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Chapter 11 Pricing Issues in Channel Management. Pricing decisions cause more concern of top-level executives than any other marketing mix area because…

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Presentation on theme: "Chapter 11 Pricing Issues in Channel Management. Pricing decisions cause more concern of top-level executives than any other marketing mix area because…"— Presentation transcript:

1 Chapter 11 Pricing Issues in Channel Management

2 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. 11 The Importance of Pricing Objective 1:

3 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. 11 Anatomy of Channel Pricing Structure Objective 2:

4 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. 11 The “Golden Rule” of Channel Pricing

5 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. 11 Influencing Pricing Strategy Objective 3:

6 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 11 Member Reactions Not Always Clear (A Priori)

7 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. 11 Channel Pricing Guidelines Objective 4:

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

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

10 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 Rival Brands Guideline

11 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. 11 Special Arrangements Guideline

12 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. 11 Conventional Norms Guideline

13 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. 11 Variation on Models Guideline

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

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

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

17 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 11 Other Issues in Channel Pricing Objective 6:

18 Given members often view pricing as an area over which they have total control, channel managers… 1.Must rule out any type of coercive power approaches to controlling member pricing policy 2.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. 3.Must, if necessary to possess control, enact “friendly persuasion” 11 Exercising Control in Pricing

19 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. 11 Changing Price Policies

20 Channel managers must be sensitive not to simply “pass” price increases on to the channel. Instead, they should… 1.Consider the long- and short-term implications of such increases versus maintaining current prices. 2.If price increases are necessary, change strategies in other areas to assist in offsetting the effects of such increases. 11 Passing Price Increases on Through Channel

21 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 11 Using Price Incentives in the Channel

22 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.* 11 Gray Marketing Vs. Diverting*


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