Chapter 11

1. Chapter 11 Pricing Issues in Channel Management

2. Objective 1: 11 The Importance of Pricing • Pricing decisions cause more concern of top-level executives than any other marketing mix area because… Pricing is viewed as having the most direct link to the firm’s bottom line.

3. Objective 2: 11 Anatomy of Channel Pricing Structure • All channel participants want a “share of the profits” • Generally, members will only carry those products that offer a GM sufficient to cover costs and generate a sufficient profit.

4. 11 The “Golden Rule” of Channel Pricing It is not enough to base pricing decisions solely on the market, internal cost considerations, and competitive factors. Rather, for those firms using independent channel members, explicit consideration of how pricing decisions affect channel member behavior is an important part of pricing strategy.

5. Objective 3: 11 Influencing Pricing Strategy • Channel managers must… • Determine pricing strategies that will foster or promote channel member cooperation and minimize conflict. • While not always feasible, channel managers must focus on incorporating members’ concerns/needs into future pricing decisions.

6. 11 Member Reactions Not Always Clear (A Priori) • Some possible reactions by members to a “cut” in price include… • May expect the “cut” to increase sales volume and profitability • May be reluctant to deal with product because of possible negative effects on product’s image • May be reluctant to deal with product because of possible negative effects on their own store image • May resent “cut” because of a likely decrease in margins realized • May be concerned about a loss in value on their existing inventory of the product

7. Objective 4: 11 Channel Pricing Guidelines • Why are guidelines necessary? • To help focus more clearly on the channel implications of one’s pricing decisions. • To provide general prescriptions on how to minimize conflict potential and promote cooperation through one’s pricing decisions.

8. 11 Profit Margin Guideline • Guideline #1: Each efficient reseller must obtain unit profit margins in excess of unit operating costs

9. 11 Different Classes of Resellers Guideline • Guideline #2: Each class of reseller margins should vary in rough proportion to the cost of the functions the reseller performs.

10. 11 Rival Brands Guideline • Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line with those charged for comparable rival brands

11. 11 Special Arrangements Guideline • Guideline #4: Special distribution arrangements— variations in functions performed or departures from the usual flow of merchandise—should be accompanied by corresponding variations in financial arrangements.

12. 11 Conventional Norms Guideline • Guideline #5: Margins allowed to any type of reseller must conform to the conventional percentage norms unless a very strong case can be made for departing from the norms.

13. 11 Variation on Models Guideline • Guideline #6: Variations in margins on individual models and styles of a line are permissible and expected. However, they must vary around the conventional margin for the trade.

14. 11 Price Points Guideline • Guideline #7: A price structure should contain offerings at the chief price points, where such price points exist.

15. 11 Product Variations Guideline • Guideline #8: A manufacturer’s price structure must reflect variations in the attractiveness of individual product offerings.

16. Objective 5: 11 Caveat on Guidelines • There is no guarantee on effectiveness • Particular circumstances and situations exist in which these guidelines will not apply or will be irrelevant.

17. Objective 6: 11 Other Issues in Channel Pricing • Exercising control in channel pricing • Changing pricing policies • Passing price increases on through channel • Using price incentives in the channel • Dealing with gray marketing, diverting*and free riding

18. 11 Exercising Control in Pricing • Given members often view pricing as an area over which they have total control, channel managers… • Must rule out any type of coercive power approaches to controlling member pricing policy • Should encroach on the pricing domain of a member only if it believes that it is in its vital, long-term strategic interest to do so. • Must, if necessary to possess control, enact “friendly persuasion”

19. 11 Changing Price Policies • Changes in the channel manager’s pricing policies or related terms of sale are likely to cause reactions among channel members. • Thus, • One must understand that fears of such changes are likely they result of becoming accustomed to the existing strategy, as well as concerns about their strategies being “tied” to those of the channel manager.

20. 11 Passing Price Increases on Through Channel • Channel managers must be sensitive not to simply “pass” price increases on to the channel. Instead, they should… • Consider the long- and short-term implications of such increases versus maintaining current prices. • If price increases are necessary, change strategies in other areas to assist in offsetting the effects of such increases.

21. 11 Using Price Incentives in the Channel • Channel managers may face difficulties in gaining strong retailer acceptance or follow-through on pricing promotions. • Thus, channel managers must… • Make promotions as simple & straightforward as possible • Design price promotion strategies to be at least as attractive to the retailer as they are to the customer

22. 11 Gray Marketing Vs. Diverting* • Diverting* • Occurs when unauthorized members of a channel buy/sell excess merchandise to/from authorized members.* • Gray marketing • Occurs when branded merchandise flows through unauthorized channels that cross national boundaries* • Free riding • Occurs when customers seek product information etc. from full service firms then purchase from a limited service discounter or over the Internet.*