Chapter 11Major Topics for Ch. 111. The Pricing IngredientThe Importance of Pricing2. Major Considerations: Anatomy of Channel Pricing StructureAn Example of Channel Pricing for Guitar String3. Channel Structure and Pricing Issues*3-1. Channel Pricing in Practice*Channel Manager’s RoleSlide 104. Channel Pricing GuidelinesProfit MarginsDifferent Classes of ResellersRival BrandsSpecial ArrangementsConventional Norms in MarginsMargin Variation on ModelsPrice PointsProduct VariationsGuideline Caveat5 & 6: Other Channel Pricing IssuesExercising Control in PricingChanging Price PoliciesPassing Price Increases Through the ChannelUsing Price as Incentives in the Channel*Gray Market & Free Riding*Chapter 11Chapter 11Pricing Issues in Channel Management2Major Topics for Ch. 111. Pricing2. Major Considerations3. Channel Structure and Pricing*4. Channel Pricing Guidelines5. (Manufacturer) Pricing as a Channel Incentive*6. Gray market and free riding problems in marketing channels**31. The Pricing Ingredient•Price: the ultimate measure of value of a product/service.•Valuation: simultaneous appraisal by sellers & buyers for economic and psychological/social worth of market offerings.*The Importance of PricingThe Importance of Pricing1111Pricing decisions cause top-level marketingexecutives more concern than any otherstrategic marketing decision area.Pricing decisions cause top-level marketingexecutives more concern than any otherstrategic marketing decision area.Pricing is viewed as having a more directlink to the firm’s bottom line.11112. Major Considerations:2. Major Considerations:Anatomy of Channel Anatomy of Channel Pricing StructurePricing StructureChannel participants each want a part of the total price sufficient to cover theircosts and provide a desired level of profit.cf) Retail Pricing  Whoelsale PricingChannel participants each want a part of the total price sufficient to cover theircosts and provide a desired level of profit.cf) Retail Pricing  Whoelsale Pricing6An Example of Channel Pricing for Guitar StringManufacturerWholesalerRetailerCustomer$2.50 Manufacturer cost$3.40$5.007.50Wholesale priceRetail priceManufacturer price11113. Channel Structure and Pricing Issues*•Intensity and Pricing  Channel Control Issue•Level and Pricing*  Channel efficiency Issue / Channel control issue•Ownership/function and Pricing  Channel flexibility Issue / Channel control issue11113-1. Channel Pricing in Practice*•Channel Level and Pricing  Affects channel efficiency/channel control issue• When using a Direct Channel: Transfer Pricing issue  Four options • When Using an Indirect Channel: Double or Triple Markup Issue • Market Power and Pricing: Who has more bargaining power?1111Channel Manager’s RoleChannel Manager’s RoleMajor areas of consideration in a manufacturer’s pricing decisionInternalcostconsiderationsChannelconsiderationsCompetitiveconsiderationsTargetmarketconsiderationsChannel manager must focuson the channel considerationsand work to incorporate theminto the firm’s pricing decisions1111Channel Manager’s RoleChannel Manager’s RoleHavechannel members’viewpoints on pricing issues included as an integral part of the manufacturer’s price-making processHavechannel members’viewpoints on pricing issues included as an integral part of the manufacturer’s price-making processSuch action anticipatesand hopefully avoidsproblems that mayarise after pricingdecisions havetaken effectSuch action anticipatesand hopefully avoidsproblems that mayarise after pricingdecisions havetaken effectEx) Rubbermaid versus Wal-Mart4. Channel Pricing Guidelines4. Channel Pricing Guidelines11111. To help those involved in pricing decisions tofocus more clearly on the channel implicationsof their pricing decisions1. To help those involved in pricing decisions tofocus more clearly on the channel implicationsof their pricing decisionsWhy?2. To provide general prescriptions on how to formulate pricing strategies that will help promotechannel member cooperation and minimize conflict2. To provide general prescriptions on how to formulate pricing strategies that will help promotechannel member cooperation and minimize conflict1111Profit MarginsProfit MarginsGuideline #1: Each efficient reseller must obtainunit profit margins in excess of unit operating costs.Guideline #1: Each efficient reseller must obtainunit profit margins in excess of unit operating costs.ORChannel members who believe that the manufacturer is not allowing them sufficient margins are likely to seek out other suppliers or establish and promote their own private brands.Different Classes of ResellersDifferent Classes of Resellers1111Guideline #2: Reseller margins should varyin rough proportion to the cost of the functions thereseller performs.Guideline #2: Reseller margins should varyin rough proportion to the cost of the functions thereseller performs.1. Do channel members hold inventories?2. Do they make purchases in large or small quantities?3. Do they provide repair services?4. Do they extend credit to customers?5. Do they deliver?6. Do they help train the customers’ sales force?1111Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line withthose charged for comparable rival brands.*Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line withthose charged for comparable rival brands.*Channel managers should attempt to weigh any margin differentials between their own and competitive brands in terms of what kind of support their firms offer and what level of support they expect from channel members.•When to Offer Higher Margin than Competitors’ ?•When to Offer Lower Margin than Competitors’ ?Rival BrandsRival Brands1111Guideline #4: Special distribution arrangements should be accompanied by corresponding variations in financial arrangements.Guideline #4: Special distribution arrangements should be accompanied by corresponding variations in financial arrangements.The margin structure should reflect any changes in the usual allocation of distribution tasks between the manufacturer and the channel members.Special ArrangementsSpecial Arrangements1111Guideline #5: Margins allowed to any type of reseller must conform to the conventionalpercentage norms unless a very strong case can be made for departing from the norms.*Guideline #5: Margins allowed to any type of reseller