Success Strategies in Channel Management

Success Strategies in Channel Management Pricing in Channels

Pricing Policy and Methods Price Cutting Buyer Evaluation Eight Stages In Establishing Prices Price and Value Segmented Pricing Common Pricing and Methods Competition-Based Methods Profit-Based Methods Competition Oriented Pricing Discounts and Allowances

A marketer needs to be aware of the prices charged for competing brands. This allows a firm to keep its prices the same as competitors' prices when non-price competition is used. If an organisation uses pace as a competitive tool, it can price its brand below competing brands. A pricing policy is a guiding philosophy or course of action designed to influence and determine pricing decisions. Pricing policies help marketers solve the practical problems of establishing prices. A pricing method is a mechanical procedure for assigning prices to specific products on a regular basis. The three basic types of pricing methods are cost-orientated, demand-orientated, and competition-orientated pricing. Pricing Policy and Methods

Price Cutting • As a promotional tool, price cutting has been used by countless organisations as a marketing strategy, when entering a new market, or attempting to extend their share of a market. • Of all the marketing tools available to an organisation, price cutting is the easiest and quickest to implement, and requires no injection of cash to put into practice, although the returns will be less. However, other things being equal, price cutting is the same as giving discounts: it erodes profits. The thinking is that sales will increase to a level which will offset the loss of profit.

The Price Cut Trap • While in the short term distributors can successfully combat the competition, increase their share of the market, and increase their sales turnover, the ultimate object of pricing isusually to obtain satisfactory profit. Price cutting as a long-term strategy has only a limited possibility of success.

Competitive Reactions • Whether you are constructing a pricing schedule on entering a new market, or already operating in a market, you must assume that if you price your product lower than that of your competitors, it will attract their attention. This attention can be unwelcome, depending on the size, importance and timing of your price cut, and the position of the product in the market. You could make a general assumption, and work on the basis that, for every price cut you make, competitors will copy; the net result would be that profits are lowered all round.

Buyer Evaluation • It is reasonable to accept the economic axiom that prices paid tell us something about buyer evaluations of value offers. • (i) the traditional demand theorem that 'the lower the price, the greater the sales'. • (ii) the premium-pricing dictum: 'the higher the price, the higher the customer valuation - so, the greater the sales'. • Both statements are equally true, depending on the market and the environment. They are therefore dangerous as general principles for the real marketer. • The practical function of marketing is not to maximise quantity demanded by offering the cheapest possible product at the lowest (or highest) possible price. • The primary aim must be to offer products formed in consonance with consumer demand, at prices compatible with consumer evaluations and corporate sales/profit objectives. • Pricing must take into account the general policies, aims, and long-term strategies of the firm.

Price and Value • Consumers value many other things apart from price. Competition never occurs only in terms of price. • To believe otherwise is to assume that consumers cannot differentiate or evaluate competing products except by their price tags. There would be no point in constructing marketing mixes or segmenting, targeting or positioning. It would assume that consumers had no preferences beyond price.

Evaluation of Competitors' Prices • Knowing the prices of competing brands can be very important for a marketer. Competitors' prices and the marketing mix variables that they emphasise partly determine how important price will be to customers. Marketers in an industry in which non-price competition prevails need competitive price information to ensure that their organisations prices are the same as its competitors' prices.

Rather than emphasise demand, cost, or profit factors, a price setter can stress what competitors or "the market" is doing. Customary Pricing For some products where tradition, a standardised channel of distribution, or other competitive factors dictate the price, customary pricing is used. Loss-Leader Pricing For a special promotion many retail stores deliberately sell a value offerbelow its customary price to attract attention to it. The purpose of this loss-leader pricing is not to increase sales but to attract customers in hopes they will buy other products as well, particularly the discretionary items carrying large markups. Competition-Based Methods

Costs • None of the preceding comments were intended to imply that costs are not profoundly important in marketing operations. The primary argument in this regard can be summed up as follows: to be successful in the long haul, marketers must pay considerably more attention to the 'demand side' of the marketing equation (the consumer's side) than the 'supply side' (the manufacturer's side).

Eight Stages In Establishing Prices • (1) selecting pricing objectives; • (2) assessing the target market's evaluation of price and its ability to purchase; • (3) determining demand; • (4) analysing demand, cost, and profit relationships; • (5) analysing competitors' prices; • (6) selecting a pricing policy; • (7) developing a pricing method; and • (8) determining a specific price.

Steps for Determining Prices. • 1. Establish target market objectives • 2. Formulate marketing mix strategy • 3. Develop pricing policies (and constraints) • 4. Choose pricing strategies • 5. Set pricing tactics. • This presents the basic ruling ensuring :- • -that prices are oriented to their markets; • -that price is integrated as an effective element of the marketing mix.

Common Pricing Methods • Penetration Price. A penetration priceis a price below the prices of competing brands and is designed to penetrate a market and produce a larger unit sales volume. When introducing a product, a marketer sometimes uses a penetration price to gain a large market share quickly. This approach places the marketer in a less flexible position than price slumming because it is more difficult to raise a penetration price than to lower or discount a slumming price. It is not unusual for a firm to use a penetration price after having skimmed the market with a higher price. • Prestige Pricing. In prestige pricing, prices are set at an artificially high level to provide prestige or a quality image. • Prestige pricing is used especially when buyers associate a higher price with higher quality. Typical product categories in which selected products are prestige priced include perfumes, cars, alcoholic beverages, jewellery, and electrical appliances. If producers that use prestige pricing lowered their prices dramatically, it would be inconsistent with the perceived images of such products. • Psychological Pricing Psychological pricingencourages purchases based on emotional rather than rational responses. It is used most often at the retail level. Psychological pricing has limited use for industrial products.

Common Pricing Methods • Odd-Even Pricing. Through odd-even pricing, that is, ending the price with certain numbers-it is generally thought that marketers are trying to influence buyers' perceptions of the price or the product. Odd pricing assumes that more of a value offerwill be sold at $99.95 than at $100.00. Supposedly, customers will think, or at least tell friends, that the product is a bargain-not $100.00, mind you, but $99.95, plus a few insignificant cents. • The most probable reason is that a price such as $99.95 requires the shop assistant to use the cash register to make change. Thus the transaction is recorded - the money is not just pocketed. • Customary Pricing. In customary pricing, certain goods are priced primarily on the basis of tradition. • Demand-Backward Pricing - Producers sometimes estimate the price that consumers would be willing to pay for a relatively expensive item such as a shopping good. They then work backward through the margins that may have to be paid to retailers and wholesalers to determine what price they can charge wholesalers for the product. This demand-backward pricing results in the manufacturer deliberately adjusting the quality of the component parts in the product to achieve the target price.

Common Pricing Methods • Bundle Pricing - A frequently used demand-oriented pricing practice is bundle pricing - the marketing of two or more products in a single "package" price. • Price Lining. - When an organisation sets a limited number of prices for selected groups or lines of merchandise, it is using price lining.A retailer may have various styles and brands of similar quality men's shirts that sell for $25.00. Another line of higher quality shirts may sell for $40.00. Price lining simplifies consumers' decision making by holding constant one key variable in the final selection of style and brand within a line. In product line pricing, the company should look at the prices of the overall product line to ensure that the price of the new model is within the range of existing prices for that line. Failure to consider the impact of the new model's price relative to the existing product line may change buyers' perceptions of all the models in the line. • Professional Pricing - The concept of professional pricing carries with it the idea that professionals have an ethical responsibility not to overcharge unknowing customers. In some situations, a seller can charge customers a high price and continue to sell many units of the product. Medicine offers several examples

Common Pricing Methods • Promotional Pricing- Price is an ingredient in the marketing mix, and it often is coordinated with promotion. The two variables sometimes are so interrelated that the pricing policy is promotion orientated. Examples of promotional pricing include price leaders, special-event pricing, and experience-curve pricing. • Price Leaders. - Sometimes a firm prices a few products below the usual markup, near cost, or below cost, which results in prices known as price leaders. This type of pricing is used most often in supermarkets and department stores to attract consumers by giving them special low prices on a few items. Management hopes that sales of regularly priced merchandise will more than offset the reduced revenue from the price leaders. • Special-Event Pricing. - To increase sales volume, many organisations coordinate price with advertising or sales promotion for seasonal or special situations. Special event pricing involves advertised sales or price cutting that is linked to a holiday, season, or event.

Common Pricing Methods • Standard Markup Pricing - Managers of supermarkets and other retail stores have such a large number of products that estimating the demand for each product as a means of setting price is impossible. Therefore they use standard markup pricing, which entails adding a fixed percentage to the cost of all items in a specific product class. • Cost Plus Fixed-Fee Pricing - In buying highly technical, few-of-a-kind products such as aircraft or space satellites, the government has found its contractors are reluctant to specify a formal, fixed price for the procurement. Therefore it uses cost plus fixed-fee pricing, which means that a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project. • Experience Curve Pricing - The method of experience curve pricing is based on the learning effect, which holds that the unit cost of many products declines by 10 percent to 30 percent each time a firm's experience at producing and selling them doubles.

Target Profit Pricing - A firm may set an annual target of a specific dollar volume of profit, which is called target profit pricing. Target Return-on-Investment Pricing - Firms set annual return-on-investment (ROI) targets such as ROI of 20 percent. Target return-on-investment pricing is a method of setting prices to achieve this target. Target Return-on-Sales Pricing - A difficulty with target profit pricing is that although it is simple and the target involves only a specific dollar volume, there is no benchmark of sales or investment used to show how much of the firm's effort is needed to achieve the target. Firms like supermarket chains often use target return-on-sales pricing to set typical prices that will give the firm a profit that is a specified percentage, say 1 percent, of the sales volume. Profit-Based Methods

Competition Oriented Pricing • In using competition-orientated pricing, an organisation considers costs and revenue to be secondary to competitors' prices. The importance of this method increases if competing products are almost homogeneous and the organisation is serving markets in which price is the key variable of the marketing strategy. A firm that uses competition-orientated pricing may choose to be below competitors' prices, above competitors' prices, or at the same level. Competition-orientated pricing should help attain a pricing objective to increase sales or market share. Competition-orientated pricing methods may be combined with cost approaches to arrive at price levels necessary for a profit.

Discounts • Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favourable to the seller. Four kinds of discounts are especially important in marketing strategy: • (1) quantity, • (2) seasonal, • (3) trade (functional), and • (4) cash discounts.

Discounts • Quantity Discounts - Quantity discount are of two general kinds: non cumulative and cumulative. Non cumulative quantity discounts are based on the size of an individual purchase order. They encourage large individual purchase orders, not a series of orders. Cumulative quantity discounts apply to the accumulation of purchases of a value offerover a given time period, typically a year. Cumulative quantity discounts encourage repeat buying by a single customer to a far greater degree than do non cumulative quantity discounts. • Seasonal Discounts - To encourage buyers to stock inventory earlier than their normal demand would require, producers often use seasonal discounts. • Trade (Functional) Discounts - To reward wholesalers and retailers for marketing functions they will perform in the future, a manufacturer often gives trade, or functional, discounts. These reductions off the list or base price are offered to resellers in the channel of distribution on the basis of (1) where they are in the channel and (2) the marketing activities they are expected to perform in the future. • Cash Discounts - To encourage retailers to pay their bills quickly, producers offer them cash discounts.

Volume Discounts • Order Discounts - Often the cost of processing and shipping increases very little with the size of a customer's order. Consequently, the per-unit cost of processing and shipping declines significantly with the quantity ordered. For this reason, sellers generally prefer that buyers place large infrequent orders, rather than small frequent ones. To encourage them to do so, sellers often give discounts based on the quantity purchased in a given order. Such discounts may be offered in addition to volume discounts for total purchases in a year, because volume discounts and order discounts serve separate purposes. The volume discount is to retain the business of large customers. The order discount is to encourage customers to place large orders.

Discounts • Step Discounts - Step discounts, or block discounts, differ from order discounts in that they do not apply to the total quantity purchased, but only to purchase beyond a specified amount. The rationale is to encourage individual buyers to purchase more of a value offer without having to cut the price on quantities for which they would pay a higher price. Thus, in contrast to other segmentation tactics, step discounting does not segment different customers for pricing, but rather segments different purchases by the same customer. Such pricing is common for public utilities with customers who buy electricity for multiple uses and place a different value on it for each use. • Two-Part Pricing - Two-part prices involve two separate charges to consume a single product. For example, amusement parks sometimes have an entry fee plus a ticket charge for each ride, car rental organisations have a daily rate plus a mileage charge, and racket clubs have an annual membership fee plus a charge for court time. In each of these cases, heavy users pay less than do light users for the same product, since the fixed fee is spread over more units.

Allowances • Allowances - like discounts - are reductions from list or quoted prices to buyers for performing some activity. • Trade-In Allowances - A trade-in allowance is a price reduction given when a used product is part of the payment on a new product. Trade-ins are an effective way to lower the price a buyer has to pay without formally reducing the list price. • Promotional Allowances - Sellers in the channel of distribution can qualify for promotional allowances for undertaking certain advertising or selling activities to promote a product. Various types of allowances include an actual cash payment or an extra amount of "free goods".

Segmented Pricing • The Importance of Segmented Pricing • Segmented pricing also spurs competitive innovation. Organisations improve their products because improvement enables them to charge more profitable prices. But such improvements are often valued differently by different buyers. When only a sub-segment of an organisation’s buyers value a potential improvement, the ability to segment them for pricing-to recover costs of development and to earn a profit provides the sole incentive for such advances. Without segmented pricing, the unique demands of small market segments would more often go unsatisfied.

Segmented Pricing • If pricing a value offer differently across segments were easy, everyone would do it. Customers whom management would like to charge a higher price will not usually cooperate with a strategy to segment them. They will not identify themselves as members of a relatively price-insensitive segment simply to help the seller charge them a higher price. Middlemen can undermine a segmented-pricing strategy as well. If they can figure out how to buy the product cheaply and resell it to segments that will pay more, they can capture the profit from segmented pricing for themselves. Finally, some segmented-pricing tactics violate federal antitrust laws.' An organisation that adopts segmented pricing as a strategic goal still faces the difficult task of developing tactics that overcome all three of these problems.

Segmented Pricing • Segmenting by buyer identification - Occasionally pricing differently among segments is easy because buyers in the different segments have obvious characteristics that distinguish them. Barbers charge different prices for short and long hair because long hair is usually more difficult to cut. They also cut children's hair at a substantial discount because many parents view home haircuts as acceptable alternatives to costly barber cuts for their children. For barbers, simple observation of the customers is the key to segmented pricing. • Segmenting by purchase location - If customers in one market segment purchase at different locations, they can be segmented by purchase location. This is common practice for a wide range of products. Dentists, opticians, and other professionals sometimes have multiple offices in different parts of a city, each with a different price schedule reflecting differences in their clients' price sensitivity. Many grocery chains classify their stores by intensity of competition and apply lower mark-ups in those localities where competition is most intense. Even when locations are very near each other, switching is usually minimal. Switching from the higher-price to the lower-price location is minimized by differences in the convenience, ambiance, or prestige value of different locations.

Segmenting by Time of Purchase • When customers in different market segments purchase at different times, one can segment them for pricing by time of purchase. Theatres segment their markets by offering midday matinees at substantially reduced prices, attracting the price-sensitive retirees, students, and unemployed workers who can most easily attend at such times. Less price-sensitive evening patrons cannot so easily arrange dates or work schedules to take advantage of the cheaper midday ticket prices. Similarly, restaurants usually charge more to their evening patrons, even if they cater primarily to a lunch crowd. They do so because their are more numerous, cheaper substitutes for lunches than there are for dinners. A Big Mac or a brown bag, acceptable for lunch, is generally viewed as a poor substitute for a formal dinner as part of a night's entertainment.

Segmented Pricing • Periodic sales - offering the same merchandise at discounted prices, can also segment markets. This tactic is most successful in markets with a combination of occasional buyers who are relatively unfamiliar with the market, and more regular buyers who know when the sales are and plan their purchases accordingly. Furniture producers employ this tactic with sales every February and August. Those are not months when most people would naturally think about buying furniture. But people who regularly buy home furnishings, and who are more price sensitive because of the substitute awareness and total expenditure effects, know to plan their purchases to coincide with these sales. • Peak-Load Pricing - Segmenting by time is also useful when the cost of serving a buyer varies significantly with the time of purchase. That occurs when demand varies at different times but the product is not storable. Airlines, for example, face greater demand for seats on Mondays, Thursdays, and Fridays than on other days. Early morning and late afternoon departures are also more in demand than departures during the midday and evening.

Segmenting by Purchase Quantity • When customers in different segments buy different quantities, one can sometimes segment them for pricing with quantity discounts. Quantity discount tactics are of four types: volume discounts, order discounts, block discounts, and two-part prices. They are common when dealing with differences in price sensitivity, costs, and competition.

Price Segmenting by Product Design • Of the preceding segmentation tactics, only segmenting by buyer identification actually prohibits some buyers from purchasing at the lowest price. Segmenting by location, time, and purchase quantity give all buyers the option to pay the lowest price if they want it. Marketers use such strategies effectively because they realize that people do not make purchases by evaluating the products alone but by evaluating the entire purchase opportunity. The same narrowly defined product or service may be seen by buyers in different contexts as a substantially different purchase opportunity. A loaf of bread available at a convenience store is not the same purchase opportunity as one available in a crowded supermarket. A movie shown at one o'clock in the afternoon is not the same purchase opportunity as the same film shown in the evening. Segmentation by location, time, and purchase quantity all involve creating different purchase opportunities designed to induce the price-insensitive or higher-cost buyers to purchase willingly at a higher price.

Price Segmenting by Product Bundling • Product bundling is a widely used tactic for segmented pricing, although its rationale often goes unnoticed. Retailers bundle free parking with a purchase in their stores. Grocery stores bundle trading stamps or chances in games with purchase of their groceries. Newspapers with morning and evening editions bundle advertising space in both of them. Restaurants bundle foods into fixed-price dinners, generally a cheaper alternative to the same items served a la carte. Symphony orchestras bundle diverse concerts into season subscription tickets. These are but a small fraction of the goods sold in bundles, but they illustrate the breadth of the practice-from commodities to services, from necessities to entertainment. What makes bundling a successful segmented-pricing tactic? In each case the products bundled together have a particular relationship to one another in their value to different buyer segments.'

Bundling • Optional Bundling - Generally products are not sold in indivisible bundles only. Most firms follow the tactic of optional bundling where products can be bought separately, but the option is available to buy them in a bundle at prices below their cost if bought separately. Optional bundling is more profitable than indivisible bundling whenever some buyers value one of the items in the bundle very highly but value the other less than it costs to produce. For such a customer, the extra revenue the firm would earn from selling the bundle would be less than the extra cost of producing it.

Success Strategies in Channel Management