelihood of sales goes up. Since a fad is not going to
sustain for long, it is wise to cover many retailers and make the product widely available for its short
shelf life.
The advantages of having an intensive distribution are as follows:
The product gets wider coverage in the target market.
It is convenient for customers to find the product.
Faster sales cycle is possible.

The disadvantages to be considered are as follows:

You have lesser control over the retail operations.

Since there is less push for the retailer, a consumer pull has to be generated.
3. Selective Distribution Midway between exclusive and intensive distribution options is
selective distribution. In selective distribution, no single retailer has exclusive rights over an area, but
retailers are not appointed indiscriminately. A few retailers are chosen to stock the product in a given
region. Some of the positive attributes of exclusive distribution such as control over the retailer and
an exclusive image, can be retained without sacrificing too much of market coverage. Many sellers
of consumer durables, apparel, and other relatively highvalue goods use this kind of distribution
network.

Types of Retailing
Specialty Stores: Carry a narrow product line with a deep assortment within the line. Ex: Athletes
Foot, Tall Men, The Limited.
Department Stores: Carry several product lines. Ex: Sears, J.C. Penney, Bloomingdales.
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Supermarkets: Relatively large, low-cost, low-margin, high-volume, self-service operations designed

to serve the consumers total needs for food, laundry, & household maintenance products. Ex:
Kroger, Safeway, Food Lion.
Convenience Stores: Relatively small stores located near residential areas, opened long hours seven
days a week. Ex: 7-eleven
Discount Stores: Sell standard merchandise at lower prices by accepting lower margins & selling
higher volumes. Ex: Wal-Mart, H.E.B., Kmart.
Off-Price Retailers: Buy at less than regular wholesale prices & charge consumers less than retail.
Factory outlets: Owned & operated by manufacturers & normally carry the manufacturers surplus,
discontinued or irregular goods. Ex: Ralph Lauren, Liz Claiborne.
Independent off-price retailers: Owned & run either by entrepreneurs or by division of larger retail
corporations. Ex: TJX Cos.
Warehouse clubs: Sell a limited number of brand-name grocery items, appliances, clothing, etc. at
deep discounts. Operate in huge, low-overhead, warehouse-like facilities. No credit cards. No
deliveries. Ex: Sams Club.
Superstores: 35,000 square feet selling space. Meets consumers total needs. Ex: Petsmart, Home
Depot, Staples.
Catalog Showrooms: Sell a broad selection of high-markup, fast-moving, brand-name goods at
discount. Ex: Service Merchandise.
Retail life cycle: emerges, grows, matures, declines.
Wheel-of-retailing
New store types emerge to challenge old store types.
New store types emerge to meet widely different consumer preferences for service levels & specific
services. Retailers can position themselves as offering one of four levels of service:
1. Self-service.
2. Self-selection. Customers can ask for assistance. Higher operating expenses than the previous
one.
3. Limited-service. More sales assistance because customers need more info.
4. Full-service. Provides salespeople who are ready to assist in every phase of the locatecompare-select process.
Nonstore Retailing: 4 major categories
1. Direct Selling: Oldest one. 3 types:

One-to-one selling: A salesperson visits & tries to sell products to a single potential user. Ex:
Avon, Electrolux.

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One-to-many: A salesperson goes to the house of a host who has some people in the house.
Ex: Tupperware.

Multilevel: A variant of direct selling in which companies recruit independent businesspeople

who act as distributors for their products. These distributors in turn recruit & sell to subdistributors, who eventually recruit others to sell their products, usually in customer homes.
Ex: Amway, NuSkin.

Direct Marketing: Includes telemarketing, TV direct response marketing & electronic shopping.
Ex: 1-800-FLOWERS, Home Shopping Network.
Automatic Vending: Vending machines offer 24 hour selling, self-service & unhandled
merchandise. Ex: COKE, Pepsi.
Buying Service: A store less retailer serving specific clienteles- usually the employees of large
organizations, such as schools, hospitals, unions, & government agencies. Ex: United Buying Service

Retail Organizations
Achieve many economies of scale, such as greater purchasing power, wider brand recognition, &
better trained employees. The major types of retail organizations are:
1. Corporate Chain Stores: Two or more outlets that are commonly owned & controlled, employ
central buying & merchandising, & sell similar lines of merchandise. Their size allows them
to buy in large quantities. Ex: Tower Records, Pottery Barn.
2. Voluntary Chain: Wholesaler-sponsored group of independent retailers engaged in bulk
buying & common merchandising. Ex: Independent Grocers Alliance.
3. Retailer Cooperative: Independent retailers who set up a central buying organization &
conduct joint promotion efforts. Ex: Associated Grocers, ACE.
4. Consumer Cooperative: A retail firm owned by its customers. Started by community
residents. Ex: local consumer cooperatives.
5. Franchise Organization: Contractual association between a franchiser & franchisees.
Normally based on some unique product, service or method of doing business. Prominent in
fast foods, video stores, health/fitness centers, auto rentals. Ex: McDonalds, Pizza Hut, Taco
Bell, Burger King.
6. Merchandising Conglomerate: A free-form corporation that combines several diversified
retailing lines & forms under central ownership , along with some integration of their
distribution-&-management function Ex: F.W. Woolworth, Kids Mart.

Retailer Marketing Decisions

1. Target-market decision: A retailers most important decision. Until the target is not defined,
the retailer cannot make consistent decisions. Retailers should conduct periodic marketing
research to ensure that they are reaching & satisfying their target customers.
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2. Product Assortment-&-procurement decision: Must match the target markets shopping

expectations. The retailer has to decide on product-assortment breadth & depth. Another
product assortment dimension is the quality of the goods. The real challenge is to develop a
product differentiation strategy:

Feature some exclusive brands not available at competing retailers.

Feature mostly private branded merchandise.

Feature blockbuster distinctive merchandise events.

Feature surprise or ever-changing merchandise

Feature the latest or newest merchandise first.

Offer merchandise customizing services.

Offer a highly targeted assortment

Once the retailer decides on the product-assortment strategy, the retailer must decide on procurement
sources, policies, & practices. Retailers are rapidly improving their procurement skills. Stores are
learning to measure direct product profitability, which enables them to measure a products handling
costs from the time it reaches their warehouse until a customer buys it & takes it out.
Services-&- store- atmosphere decision: The services mix is one of the key tools for
differentiating one store from another. The stores atmosphere is another element. Ex: Banana
Republic stores work on the concept of retail theater.
Price Decision: Key positioning factor & must be decided in relation to the target market, the
product-&-service-assortment & competition. Retailers must pay attention to pricing tactics. They
will plan markdowns on slower-moving merchandise. A growing number of retailers have abandoned
sales pricing in favor of everyday low pricing (EDLP). This could lead to lower advertising costs,
greater pricing stability, a stronger store image of fairness & liability, & higher retail profits.
Promotion Decision: Use promotion tools that reinforce image position.
Place Decision: Retailers have a choice of locating their stores in:

Central business districts (downtown). Rents are high.

Regional shopping centers. Large suburban malls containing 40-200 stores. Malls are
attractive because of generous parking, one-stop shopping, restaurants, & recreational
facilities.

Community shopping centers. Smaller malls. Between 20-40 smaller stores.

Strip malls. Contain a cluster of stores, usually housed in one long building.

A location within a larger store. Certain well known retailers-McDonalds, Dunkin Donutsare locating units in airports, schools, Wal-Marts.

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Retailers can assess a particular stores sales effectiveness by looking at four indicators:
1. Number of people passing by on an average day.
2. % who enter the store.
3. % of those entering who buy.
4. Average amount spent per sale.

Trends in Retailing
Main developments that retailers need to take into account as they plan their competitive advantage:

New Retail Forms constantly emerge to threaten established retail forms.

Shortening Retail Life Cycles. Retail forms are rapidly copied.

Nonstore Retailing due to electronic age.

Increasing Intertype Competition. Competition between store & nonstore retailers is

common.

Polarity of Retailing.

Giant Retailers are emerging.

Changing Definition of One-Stop Shopping. Now specialty stores within malls are becoming
increasingly competitive with large department stores in offering one-stop shopping.

Growth of Vertical Marketing Systems.

Portfolio Approach. Retail organizations are increasingly designing & launching new store
formats targeted to different lifestyle groups.

Growing Importance of Retail Technology.

Global Expansion of Major Retailers due to mature & saturated markets at home. Ex: The
Gap, Burger King, Tony Romas.

Retail Stores as Community Centers or Hangouts. Establishments that provide a place for
people to congregate (cafes, tea shops, book-shops, etc.).

Wholesaling
All the activities involved in selling goods or services to those who buy for resale or business use.
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Excludes manufacturers, farmers & retailers.

They are also called distributors.

Pay less attention to promotion, atmosphere & location.

Transactions are larger than in retailing.

They are used whenever they perform one of the following more efficiently: selling &
promoting, buying & assortment building, bulk breaking, warehousing, transportation,
financing, risk bearing, market info & management services & counseling.

Types of Wholesalers
1. Merchant wholesalers. Independently owned businesses that take title to the merchandise
they handle. Two categories:

Full service wholesalers provide a full line of services. Two types:

o wholesale sell primarily to retailers
o industrial distributors sell to manufacturers.

Limited-service wholesalers offer fewer services than full-service wholesalers. Several types:
o Cash & carry wholesalers. Limited line of fast moving goods. Sell to small retailers.
Do not deliver.
o Truck wholesalers. Limited line of semi-perishable products. Sell & deliver.
o Drop shippers. Operate in bulk industries. Do not carry inventory.
o Rack jobbers. Serve grocery & drug retailers. Bill the retailers only for the goods sold
to consumers.
o Producers cooperatives. Owned by farmer members & assemble farm produce to sell
in local markets.
o Mail-order wholesalers. Send catalogs.

Brokers & agents. Do not take title to goods & perform only a few functions.

Brokers bring buyers & sellers together & assist in negotiation.

Agents represent either buyers or sellers on a more permanent basis than brokers do. Several
types:

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o Manufacturers agents
o Selling agents
o Purchasing agents
o Commission merchants
Manufacturers & retailers branches & offices. Branches & offices dedicated either to either sales
or purchasing.
Miscellaneous Wholesalers. A few specialized types of wholesalers are found in certain sectors of
the economy.

Market Logistics: Involves planning, implementing & controlling the physical flows of materials
& final goods from points of origin to points of use to meet customer requirements at a profit. Info
systems play a critical role in managing market logistics. it Involves several activities: sales
forecasting, distribution, production & inventory levels.

Decisions
Order
processing:
How
should
Warehousing:
Where
should
Inventory:
How
much
stock
Transportation: How should goods be shipped?

orders
stocks
should

be
be
be

handled?
located?
held?

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