module 7a

Framework of Pricing The first thing I want to put you to

some terms and terminologies. So, this is a typical price
quality matrix. So, on the x axis you have got the price and
the y axis the quality and price three types - high, medium,
low and same is quality - high, medium, low. So, price high,
quality high, it is called premium strategy. Price high,
quality medium, it is overcharging strategy. By price high
and quality low, it is called rip off strategy. The names are
self explanatory. The work for you is to find out what kind
of products has got, what kind of strategy over here so far
as price quality matrix is concerned. So something like an
Apple, it will be like a premium strategy. High price and
high quality - Apple products. Medium and low, figure it
out. I do not want to tell it out on live channel and do not
want to get into trouble for this. You will be figuring out
price is high, quality is medium and price is high, quality
low. Second, let us go to price medium. Price medium,
quality high. These kind of things are high value strategy.
You can see that in FMCG market, you can say that see that
in the durable market. You can do that in the, even in food
produce. Price medium, quality medium, medium value
strategy. Price medium, quality low, false economic
strategy. And then finally, price low quality, price low quality
high, it is super value strategy. So price, when your quality
is high, you get premium strategy, high value strategy and
super value strategy. Price low and quality is medium, you
get good value strategy. And then price low and quality low,
you say economic strategy. Now, I told you about the
products and all, Apple is probably an universal accepted
one, so lot, not lot of debate on that. But when you start
actually discussing this among your friends or among your
peers and colleagues and all and you start discussing this,
you will find out that there is no clean agreement on each
of these strategies. Can you tell me why? Why there is no
clean agreement on any of this strategy? I have given you
the clue to this right in the beginning of the course.
Marketing Fundamentals
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Rights Reserved. This document has been authored by Prof.

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Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. What is
marketing? Customers. Customers value. So when you are
talking about this price high, medium, low is universally
acceptable. But quality high, medium and low. There is no
universally acceptable definition for quality. So quality is
conformance requirements. So, when the customer is, so
essentially that means that the customer is deciding what is
quality for the customer. So if you're traveling, by flight, so
the kind of water that you are expecting for drinking and
when you are traveling by train, say it is Rajdhani, the kind
of water you expect versus it is passenger train, the kind of
quality of water that you expect versus if you are traveling
by car on road, the kind of the quality of water that you
expect, it differs. So, the point of telling you this is that,
when your customer segment changes, the definition of
quality also changes. So for a premium consumer, probably
sometimes the quality, high quality could be medium, but
for a low end customer, a regular medium quality could be
high. So, the market will depend upon the type of customer,
not really on the type of product. So, when you are doing
this price quality matrix, the way to have a concrete answer
and clarity to your thought process is to also define the
customer group. ACCA, B, C or the premium customer, the
mid range customer, the low end customers. So, create the
customer segmentation first and then go for the price
quality matrix. Then, you get to see that what is high, what
is medium, what is low and it becomes easier for you to
develop the strategy. So let me, let me give you here an
example. All of you must be knowing about the debacle of
Tata Nano. It was conceptualized as a low price car, cheap
car, cheap vehicle. 1 lakh vehicle and it was targeted
towards the large customer who essentially would be riding
a two wheeler for them, Tata Nano was positioned that
those who normally drive or until now they have been
driving two wheelers, now they will be able to afford a car.

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That was the whole idea of it. So, typically it will say it is a
low price and it will be a medium quality strategy. So, it was
targeted to be a good value strategy. For a car when the, at
that time, so Tata Nano is about 10, 15 years old story. So,
at that time the lowest price car was about 3 to 4 lakh and
at that time Nano was available in 1 lakh.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. So, definitely it
is low price. And it is not really the really high premium
quality, but quality was medium. It was acceptable quality.
So it is a good value strategy in this price quality matrix. So
you would expect that such a product should fly off. But
what actually happened? It was a disaster. It was supposed
to be the first vehicle of people who could not afford four
wheelers. On the other hand, what it actually became is the
second or third vehicle of the people who already have one
or two four wheelers. Why do you think people at the lower
end of the market, they did not find value in Nano? I don't
know. What do you, what do you think went wrong there?
You can Google around. Lot of theories are there. Lot of
stories about this are there, but one of the prime reason for
that is it is positioning as a cheap vehicle. It is positioning
as a low priced vehicle. See everybody likes low price, but
nobody likes a cheap vehicle. Nobody likes anything cheap.
You would like to have a bargain. You would like to feel
happy that I managed to get a good quality at a lower
price. But when the conceptualization of the product is that
of it is a 1 lakh vehicle. Anybody who rides a Tata Nano,
everybody knows it is a 1 lakh vehicle. So that guy, the guy
who is, who is supposed to buy Tata Nano now thought. Let
us see if I have a bike and the bike is say 80, 000, 90, 000
rupees, then actually I am riding a good bike. So among the
bike riders, my status is higher. I am not riding a 20, 000 or

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30, 000 scooter. I am riding a 80, 000, 90, 000 bike. But
when I am going for a one lakh car. I am actually at the
lower end because the other end of the car, the lowest until
now was about 4 lakh. So everybody sees that I cannot
afford a 4 lakh car and hence I am riding a 1 lakh car. So in
a way, my financial condition is out there in the open.
Everybody knows about it and the car is 1 lakh car. So, there
must have been some compromises somewhere. Is it safe?
I do not know. So do you see the problem here. The
problem is not with price or quality, the problem is the
target consumer and the way you position the product for
the target consumer. So here it is a, I mean among the
other things, of course, they had to move
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. from Shingur
Nandigram in West Bengal all the way till Gujarat and the
cost of production increased and the time for product
launch that also increased. Those things were there, but it
is a major marketing disaster because it was positioned as
a poor man's vehicle. It is positioned as a one lakh car and
in a way like a cheap vehicle. So, nobody likes a cheap
vehicle. So, obviously, nobody wanted to buy that vehicle
and it went into a different tail spin. So, the purpose of
telling you the story is that when you are looking into price
quality metrics, they themselves do not mean much if you
do not put the context to it and that context is that of the
consumers. If you identify the consumer, fix the target
segment, identify the value proposition and then the price
quality makes sense. Then you, so in other words what I am
talking about here is that price quality is a function of
positioning. So, positioning will lead to product, positioning
will lead to branding, positioning will lead to price,
positioning will lead to quality, positioning will lead to

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 distribution. Everything flows from the segmentation,
targeting and positioning. Is it clear now? So this is the
conceptual idea of price. Of course, everybody knows what
price is. So I am not trying to give any definition or anything
about it. But the whole idea of price over here is that this is
the way how you have to perceive, this is the way how you
have to conceptualize pricing.

This text presents a deep dive into the price-quality matrix and the concept of product
positioning in marketing, emphasizing how critical it is to consider customer segmentation
when developing pricing strategies. Here's a summary and analysis of the key points:

Price-Quality Matrix
The matrix is structured with price on the X-axis and quality on the Y-axis. This creates a
framework for classifying products based on these two attributes.

Price Categories: High, Medium, Low

Quality Categories: High, Medium, Low

Pricing Strategies in the Matrix

1. Premium Strategy: High price and high quality.

2. Overcharging Strategy: High price, medium quality.

3. Rip-off Strategy: High price, low quality.

4. High Value Strategy: Medium price, high quality.

5. Medium Value Strategy: Medium price, medium quality.

6. False Economic Strategy: Medium price, low quality.

7. Super Value Strategy: Low price, high quality.

8. Good Value Strategy: Low price, medium quality.

9. Economic Strategy: Low price, low quality.

Positioning and the Customer's Perspective

While price is easy to categorize (high, medium, or low), quality is more subjective and
varies by customer segment. This is crucial when creating a price-quality matrix. For
example:

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 A premium customer might find medium quality acceptable, whereas a budget-
conscious consumer might perceive medium quality as high.

The definition of quality depends on the customer segment. What one group considers
high quality may be seen as low quality by another group.

Tata Nano Case Study

Tata Nano was conceptualized as a low-price car targeted at people who were
previously riding two-wheelers but could now afford a car. The low price and medium
quality suggested it would be a good value strategy.

However, the positioning of the car as a "cheap vehicle" led to negative perceptions.
People saw it as a cheap option, and this hurt its appeal to the target market. Buyers in
the lower income segment did not want to be seen driving a cheap car, as it signaled
low status.

The target segment's perception of value was misaligned with the product's
positioning. Brand perception played a crucial role in the failure of the Nano,
highlighting the importance of positioning in product success.

Conclusion
The price-quality matrix needs to consider the target customer. The matrix alone,
without customer segmentation and positioning context, does not provide a complete
strategy.

Positioning—which leads to how the product is branded, priced, distributed, and

perceived—is key to the success of the product.

The main takeaway here is that in marketing and pricing strategies, understanding
customer segmentation and perception is just as important as the actual product's price
and quality. Without aligning these elements, even well-priced products can fail to meet
customer expectations.

The Pricing Vocabulry Now, there is an interesting few

terms that will be associated with pricing which I think you
need to know about it. So there is something the product
price which will be based on the cost of goods sold. So what
will be the cost of goods sold is the total cost of
manufacturing. So if a product is, if, if toothpaste or soap or
anything that is manufactured. So, what is the value? What

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is the cost of a bar of soap? What is the cost of a bottle of
Coca Cola? So, the cost of a bottle of Coca Cola is the
manufacturing cost is 1 rupee. So, cost of, cost of goods
sold over here, probably it will be 1. 5, 1 rupee 50 paisa,
because it has to come from the, it has to be packaged, it
has to be put in a bottle and then it has to reach the
distribution network and retail. So total cost will be say 1. 5,
1 rupee 50 paisa. So the product price typically will be more
than this. And what will be a bottle, it will be about say 10
rupees. So product price will depend upon on one side the
cost of goods sold. And on the other side, it is the perceived
value. What is the perceived value over here? The perceived
value is what the consumers think the price of the product
is. The price of the value, the value of the product is. Now
what kind of value does the Coca Cola bottle give? We
discuss Coca Cola quite often in the class. So, it depends
upon the association with the events, association with the
activities, celebrity endorsements. So, it is the celebrities,
they provide value to the product. So, if it is promoted by
Aamir Khan, then must be a good product. If it is promoted
by Salman Khan, again it is a good product. If it is
associated with the festivals, it must be a good product. So,
the marketing promotions that increase the perceived
value of any product. So, even though the cost of
manufacturing is 1 rupees 50 paisa and the product is
actually sold at 10 rupees, you think that you are getting a
value over here because of the marketing promotions and
the campaigns and the positioning, you think that this must
be about 20 rupees. So, which means you think that there is
a value of the product that you are getting. So, the
consumer's incentive is to purchase the product for that.
So, so consumers will purchase the
Marketing Fundamentals
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Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
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be reproduced, or stored in a retrieval system or
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without the prior permission of the author. product when
the pursued value is more than the product price. If the
pursued value is less than the product price, then nobody
will be interested to buy the product. They will say that it is
a rip off strategy. The quality is low and the price is high.
And the firm's incentive in pricing is that price should be
above the cost of goods sold, so that you are actually
covering the cost of manufacturing over here. And the
distribution and all. So whatever investment you are
getting into the, you have, you have, you have whatever
you have invested in the product to get it to the customer,
you are covering that. So again, summarizing, cost of goods
sold, then price, product price, and then perceived value
price. The perceived value price is the customer's incentive
to buy the product. And marketer should put an effort to
create the pursuit value higher than the product price. And
the product price has to be most cases I cannot say has to
be product cases product price in most cases is above the
cost of goods sold. If it is not then actually you are losing
money in this. Can you think of any guys any any business
where the, the cost of goods sold is more than the product
price and strategy involves actively losing money, but still
they are doing it. Can you think of any? Most of the online
players. Most of the online players including the bigger
ones like the Amazons, Flipkarts, Myntras. And the food and
grocery kind of guys like Big Basket, Swiggy, Instamart or
the other quick commerce guys, Blinkit. All those guys, they
are actually as of now, they are actually not making money
in the whole business. So, their objective is over here to
acquire customers. Amazon has been profitable now for
the last few years, not, not net profit, but operational profit,
but other, other major players, they are still looking at
acquiring customers. So they, every time they are giving a
discount, every time they are going on a sale and all that
thing, they are increasing the sales volume, that they are
acquiring more customers, but they are not really making a
profit out of it. Because in most cases, I cannot say in all
times, but in most cases the cost of goods sold is below the
product price. So obviously the customer gets a lot of value
out of it, but the company is not getting the benefit. The
overall idea is that over a period of time when you have
acquired

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Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. enough
number of customers,then you will be able to increase the
price or the scale, the economy of scale will offset the lower
price. That is the whole idea with which the business is
going on. The point of telling you the story is that it is not
always the case that cost of goods sold, this is the, what I
am telling you is the ideal scenario. But it is not always the
case that cost of goods sold will be below the product price
and perceived value will be above the product price. There
is a another concept in pricing which is called true
economic value. True economic value is related with the
alternatives available. So, in a way you can call it the
opportunity cost or the lifetime value something related to
that it is not exactly, but something like that. So, true
economic value is the cost of next best alternative plus the
value of the performance differential. If the buyer has
several available alternatives to choose from, so any
assessment of true economic value has to be relative to the
next best alternative. So, someone traveling by air to say
from Bangalore to Delhi, now obviously you are paying a
higher price and instead if you travel by train, you will be,
your cost will be lower, your price will be lower. But, the
time taken, so Bangalore to Delhi probably will be 36 hours
or 40 hours by train whereas in flight it is 2 hours. Now
when you are looking at true economic value of it, you are
looking at the cost of next best alternative which is going
by train and the differential. That is the time, how much
time you are spending in train versus how much time you
are spending in flight. So, if you are just going for no
specific reason, say for vacation or it does not matter to you
that whether you reach in 1 day or 3 days, then probably
you will find more value in traveling by train. But if you have

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 got a meeting to attend in Bangalore and then go to Delhi
and attend another meeting over there, then your time is
quite important. So, at that time the true economic value of
travelling by air will be more in comparison to the true
economic value of travelling by train. So, the concept of
true economic value is essentially to compare against the
alternative and this is and prove to the customer, position
to the customer that this is how you are saving your time or
saving your money, overall saving your resources.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. So, the true
economic value ideally should be above the perceived
value. So, then only you will be able to show it to the
customer that see whenever you are using say train
actually you are saving a lot. So, these are few of the
concepts that we have discussed in pricing. Next, I am
going to talk about the price setting policy. How do you go
about setting the price?

The text provides a detailed exploration of several key concepts related to pricing strategies
and how businesses manage pricing decisions. Here's a breakdown of the key terms and
ideas:

Key Pricing Concepts:

1. Cost of Goods Sold (COGS):

This refers to the total cost of manufacturing a product. For example, if a bottle of
Coca-Cola costs 1.5 rupees to produce, this is the COGS. This cost includes the raw
materials, packaging, and other manufacturing costs.

2. Product Price:

The final selling price of the product is typically higher than the COGS. In the case
of Coca-Cola, the product price could be 10 rupees, which is the amount the

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 consumer pays for the product.

3. Perceived Value:

This is the value that the customer attributes to the product, which can be
influenced by marketing efforts such as advertisements, celebrity endorsements,
and associations with certain events or experiences.

For example, Coca-Cola’s perceived value may be higher due to these promotional
activities, making consumers feel the product is worth more than the actual
manufacturing cost.

4. Price Sensitivity and Incentives:

Consumers are motivated to buy when they perceive the value of the product to be
higher than the price. If consumers believe the value of the product is lower than
the price, they will not purchase it and may consider the pricing strategy a rip-off.

5. Ideal Pricing Scenario:

The ideal scenario for a business is when the product price is above the cost of
goods sold (COGS), ensuring that the company covers its manufacturing costs and
other expenses, while making a profit.

6. Business Strategy Involving Losses (Customer Acquisition):

Some businesses, especially in the online retail sector (like Amazon, Flipkart, Big
Basket, etc.), may sell products at a loss initially. This strategy involves customer
acquisition rather than short-term profits. By offering discounts and promotions,
these companies aim to increase sales volume and attract more customers.

The long-term goal is that through economies of scale (increased production and
sales volume) or by raising prices after customer acquisition, the business will
eventually turn a profit.

7. True Economic Value (TEV):

True Economic Value refers to what the product is worth relative to alternatives.
This concept is linked to the opportunity cost or the value derived from using an
alternative option. For instance, if someone chooses to travel by air instead of train,
the true economic value would consider the time saved by flying versus the money
saved by traveling by train.

The TEV can be used to show customers how a product saves them more resources
(time, money, effort) than an alternative.

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 8. True Economic Value vs. Perceived Value:

Ideally, the true economic value should be higher than the perceived value, as this
helps convince customers that they are making the right decision by choosing your
product. For example, when flying instead of taking the train, the TEV might be
higher due to the time savings, even if the perceived value is simply based on price.

Example of Amazon and Other Online Platforms:

Online businesses like Amazon, Flipkart, and food delivery services (e.g., Big Basket,
Swiggy) often operate at a loss in the short term. Their main objective is not immediate
profit but customer acquisition.

They use discounts and promotions to drive up sales volume. The goal is to build a loyal
customer base and then leverage that customer acquisition over time to either increase
prices or benefit from economies of scale, eventually leading to profitability.

Summary:
The core idea is that pricing is not just about setting a price above the cost of goods sold
(COGS). It involves considering the perceived value of the product, which is heavily
influenced by marketing efforts, branding, and customer perceptions. Businesses may
sometimes price products below COGS for strategic purposes like customer acquisition, but
in the long run, they need to ensure that their true economic value justifies the perceived
price, leading to sustainable profitability.

The next logical step is to look into the price-setting policy, which will outline how
companies determine the actual price of their products based on these principles.

Price Setting Policy So, now I am going to talk to you about

the price setting policy. How do you go about setting the
price? This is the most important thing in pricing. So, I will
follow the same template actually when pricing,
distribution and promotion, the policy are more or less the
same pattern it will follow. What it is? Selecting the pricing
objective. Is it a new thing for you? Yeah. So, keep this in
mind, you have an organizational objective, you have an
marketing objective and then you will be having a pricing
objective. So, organization objective say it will be ROI,
return on investment or profit or market share, any of
these things could be organizational objective. Now, if it is
say market share. I want to achieve 5 percent market share

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or 10 percent market share in 1 year. If that is the
organizational objective, then what will be the marketing
objective? So, marketing objective means you will have to
sell that many number of units to have the market share. If
the total market is say 100 units, total market consists of
100 units. So, if you want to have 10 percent market share,
then you would be, you should be able to sell 10 units to
the target group, any product. So I am just giving a
hypothetical example. So if the organizational objective is
10 percent market share, then the marketing objective
becomes that I should be able to sell 10 units of the
product to the target group. So, we, we have discussed, X
ray machines and city scanners and all. So, let us say that
city scanner machine, 10 city scanner machines I want to
sell by the end of the year. So, that is my marketing
objective. Then it comes down to what should be the
pricing objective here. So, if I consider, if I consider the
same city scanner machine over here and I want to have 10
percent market share that is I want to sell 10. Last year I
sold 3, 3 machines and this year I want to sell 10 machines.
So that means I want to sell 7 more. So the pricing objective
will be what? Obviously, you are not looking at, branding,
you are not looking at, creating an image for the brand. You
are looking at more of capturing the market. So, the pricing
objective will be penetration over here.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. You will be
looking at reducing the price in order to capture the
market. On the other hand, if last year you have sold 8, this
year you want to sell 10, so you are not so desperate. So,
now you are looking at defending it, you are looking at
creating a brand. So, now you are not really looking at
penetration pricing, you are more looking at skimming

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pricing, you are more looking at defending the brand or
even building the brand. So, you want to say you are high
quality, so will not reduce the price, if you are interested for
higher quality product you will come. Now, let us change
the circumstance. Let us go to soap. You are looking at the
total market consists of 1 lakh soaps. You are looking at 10
percent market share. Last year, 1 lakh soap bars were sold,
even 10 percent market share. So, which means you are
looking at 10,000 soaps. So, 10,000 soaps. Last year you
sold 5,000 soaps. So you want to defend, you want to still
sell those 5,000 soaps that you sold last year plus you want
to sell 5,000 more. So what will be the pricing objective?
Only pricing probably will not work here along with price
will probably looking at promotion also. We are looking at
distribution also, but the pricing objective could be here
that I want to reduce the price. I want to reduce the price
and reach out to a larger customer base. So, the pricing
objective is growth, capturing, entering into more market
territories. On the other hand, if last year all you have
already sold 8000, 9000, soap and this year you are looking
at 10, 000 soap, in real life in organization that will never
happen. If you have sold 9, 000 this time they will put it to
29, 000. You will never get like 9, 000 to 10, 000 take it from
me. So say 9, 000 to 10, 000 then you are more looking at
building the brand. Also what we discussed in Santoor, if
you recall in the last stage of Santoor that we discussed
Santoor as entering into premium segment. So, when
Santoor was entering into premium segment over there,
honey and apricot or glycerin moisturizer soap, what do
you think the objective will be? It is not market share, it is
not growth, it is awareness, it is brand building. Because,
Santoor has been associated with, sandalwood and
turmeric forever. But, now that it is getting into the
premium segment which customers have not associated
with until now. So, then you are looking at more promotion,
you are looking at premium distribution network and you
are looking at defending the price.
Marketing Fundamentals
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Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online

14/53
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. So, you are not
really looking at reducing the price. So, the whole idea of
telling you this is even a simple thing like pricing objective
makes a big difference. Your pricing objective for growth,
your pricing objective as market share, your pricing
objective as defending the brand or creating a brand or
your pricing objective that it should be comparable to the
competitor. These are very, very different pricing objectives.
So, the pricing objectives could be survival in which case.
Your price will be dependent on whatever is the market
lowest price and you would be charging around the same
because you want to also survive in the market profit. So it
will come from the return on investment or how much cost
you have incurred and based on that you will set the price
or revenue increasing the maximum revenue in which case
it will depend upon growth. How many customers, how
maximum number of customer that you can reach out to,
you could reduce the price and then market skimming. So
market skimming would be that when you are looking into
charging higher price because you want to build a brand or
you want to create a brand or you want to defend a brand,
defend the quality. So those kind of objectives that could be
there. The next thing in price setting policy is to determine
the demand and estimate the cost. So determine the
demand, let me first tell you all the steps, then I will
individually go to each one of them and explain. Any pricing
objective I have already explained to you. Step 1, pricing
objective. Step 2, demand determine the demand. How
many customers are willing to pay for it? Then estimate the
cost. How much money that you have spent? How much
resources you have spent for this? Then analyze the
competitor's cost, price and offers. So basically, if you
remember the true economic value, those are the things
that is coming up over here that how does your, costs
compare with the competitor's cost. And then finally, select
a pricing method, there are multiple pricing methods are
there. Select a pricing method and then choose a final

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price. So let me explain each of the things. The first one
already I have explained to you that is what should be the
pricing objective and I also told you that how this compare
with the overall organizational objective and the marketing
objective.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. Now you go to
demand. So demand I, I think. I have told you in the first
week when I was talking about the definition of marketing,
the demand is need or desire into ability into willingness.
So, demand is how many people, how many consumers
have the need or desire for the product, then out of that
how many have the financial ability to pay for the product,
and then out of that how many of them are willing to spend
that kind of money. In order to buy the product or service
under consideration. So that is the demand. And I have
given you that Hall Davidson example in which you see that
how the demand gradually reduces, starting from the need
to the ability to, the willingness, it's a funnel. When you're
looking at determination of the demand, there are two
things are important over here. One, you have to estimate
the demand. Depending upon the funnel and second, you
have to keep it in mind the sensitivity of the customers. So,
sometimes when the customers are too sensitive, at that
time, a small change in price leads to a huge change in the
customer demand. So, this is a case of the price being
highly elastic. And then there is sometime customers say it
is a luxury kind of products. So, here the customers are not
really concerned about price hike. Even when actually price
increases, they are actually okay to buy it because that is a
status symbol. So, this is the kind of thing or it is the
essential commodities, rice, you will still have to buy.
Potatoes, you will still have to buy. So, in which case it does

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not matter whatever is the price still you will buy. So, at a
very high end at a very low end there will be no significant
change, but in between there could be price sensitivity. And
this is something you have to keep it in mind while
determining the demand. Then the next thing becomes the
estimation of cost. So, what is the, what are the different
costs over here? There are some fixed costs which are
called otherwise overheads. The rentals, the installation,
the salaries, the interest on loans, these kind of things are
fixed. Then there are variable costs. So what are the
variable costs? The raw material, the fuel, wage, workers
wage and salary. So these kind of things are variable costs.
So total cost is the sum of the fixed cost and variable cost.
So here you have to understand
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. this because
the fixed cost anyway you have to incur and variable cost
depends upon the volume of production and the volume of
distribution. So while you are estimating the demand, you
also have to estimate the cost that how much definitely you
are incurring and how much you are incurring along with
the volume and this will help you to identify what is the cost
of goods sold. So you have done the demand, you have
done the cost and then the next thing is the competition.
So here there is actually nothing significant for me to say,
but you have to identify that your fixed cost, your variable
cost, your total cost and how does that compare with the
fixed cost and variable cost and total cost of the competitor.
So, if the competitor is a market leader then, most likely he
will have a scale, scale, large scale of production and large
customer base. So, when the customer, when he has got
more customers, more distribution channel and larger
customer base, larger manufacturing capacity, then per

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 unit cost also will reduce because the economy of scale will
be there. And for a new player, it will be very, very difficult
to match up to that kind of economy of scale. So, your per
unit cost will always be more than that of your competitor,
if the competitor is a leader. But otherwise, you can think if
you have a technological advantage, you have some latest
technology, latest manufacturing process. Then, you would
be able to actually reduce the cost significantly and that
you will be having a cost advantage over the competitor,
both the ways it works. So, you will have to figure it out that
what is your demand, your cost and what is the cost of the
competitor, then you go to the selecting the pricing
method. So, after discussing all these things, selection of a
pricing method is kind of intuitive. So, So, you can select
based on the ceiling that is the total how much customer is
willing to pay kind of perceived value which I spoke earlier
and the floor which is the minimum you can afford that is
the cost of goods sold. So, your price will be between the
cost of goods sold to the perceived value. And if you are
using true economic value, then the true economic value.

Price Setting Policy

Setting a price involves several steps and considerations to ensure it aligns with both
organizational goals and market realities. Here is a breakdown of the key points discussed in
the price-setting policy:

1. Selecting the Pricing Objective:

Organizational Objective: This could include goals like Return on Investment (ROI),
profit, or market share.

Marketing Objective: This refers to specific sales targets. For example, if the
organizational objective is to capture 10% market share, the marketing objective
would be to sell a certain number of units to achieve that share.

Pricing Objective: This ties directly into the sales targets and may differ depending
on the market context. If a company aims to capture market share (e.g., sell 10 city
scanners), it may use penetration pricing, which reduces the price to drive higher
sales. However, if sales are already high, the pricing objective may shift towards
defending the brand or skimming pricing, which focuses on maintaining or
improving the brand image by charging higher prices.

2. Determine Demand:

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 Need, Ability, and Willingness: Demand is driven by three factors:

Need/Desire: Consumers must want the product.

Ability: Consumers need the financial means to buy the product.

Willingness: Consumers must be willing to spend that money.

Price Sensitivity: Demand can be influenced by how sensitive customers are to price
changes. For example, essential goods might have inelastic demand, where price
changes do not significantly affect demand. In contrast, luxury or non-essential
products may be more sensitive to price fluctuations.

3. Estimate the Cost:

Fixed Costs: These are overheads like rent, salaries, and loan interest, which do not
change with the volume of production.

Variable Costs: These depend on the volume, including raw materials, wages for
labor, and fuel. Understanding the balance between fixed and variable costs helps
determine the total cost of goods sold.

4. Analyze Competitors' Costs, Prices, and Offers:

Understanding competitors’ pricing strategies is crucial. For instance, a market

leader might have a cost advantage due to economies of scale, which can reduce
their per-unit costs. New entrants or smaller firms may face higher per-unit costs,
making it harder to compete on price alone.

5. Select a Pricing Method:

Ceiling (Perceived Value): The maximum price customers are willing to pay, driven
by factors like brand perception, quality, and customer value.

Floor (Cost of Goods Sold): The minimum price that covers the cost of production.
Pricing should be between these two boundaries, with the aim of capturing value
without underpricing the product.

True Economic Value: This considers the alternatives available to the customer and
compares the perceived value of your product with the competition’s product. It
involves showcasing how the product’s benefits (e.g., time saved, convenience)
justify a higher price point.

Conclusion

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The price-setting policy is a critical process that combines several factors: pricing objectives,
demand estimation, cost analysis, and competitor research. By understanding these
elements, companies can select the most effective pricing strategy that supports their
broader organizational and marketing goals.

Methods of Pricing So, what are the different pricing

methods? Markup pricing and target return pricing. These
things are based on the floor. So, I will explain to you. But
markup and target return are based on the floor. Then
perceived value and value pricing. This is based on this.
Perceived value actually based on the selling. Value pricing
and going rate pricing is kind of related with the
competitor. And then sealed bid pricing which is more of a
B2B pricing method. And psychological pricing is an
interesting thing, 199.99 is much less than 200. That kind of
attitude of the consumers which is used in psychological
pricing. So, let me explain each of these things in details.
So, the first one over here is the markup pricing and the
target return pricing. The markup or target return pricing
there is formula that is there. So, target return price is the
unit cost of production or the cost of goods sold plus the
desired return whatever you are expecting 2 percent, 3
percent, 5 percent. The percentage of desired return then
into invested capital how much money you have put into it
by total unit of sales. So, when you are estimating it in the
beginning, you are setting up the price at that time it will be
dependent on your estimation of the total demand that the
reason why the demand is very important over here.
Because unit sales, how many units you are selling, that
depends upon your estimation of the demand. So, typically
you are not deciding price after the product has been there
in market for a year. When your product is there in the
market, before that you have to set up the price. So, at a
particular price point, the product will be made available in
the market. So, what is the idea over here? The idea over
here is you have to estimate unit cost will be available with
you, that is the cost of goods sold. And then unit sales is
something that you have to estimate. And then the desired
return is the target return, how much return you are
expecting and then the total capital that is the fixed cost
that you have invested into it. So that is the target return
price, which is essentially a formula, which you are using to,

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from the, based on the floor. Your floor is the unit cost and
the invested capital. And then markup
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. price is again
one more model in which you are looking at the floor that
is cost plus markup. So, this is typically is done in the retail
space, where in the initial phase a new fashion comes to a
retail store, at that time they will be charging a markup,
which is just to show that this is the latest fashion. And then
when this goes to the last phase of the fashion cycle at that
time the new stock is again expected and the old stock is
not yet finished. Then you put a markdown over there to
reduce the cost and clear the inventory. So this is one of the
simplest explanation of markup. Markup is used in different
other ways also at different other places. So markup price
essentially means cost. Cost of goods sold plus the
percentage of the markup, whatever markup you are
expecting. So, these two are the pricing which is based on
the floor. Then you are looking at pricing based on the
selling. So, one of the thing you have to keep it in mind
here that the target return or the markup pricing do not
inherently take the market behavior or the consumer needs
and wants into account. So, the result is the pricing strategy
is based on your desired value, your from the product, but
the perceived value or the customer expectation is not
taken into consideration. So, if you have, a mark, a brand
value already there in the market and if it is a kind of
product which already have acceptance in the market, you
can decide to increase the price, set the price in based on
the seal floor. But if you are looking at entering into the
market in the beginning, at that time maybe you will be
more concerned about the how much customers are willing
to pay for this. But that is purely based on the way you are

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going to position the product in the market and what is the
pricing objective here. The third type of pricing is the
perceived value pricing. Here the price is based on the
perceived value of the customer. The focus is on buyer's
perception of the value, not seller's cost. The other element
of the marketing mix that is used to create value
proposition, over the year. So, it could be product, it could
be distribution, it could be promotion. All these things will
be used to create the value proposition. So, if it is sold
through exclusive retail outlets, then there is an increased
value. If it is sold in exclusive platforms for a very short
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. period of time,
then there is an increased value. If the promotion is
through celebrities and promotion is talking about the
exclusivity, then the perceived value goes up. And the vice
versa, the pursuit value could go down. So DuPont is a
major practitioner of this model. Caterpillar is a major
practitioner of this model. So Caterpillar, I will give you an
example, Caterpillar tractors, they charge 100,000 dollar in
comparison to the competitors price of 90,000 dollar. So
what they say is that, I mean the logic which they speak
about in the promotion, the 90,000 is the tractor price
which is equivalent to the competitor, 7,000 dollar is more is
the premium for superior durability, 6,000 is premium for
superior reliability, 5,000 is the premium for superior
service, 2,000 is the premium for longer warranty on parts
and 10,000 is the discount. So nine (90,000) plus
seven(7000). That is 97 plus six that is 103, then five. So
totally it is $110,000 if you put the logic of Caterpillar. So
totally the price of Caterpillar tractor, what should have
been is $110,000. But they charge 100,000. So what they
say is that we are actually giving you a discount of 10,000

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even though they are charging 10,000 more than the
competitor. But this has to be communicated to the target
group. This is something that will not happen
automatically. If you do not say anything and just price it as
one is at 100,000 and one is at 90,000 then 90,000 is
cheaper and people will go for it. So, this thing of superior
durability, superior reliability, superior service, better
warranty, this thing have to be communicated and this has
to be communicated through the product design, through
the promotion and through the distribution network trade,
through all these things this message has to be
communicated. Next value pricing. Value pricing is fairly
low price for a high quality offering. Logic is that price
should represent high value offered to the consumer.
Computer companies charge lower price for the base
model, but then advanced one. Even Walmart, the everyday
low price that is also one example of value pricing. There
are other guys which are looking at like Aldi and Lidl, which
are German retailers, deep discount retailers. They believe
in only value pricing, the lower price products. And even
when
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. we have our lot
of online players, they do this. Independence Day sales,
then Republic Day sales and then some festival, Holi, Diwali
sales and all. And then the prices are at much lower price in
comparison to the actual MRP. So then this is also an
example of value pricing. The objective of value pricing over
here is that you are going to have a lot of sales during this
period. So you will be having a lot of customers. So the
volume will upset the price. So, the cost that you are
incurring by reducing the price will be upset by increasing
the volume of the production. So, this is essentially the idea

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of value pricing. Sometimes it works, sometimes it does
not. Then we are going to talk about the pricing which are
exclusively based on the competition. So the advantage
over here is that you actually do not have to do anything
different. If your competitors are charging certain price,
then they must have thought about it. They must have
analyzed it and they have understood the market. And if
they are charging something, then that probably is what
the market is expecting. The risk is that It could be leading
to a price war. You reduce the price, your competitor reduce
the price and the story continues and at the end nobody is
actually the victor in any price war. So the two type of
pricing which are purely based on competition, one is going
rate pricing and one is sealed bid pricing. Going rate is in
B2C market and sealed bid is in B2B market. So, going rate
is farms based their price on purely based on competitor
pricing. So you may charge same, your benchmark is the
same as the competitor's price. Then you may reduce it a
little, increase it a little and give some logic to it that why
have you charged the same or more or less. But your
benchmark is that of the competitor, the major competitor
in this case. So in typical oligopolistic markets, farm sell
commodities at the same price. And the small followers and
the other followers, they follow the leaders. So it is also
called a kind of collusion, collusive oligopoly. They charge,
change the price when the leader changes. So one person
does it and others follow the suit. So you do not have the,
the majority of the market do not have the power to
change the price on their own, even though the cost
changes
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. or distribution
changes, logistics and supply chain changes, you still would

24/53
not be able to. So, this is typically what we call the going
rate pricing. And the B2B price which is called sealed bid,
firms submit sealed bids for the jobs to be done, whatever
they want to bid for. It could be building a hospital, it could
be buying a CT scanner, it could be for consumables like
papers or computers or laptops, anything like that. It could
be, it could be even tables and chairs which are used for
hospitals or educational institutions like IIMB and all. So,
here, firms base their price based on the expectation of the
competitor's price rather than their own cost or market
demand. But then here you, so you expect that your
competitor to bid this much and you want to bid below
that. Again, it is kind of market intelligence and probably
little bit of guesswork or experience. Typically, nobody bids
below the cost, but yeah, I mean, that is the way how the
sealed bid pricing happens. In case of government tenders
and all, I told you earlier also, it happens in two stages. One
is a technical bid and then it is a financial bid. So, technical
bid, those who qualify, then they qualify for financial bid
and financial bid the lowest priced one, the lowest bid one,
they win the race. So it is called L1. In some other corporate
sectors and all, they give weightages. So maybe 70, 30 or
80, 20 or 50, 50, both the financial and technical bidding. So
this is essentially the fact about sealed bid. And finally, the
psychological pricing. Few interesting facts over, over there,
the odd pricing, those who are ending in 0, price ends in 0,
means it is a status symbol, price ends in 5, 8 or 9, regular
price, price ending in 3 or 7, it is called discount pricing, I
mean that is the psychological association with the pricing.
The other thing is a, which was kind of immortalized by
Bata, Bata the shoe company. I, today, nowadays they do
not do that. In my childhood days they used to do it. There
are, there, the pricing always used to be like 199.95 or
295.99. So it is always closer towards 300 but not 300. And
the consumer psychology is 187. 63 is also equal to 100
point 100 and something 199.99 is also equivalent to 100
something. So, you still think it is in the 100 range, but the
moment it becomes 200, oh it is 200. So, psychologically
there is a difference between, price 100 to or 900 versus
the whole numbers like 200 or 1000 or 1500.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All

25/53
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. So, people do
think like that. There is also one type of psychological
pricing. Then there is another type of pricing which is called
promotional pricing. So, the promotional pricing there are
something called, there is something an interesting
concept called loss leader pricing. So, normally it is adopted
by the retail stores, the department stores or supermarkets
and all to increase their sales, footfall rate and conversion
rate. So, price of well known brands reduced with the hope
that this will attract higher footfall and then the higher
volume will compensate for the lower margins. So, that you
have got about. 3,000 SKUs stock keeping units in a store
out of that for 200 items you reduce it below the price.
These are the well known brands using loss leader pricing.
Now for those reasons people will come to the store, but it
is not that they are only going to buy those. They are going
to buy other items also which are not in a promotional
pricing. So, they will still you will still make money by the
increased footfall and increased conversion rate. But
typically the manufacturers and brands they oppose such a
move because that leads to brand dilution. They think of it,
it is somebody is selling luggage carriers like Samsonite
which is the market leader and then you sell it at 50 percent
of its price. Then customers are happy, but the brand image
if this is what regularly happening, what is wrong with
Samsonite? Why they are selling at 50 percent of the price?
Then suddenly the brand value of Samsonite over a period
of time starts reducing. So obviously it is the natural
expectation that Samsonite will oppose such a move. Then
there are other promotional pricing like special event
pricing, the pricing during festival seasons or any other
major events I told you earlier. And this is not only the
customer side pricing, it could be also the trade discounts.
So the manufacturers they provide discounts to the

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distributors, dealers, wholesalers, retailers in order to
increase the sales. So they will push for those brands which
has got higher discount in that. You can get cash rebates
and all. But these are all short term benefits. This is not a
long term strategy by which you can increase the market
share or growth. This is a short term strategy to increase
the footfall, create awareness, get a customer group, let
them give feedback on the social media. More and more
people will know about it. This kind of things is the
objective of this.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. Some other
promotional pricing is also that it is again for the trade
which is the low interest or no interest financing. So instead
of offering cash discounts, the trade is offered financial
schemes and for their increase of business or for their
increasing of logistic and supply chain support or
warehouse support. For that any kind of financial
requirement that they have the company or the brand they
could provide it. This is also one way of promotional
pricing, and also it leads to building of trust. It will become
a good differentiator in the long run. And one of the,
another and a very simpler promotional pricing which
many manufacturers, brands, as well as retailers and
distributors, they do the longer payment terms. So, you do
a EMI scheme. Instead of looking for immediate payment
or payment in 20 days or 30 days, you say that you give it in
installments over 2 year period of time. That also is a kind
of promotional pricing. Warranties or service contracts, that
also could be considered as promotional pricing longer
warranty, low cost warranty. After sales service, annual
maintenance and many times you would have observed
that if you are buying some white goods like TV or fridge or

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 something. So, the company would be giving you a
warranty of 2 years and then at that time if you want to buy
it from the retail store something like a Croma or Reliance
retail or something they would give the another 5 years of
warranty at a very small price. So, this is also a kind of
promotional pricing, because if you are buying it along with
the brand, along with the purchase, then you get a big
benefit out of it. Later on that costs higher. These are non-
cash benefits, but that does stimulate the sales and create
a good image. Then the psychological discounting, you set
higher price and then offer a discount. So, then customers
think that it is good value, I am getting a good bargain for
this. So, the discounted pricing could be in terms of
quantity, it could be in terms of cash, you are giving a cash
back guarantee. It could be the seasonal discounting, it
could be the trade discounting or it could be the sale that
happens from time to time.

You’ve shared a thorough overview of various pricing methods. Let's break down and
summarize the main concepts you discussed:

1. Markup Pricing and Target Return Pricing (Floor-Based):

Markup Pricing: This method adds a percentage markup to the cost of production. It’s
common in retail, especially for fashion items. When a new product is introduced, a
higher price (markup) is set to signify its newness or exclusivity. As the product moves
through its lifecycle and newer products are introduced, discounts (markdowns) may be
used to clear old stock.

Target Return Pricing: This is a more calculated approach where the price is set based
on the cost of goods sold plus the desired return on investment (ROI). This method
requires estimating unit sales and demand to set a price that covers costs and yields a
target return.

2. Perceived Value Pricing (Selling-Based):

This pricing method focuses on the customer’s perception of the product’s value, not the
seller’s cost. It considers how product features, exclusivity, distribution, and promotion
affect consumer value perception. Brands like Caterpillar use this approach by justifying
a premium price with superior product qualities (durability, reliability, service) and
marketing these attributes to the customer.

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3. Value Pricing:
This method offers products at lower prices for high quality. It's meant to represent high
value at a lower price, benefiting both the consumer and the company. Walmart and
other discount retailers like Aldi use this model to offer everyday low prices to drive
volume.

4. Competitor-Based Pricing:
Going Rate Pricing: Firms set prices based on the prices of competitors. In oligopolistic
markets, this could lead to price collusion, where businesses follow the pricing actions of
the market leader.

Sealed Bid Pricing: Common in B2B markets, this involves companies bidding for
contracts or jobs, such as government tenders. Firms set their bids based on the
expected pricing of competitors, often aiming to undercut them without going below
cost.

5. Psychological Pricing:
This strategy involves pricing products just below a round number to make them appear
more affordable. For example, $199.99 seems significantly cheaper than $200. It’s rooted
in consumer psychology and often used in retail to influence buying behavior. Another
form of psychological pricing includes the use of price endings like 99 or 95 to create the
perception of a deal.

6. Promotional Pricing:
Loss Leader Pricing: Retailers sell popular products at a loss to attract customers to
their store, hoping they will purchase other items that are more profitable. This is often
used in supermarkets and department stores.

Seasonal and Event-Based Pricing: Prices are reduced during specific events like
holidays or sales seasons (e.g., Diwali, Independence Day sales) to boost sales volume.

Trade Discounts and Financing Options: Manufacturers may offer discounts or financial
terms to distributors or retailers to push certain products, helping increase sales and
create goodwill.

7. Additional Promotional Pricing Methods:

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 Installment Plans or EMI Schemes: Offering extended payment terms or finance
options to make purchases more affordable.

Warranties and Service Contracts: Offering extended warranties or service contracts as

an additional selling point to stimulate sales.

Psychological Discounting: Setting a high initial price and then offering discounts to
make customers feel they are getting a better deal.

These pricing strategies each have specific contexts and advantages, often influenced by
market conditions, competition, and consumer psychology.

Price Discrimination The last thing that I want to talk to you

about in pricing is the price discrimination. So selling
products to different customers at different price, same
product as the customer changes, the price change. If that
happens, then this is called price discrimination. Typically
when you see that for kids and elders, that could be a
different one. Customer segment pricing, the different
rates based on the age group or gender, there is a different
pricing. Even if you go to movie halls, depending upon
where do you seat, where is your seat based on that the
pricing is different. Product form pricing, so different
versions of the same product are priced differently. But
they are not proportionate to their cost. For example, if you
are looking at mineral water, so the mineral water in,
airports, they are charged differently in comparison to
mineral water in regular convenience stores or in railway
stations and all. Same thing goes for the other food
produced in chocolates and all that. The price is based on
the place where it is sold. Channel pricing, so different
channels, if it is a company's own channel, then price could
be different. If it is from a multi brand outlet, the price
could be different. So this is also a case of differential price
discrimination based on channel pricing. And location
based, which I already told you that whether it is cinema
halls or airports, the price could be different. The same
food produced price could be different. And the other form
of pricing, there is another, a few strategies of pricing,
which is called product mix pricing. The first item in product
mix pricing is related to product line. So product line pricing
is the gap between the items of a product line depicting

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differential quality or different customer segment. So
different prices for iPads or iPhones. So, you have got
different, versions. You could be having five different
iPhones and each of them are with a different price. So,
because each of them are of different quality. So, different
FMCG brands variants like Surf, SurfXL, SurfXLmatic,
Topload, Frontload, Liquid, Powder. So, all these things have
got different pricing. So, this is called a product line pricing.
So, when you have
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. got multiple
prices like this, then the customer gives, get that
impression that, yeah, this is superior quality, this is inferior
quality or this is for this target segment, this is for, so this is
the kind of thing that companies do actively engage with in
order to give an idea that how does the product line look
like and what are the, what are the usage of the different
items in the product line. Then there is something called
optional feature pricing. So separate price for base model
and then the additional features. This is something you will
see in laptops or desktops or automobile, the cars. So this
is the basic price. Then whatever else you want along with
it, you have to pay for it. So in the car, if you want,
additional music systems or you want some leather seats
or, you want some additional accessories then you have to
pay for it. So, this is a base model and then whatever else
that you are looking for. There is something also interesting
as part of product mix pricing called captive product
pricing. So, in which the base product is low, but the
consumable is high. So, Gillette is one of the pioneers of
this. So, Gillette razor is low price, but the blades are higher
price. HP printers are low price, cartridges are higher price.
So, this is called captive product pricing. So, you purchase

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 the product because of low price and then you are held
captive because in order to use that you have to pay more.
Two part pricing, there is a rental and then there is a
variable fixed, fixed rental and then a variable monthly fee,
something like the telephone bill or electricity bill, those
kind of things typically are two part pricing. And then the
last thing that I will talk about pricing is product bundling
pricing. So this is where you, if you buy two items together,
then there is a discount for this. So, the retailers or the
brands, they bundle the products together and then if you
buy it together, then you get a discount or lower price for
that. So, with this actually we have finished the discussion
on pricing.

Price discrimination involves charging different prices for the same product based on factors
like customer segments, location, or channels. Here are some key types of price
discrimination:

1. Customer Segment Pricing: Prices vary based on customer characteristics like age or
gender. For instance, movie tickets might be priced differently for seniors and children,
or airlines might offer discounted fares for students.

2. Product Form Pricing: Different versions of the same product are priced differently,
though not necessarily proportional to their cost. For example, a bottle of mineral water
at an airport might cost more than the same bottle in a local store.

3. Channel Pricing: Prices may vary depending on the sales channel. For example,
products sold directly through a company's own website might have different pricing
compared to products sold through multi-brand outlets.

4. Location-Based Pricing: The price may differ depending on where the product is sold.
For instance, cinema halls or airports might charge more for the same food or drink
items.

Additionally, there are strategies in Product Mix Pricing:

1. Product Line Pricing: This strategy involves setting prices for different versions of a
product to reflect their quality or target customer segment. For example, a company
may offer several versions of an iPhone or a detergent brand like Surf with different
pricing based on quality or target market.

2. Optional Feature Pricing: This pricing structure offers a base model at a standard price,
but additional features or upgrades are priced separately. For example, a car might have

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 a basic model price, but adding features like leather seats or a premium sound system
would cost more.

3. Captive Product Pricing: The base product is priced low, but the consumables or
accessories related to the product are expensive. Gillette razors are a common example,
where the razor itself is cheap, but replacement blades are costly.

4. Two-Part Pricing: This pricing model involves a fixed fee (such as a rental) plus a variable
fee. Examples include utility bills or subscription services where there is a base charge
and a usage fee.

5. Product Bundling Pricing: In this strategy, products are sold together as a bundle at a
discount. For example, a retailer might offer a discount if you buy a phone and a case
together.

These pricing strategies are used by businesses to maximize profit while targeting different
customer needs and market conditions.

Summering Pricing So, if I summarize once again pricing is

dependent on the target segment and the positioning.
There are stage, steps of price fixing, how to determine the
price that I have explained to you. Pricing objective, then
demand and then cost and the competitors pricing, then
the price types and then choose a final price. So, then as
part of price types, I told you that what are the different
price types that are there. Price which are based on this
floor, which are the target return pricing or markup pricing.
Price which is based on ceiling, which is the perceived value
pricing and the value pricing and then the competition
based pricing, which are the going rate pricing and sealed
bid pricing. And then finally the different other pricing
tactics which are like the promotional pricing, the discount
pricing, the product mix pricing, the price discrimination.
So these are few of the things, the psychological pricing. So
these are few of the pricing tricks or tools that marketers or
retailers use in order to set up a price.

To summarize, pricing decisions are influenced by several factors including the target
segment and product positioning. The steps involved in determining a price typically follow
this order:

1. Pricing Objectives: Establishing the goals for pricing, such as maximizing profit or
gaining market share.

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 2. Demand: Understanding customer demand and how price changes affect sales.

3. Cost: Factoring in production, distribution, and operational costs.

4. Competitor Pricing: Considering competitor pricing strategies.

5. Price Types: Determining which pricing model to use, including:

Floor Pricing: Pricing based on a target return or markup, ensuring the price covers
costs and generates a profit.

Ceiling Pricing: Pricing based on perceived value or value to the customer, often set
higher to reflect quality or brand perception.

Competition-Based Pricing: Setting prices relative to competitors, using strategies

like going rate pricing (aligning with industry standards) or sealed bid pricing (for
contract-based work).

6. Tactics and Strategies: These involve using psychological pricing or other tactics to
influence buyer behavior:

Promotional Pricing: Offering temporary discounts or special offers.

Discount Pricing: Lowering prices to attract customers or clear inventory.

Product Mix Pricing: Pricing products within a line or bundle in a way that
maximizes perceived value.

Price Discrimination: Charging different prices to different customer segments

based on factors like location, age, or time of purchase.

All of these tools and strategies are used by marketers and retailers to optimize price setting,
aiming to meet business goals while catering to customer expectations and market
conditions.

Introduction to Distribution Hello everyone. This is week 7

and we are talking about distribution now. Distribution as
you know, it provides time and place utility to the consumer,
making the right product available at the right place. Now,
this was always important, but the COVID pandemic made
whole world sit up. And realize that distribution is probably
the most important thing in business these days. Now
during COVID times, the products are available, but it could
not be transported. It could not be moved and because of
the various restrictions and all, even when it was available

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 in the city headquarters, warehouses or even retail stores,
the consumers were not getting it. And subsequently, that
led to the home delivery or online platforms, app based
platforms that started in a big way and distribution
changed in a significant way. And subsequently, after the
COVID pandemic gradually moved away, we saw that the
disruption in the whole world, so, for us logistics and
supply chain is concerned. Because at various places the
manufacturing was not happening, the raw material was
not available, the items in general all over the world there is
a shortage of food and groceries, shortage of even white
goods and cars and all because of lack of availability of
chips. So, what and what not. And this is something that
you would have read. This is something you would have
observed during your, during the COVID times and
subsequently after that. Now, this comes to the interesting
fact in marketing that we are discussing now is the
distribution and what are the distribution, channels, who
are the distribution members, and also we will be talking
about what are the distribution decisions and how does
that impact the marketing strategy. So these are few of the
things that we will be discussing. And then at the end we
will end the week with a case, of an Indian case where a
product is being introduced in the rural India and then
what are the best way to go about it and how do we decide
what is the best way to go about it?

In this week's discussion, we are focusing on distribution and its importance in the
marketing strategy. Distribution is crucial for ensuring that products are available at the
right place and time, which in turn provides time and place utility to the consumer. This
means making the right product available in the right location when the consumer needs it.

The COVID-19 pandemic highlighted the critical role of distribution in business operations.
During the pandemic, while products might have been available in warehouses or retail
stores, logistics issues, transportation restrictions, and disruptions in supply chains
prevented products from reaching consumers. This challenge emphasized the need for
efficient distribution systems. As a result, there was a rapid rise in home delivery services
and online platforms, especially app-based platforms, that became a significant part of the
distribution ecosystem.

Post-pandemic, the world faced widespread disruptions in logistics and supply chains.
Manufacturing processes were delayed or halted, and raw materials became scarce. This led

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to shortages in various sectors, such as food, groceries, electronics, and automobiles (due to
chip shortages). These challenges impacted global distribution and highlighted the
complexities businesses faced in maintaining efficient supply chains.

Now, as we delve deeper into distribution in marketing, we will explore:

1. Distribution Channels: The different pathways through which products move from
manufacturers to consumers.

2. Distribution Members: The various intermediaries involved in the distribution process

(e.g., wholesalers, retailers, agents).

3. Distribution Decisions: How marketers decide on the number and types of channels to
use, and how these decisions influence their broader marketing strategy.

Finally, we'll discuss a real-world case about introducing a product in rural India, analyzing
how best to approach distribution in such markets. Understanding these concepts is
essential for designing effective marketing strategies and overcoming distribution
challenges.

Distribution Channels So what are the marketing channels

or distribution channels? Marketing channels are the set of
interdependent organizations participating in the process
of making a product or service available for use or
consumption. So they are the set of kind of pathways that a
product or service follows after production culminating in
the purchase and consumption by the final user. It includes
all the entities who participate in the physical
transportation as well as financial transactions of goods
and services between producer and consumer. Now of
course, you do understand that on one side there is a
producer, one side there is the consumer and whoever is
there in between that are part of the distribution function.
So look at this figure in front of you. On the left hand side
you have got the manufacturers like HUL, you have got the
brands, you have got the vendors or suppliers. So these are
all on the left hand side. So those who produce, those who
manufacture or those who procure items also. And, then on
the right hand side you have got the consumers, the
different type of consumers, different segments and all that
which we have discussed enough. Now, in between it is a
black box where you have got all the middlemen, all the
distribution network, all the channel members. Who are

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they? They could be the local wet markets. They could be.
Organizations like Reliance Retail or Tata, Star Bazaar or the
local wet markets even the online platforms like Amazon,
Flipkart. All these guys are part of this distribution black
box. Now these, these are the guys who play a very
significant role in connecting the manufacturer with the
consumer or the suppliers or the brands with the
consumer. So, even without brands, commodities like rice,
pulses, grains, legume, those things which are not branded,
but available in the market, that supply chain also is made
available through them. Even the vegetables, potatoes,
which you can store for a period of time, onions, potatoes,
which you can store for a period of time or the perishables
like tomatoes, like cucumber, like
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. cauliflower. So
these are the kind of things. So you do understand that the
different, the way in which the distribution networks play a
very significant role. Say farmers in western part of the
country, they make, they manufacture, they produce
onions. Put potatoes probably all over the country, they
make potatoes. But if you want to make it available, then
from those farmers, it has to come to a central warehouse.
Or a regional warehouse where in Bangalore or Mumbai or
Delhi wherever it is and from that it is from that big market
it is being taken by all the retailers procured by all the
retailers and from that it comes to you. Whereas if you are
looking at the perishable kind of vegetables or milk or eggs
those kind of stuff which are perishable, now those things
are procured almost daily in the large wholesale market
and from that it comes to the local retail market. It could be
a wet market or it could be a supermarket and then from

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 that it comes to you. So, you do understand over here the
significance of the role that these guys play

Marketing Channels / Distribution Channels refer to the network of interdependent

organizations and intermediaries that work together to make a product or service available
for consumer use or consumption. Essentially, these channels represent the various
pathways that products follow after they are produced, culminating in their purchase and
use by the final consumer.

The key aspects of marketing channels include:

1. Interdependent Organizations: These are entities that collaborate to move goods and
services from the producer to the consumer. This includes both physical transportation
and financial transactions. The organizations involved can include manufacturers,
wholesalers, retailers, and intermediaries like distributors or online platforms.

2. Role of Intermediaries: In the distribution process, intermediaries (also known as

middlemen or channel members) play a critical role in connecting the producer with the
consumer. They manage the logistics, storage, and movement of goods through various
stages of the supply chain. The intermediaries can range from local wet markets to
large retail chains (like Reliance Retail or Tata Star Bazaar) to e-commerce platforms
(like Amazon or Flipkart).

For instance, manufacturers like HUL or other vendors on one end, and consumers
on the other end, are connected through a series of middlemen or intermediaries.
These can include physical stores, online platforms, wholesalers, or even small local
shops.

3. Types of Products in the Distribution Channels:

Branded Goods: These are products like HUL’s range of FMCG products, which flow
through a distribution network involving wholesalers, retailers, and sometimes
online platforms.

Commodities and Agricultural Products: Products like rice, pulses, vegetables, and
grains, which may not be branded but still require distribution through various
channels. These products are typically procured from farms or regional warehouses
and then distributed through different retail formats, including wet markets or
supermarkets.

Perishable Goods: Items such as milk, eggs, and vegetables (like tomatoes,
cucumbers, and cauliflower) often require a daily distribution process due to their

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 short shelf life. They pass through wholesale markets and then reach local retail
outlets, whether they are wet markets or supermarkets.

4. Example of Distribution Process:

For non-perishable agricultural products like onions or potatoes, the process starts
with farmers in regions like the western part of the country. These products are first
sent to central or regional warehouses and then distributed to retailers in major
cities such as Mumbai, Delhi, or Bangalore.

For perishable products, however, the distribution process tends to be more

frequent. These goods are often procured from wholesale markets daily and then
distributed to local wet markets or supermarkets.

Overall, the distribution channels play a crucial role in ensuring that products reach the final
consumer. The effectiveness of these channels can have a significant impact on the success
of a product in the market. Distribution networks not only ensure the availability of products
but also influence the speed, cost, and efficiency with which they reach consumers.

Vocabulary in Distribution Channels There are few of the

terms and terminology that is used very frequently in retail
business in marketing distribution, which are distributors,
dealers, wholesalers, retailers, now these terms that you
see and many times people use it almost synonymously. If
you look into this table, this table has three different
columns, scale of operations, number of brands that is
handled and the major activities. What do they do? So let
me start with a wholesaler. What does a wholesaler? The
scale of operation is large. They deal with multiple brands
and their major activity is they buy it from the
manufacturer or brands and then they sell it to the
retailers. So they deal with large volumes. And then, if you
look into a retailer, a retailer buys from the, it could buy
from the manufacturer or it could, it could buy from the
wholesaler. And it is selling downstream to the consumer.
The scale of operations of wholesaler is larger in
comparison to the retailer. Having said that, the large
retailers like the Wal Mart or the Tesco's or here it is the
Star Bazaar like Tata's or the Reliance. So these guys are
much larger retailers or DMart. So these are the guys are
much larger retailers who directly procure from the
manufacturer and the brands. So, major difference

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 between a wholesaler and retailer. Wholesaler is a B to B
business, whereas the retailer is a B to C business. It buys
from the wholesaler or the brand and sells it to the
consumer. Now what about the distributor? The distributor
is a large player and distributor by it is dealing with a single
brand and it buys from the manufacturer. And sells it to the
retailer or, yeah, I mean, manufacture different and single
or multiple retailers. Dealer is a smaller player and it also
deals with a single brand and it buys from the distributor
and passes the return to the retailer. The difference
between a distributor and a retailer is that the scale of
operation of distributor is much larger. The scale of
operation of retailer is. Sorry the scale of operations of
dealer is much smaller. So, that is the major difference
between these guys. And these distributors and dealers,
they have a contractual binding for not dealing with
competing brands.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. So, you can be
a distributor of multiple brands. But they should not be
competing. You could be distributor of car. You could be
distributor of two wheeler. You could be distributor of
FMCG items. You could be distributor of Coca Cola. But if
you are distributor of Coca Cola, then you cannot be a
distributor of Pepsi. If you are a distributor of HUL, you
cannot be a distributor of Procter and Gamble. So that is
the way how this things work. So, this is the explanation of
the terms and terminologies that we will be using quite
frequently in this.

Key Terminology in Distribution Channels:

In distribution channels, the terms distributors, dealers, wholesalers, and retailers are
often used interchangeably, but they refer to distinct roles with different functions and scales

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of operation. Here's a breakdown of each term and how they differ from each other:

1. Wholesalers:

Scale of Operations: Large-scale operations.

Number of Brands: Handles multiple brands.

Major Activities: Wholesalers buy products in bulk from manufacturers or brands

and then sell these products to retailers. They deal with large volumes of goods and
play an intermediary role between the manufacturer and the retailer. They are
typically B2B (Business to Business), meaning they sell to other businesses rather
than directly to consumers.

2. Retailers:

Scale of Operations: Smaller-scale operations compared to wholesalers (unless they

are large retail chains).

Number of Brands: Can handle multiple brands or a select few.

Major Activities: Retailers purchase products either directly from the manufacturer
or from wholesalers and sell them directly to the consumer. Retailers are B2C
(Business to Consumer), meaning they deal directly with the end customers. Large
retailers like Walmart, Tesco, or Reliance often procure products directly from
manufacturers, bypassing wholesalers.

3. Distributors:

Scale of Operations: Large-scale operations, but typically focused on a single brand.

Number of Brands: Deals with one specific brand (sometimes multiple non-
competing brands).

Major Activities: Distributors purchase products directly from the manufacturer and
sell them to retailers. They are often large players within a brand's supply chain and
have a more exclusive role with the brand. A distributor’s focus is on a specific
brand, unlike wholesalers who handle multiple brands. They can deal with multiple
retailers, but always within the scope of their contracted brands.

4. Dealers:

Scale of Operations: Smaller scale compared to distributors.

Number of Brands: Deals with a single brand.

Major Activities: Dealers purchase products from distributors and sell them to
retailers. Dealers generally have a smaller operation than distributors and have a

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 direct contractual relationship with a distributor for a specific brand. They operate
on a B2B basis, like distributors, but typically handle a smaller portion of the
product distribution process.

Key Differences:

Wholesalers vs. Retailers: A wholesaler operates at a larger scale than a retailer and is
involved in selling to businesses (B2B), whereas a retailer sells directly to consumers
(B2C). Wholesalers may work with multiple brands, whereas retailers may only focus on
specific brands or product categories.

Distributors vs. Dealers: The distributor operates on a larger scale than a dealer and
handles products from a single manufacturer. While a distributor can sell to multiple
retailers, dealers generally work on a smaller scale, purchasing from distributors and
selling to a more localized set of retailers. Additionally, distributors often have exclusive
rights for particular brands, while dealers are typically bound by contracts that prevent
them from handling competing brands.

Brand Exclusivity: Distributors and dealers usually work with non-competing brands in
their respective industries. For example, a Coca-Cola distributor cannot distribute Pepsi,
and a HUL distributor cannot handle P&G products due to the exclusivity agreements in
place.

Understanding these roles and their distinctions is essential in grasping how products flow
through the supply chain from manufacturers to consumers.

Types of Wholesale Intermediaries Now, I will tell you the

type of, because I have told you the wholesalers and
wholesaling intermediaries, the wholesaling intermediaries
are three types, a merchant wholesaler, agent wholesaler,
agent or brokers, and then manufacturers own branches or
own sales offices. So, merchant wholesaler is the guy who
takes the title. That means, they actually buy the purchase
from the manufacturer and store it with them and then
they sell, pass it on to the distributor or the retailer.
Whereas an agent wholesaler, they do not take title. What
do they do? They make the manufacturer and the
consumer, which could be a retailer also, meet. And, then
they strike a deal and the agents or brokers they take the
commission out of it. So, the major difference between a
merchant wholesaler and agent wholesaler is that the

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merchant wholesaler takes title of the merchandise
whereas an agent wholesaler does not take title of the
merchandise. And, manufacturer's own sales offices could
do the role of the merchant wholesaler over there. So they
could be dealing with, they could be trying to find out the
consumers and through their branch offices or sales
offices, making contact with them and then delivering the
items from their own branch offices. And here you, it would
be interesting for you to know that the wholesaler again,
wholesaler as an agency, it is because it is B to B, we do not
as individual consumers, we do not get to see them or we
do not get to interact with them so often. But having said
that as you are doing a marketing course over here, it is
very important for you to understand that the wholesalers,
they have a significant role to play in the business of
making the things available to the final end consumer, the
time and place utility that we are talking about here. So
wholesaler, if I have to define a wholesaler or a distributor,
they are a commercial establishment that purchase
products from various manufacturers. They stock the items
and other assortments that they create and then they sell
this specific merchandise to the retailers. So they
essentially they create a kind of merchandise mix which we
spoke about in product concept as product mix. The
wholesalers or the distributors they create a mix and they
sell it downstream to the retailers.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. I spoke to you
just now about a merchant wholesaler. The wholesaler
could be a merchant or an agent wholesaler. A merchant
wholesaler provides the widest variety of marketing
functions and services and they take title, they
independently owned and they take title to the

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merchandise. What kind of full services that I am talking
about? The, they, the middlemen, like the wholesalers, they
also could do multiple activities, multiple services. It is not
really like carry and forward. They just, it is not that they
just pick up the items and they deliver it to the next guy.
Sometimes they add value to it. What kind of values? They
buy, they sell, they transport, they store, sometimes they
can standardize. They could finance the either the
manufacturer or the retailer depending upon how big they
are. They could bear the risk because if they are taking title
or taking ownership, then it does not sell, then they are
responsible for it. And they could also gather market
information about what works and what does not work and
they can pass it on to both manufacturer as well as the
retailer. So, all those guys who do all these activities, they
are called full service wholesalers and those who do any
part of it, they are called limited service wholesalers. And
one of this limited service wholesalers are called C and F
agents, you would have heard of it, carry and forward
agents. So they actually take it and they pass it on to the
next, next agency in the downstream. They do not really
add any significant value to it. So then this brokers and
agents, they do not take title as I told you earlier. Right?
And manufacturers own sales offices. They are, they are not
really as you can say independent wholesalers, but these
offices usually carry some inventory and if they do not carry
inventory, they connect with their main warehouse where
all the inventory are stocked and they can, they facilitate
the process of delivering it to the wholesaler or retailer. So,
this is specifically about the wholesaling part of it. Some of
you might be having questions about what are the brokers?
I spoke about the brokers. So, what are the brokers?
Brokers are specialized sales force contacted by the
manufacturer. This sales force carrier, other, they, they carry
other comparable items also, product line size also.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
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 be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. But, they focus
on a narrow customer segment. The products are shipped
through any other format, company owned stores or
licensees or anything. And typically, they, small
manufacturers, those who are not big enough to have their
own sales force or own warehouses or own risk taking
capability, they contact the brokers to get these things
done. So, frozen foods, many new product lines. They are
traditionally done by the, handled by the brokers. Even the
apparels, linens, apparels and linens, not like the cloth
material, but upholstery, those kind of materials that is also
dealt by the brokers. But increasingly the role of brokers
are being transferred to the online players. So, the
platforms and the different online players are there. They
actually do the role of brokering activity now and they
ensure that the, they take the merchandise and they find
out who are the suppliers and who are the buyers and they
make both of them meet and even the smaller players
would be able to survive with the presence of the brokers.
Agents, they are the same as brokers but they are exclusive
to one manufacturer or wholesaler. So difference between
agent and broker is a broker can carry complementary
product lines, they can deal with multiple product lines
whereas agents will deal with only one product line. Again,
they do not take title, they only get the manufacturer and
the intermediary together and they pocket the commission.
Textiles and industrial sector. Fertilizers, chemicals, you
deal, the agents are predominantly in that space. So this is
the wholesaling part of the intermediary chain that I spoke
to you about. Next I am going to talk about the retailing
part of it.

Types of Wholesale Intermediaries:

Wholesale intermediaries can be categorized into three primary types based on their roles
and functions: merchant wholesalers, agent wholesalers, and manufacturers' own sales
offices. Here's a breakdown of each type:

1. Merchant Wholesalers:

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 Role: Merchant wholesalers take title to the merchandise. This means they purchase the
product from the manufacturer, take ownership of it, and then sell it downstream to
distributors, retailers, or other businesses.

Functions:

They offer a wide range of services including storage, transportation, sales,

financing, and risk-bearing.

Merchant wholesalers are full-service wholesalers, meaning they provide a

comprehensive set of services like standardization, financing, and market
intelligence, in addition to physical distribution.

Value Addition: They don't just transport goods—they also provide added value,
such as market analysis and risk management.

Types of Merchant Wholesalers:

Full-service wholesalers: Handle all aspects of distribution.

Limited-service wholesalers: Provide fewer services, focusing mostly on basic

logistics without added value (e.g., C&F agents—Carry and Forward agents).

2. Agent Wholesalers:
Role: Agent wholesalers do not take title to the merchandise. They act as intermediaries
between the manufacturer and the consumer (often a retailer), facilitating deals and
taking commissions on transactions.

Types:

Brokers: Specialized salespeople hired by manufacturers to sell goods. They often

handle complementary product lines and work with a narrow customer segment.
Brokers typically focus on small manufacturers who cannot afford their own sales
force. The products they handle are usually sold through other channels (e.g.,
company-owned stores, licensees).

Agents: Similar to brokers but exclusive to one manufacturer or wholesaler. Agents

handle specific product lines and focus on selling that brand alone. They also do not
take title to the goods but earn commissions by facilitating transactions.

3. Manufacturer's Own Sales Offices:

Role: These are company-owned offices or branches that take on the wholesaling role.
Manufacturers may operate their own sales offices to handle the distribution and sales

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 functions directly.

Functions:

They may carry inventory or connect with the manufacturer’s main warehouse to
ensure that goods are delivered to the retailer or wholesaler.

These offices do not typically work as independent wholesalers but rather support
the distribution process in conjunction with the manufacturer’s operations.

Key Differences:
Merchant Wholesalers vs. Agent Wholesalers:

Merchant wholesalers take ownership (title) of the products and sell them to
retailers or other businesses, handling a broader range of services.

Agent wholesalers act purely as facilitators,

Types of Retailing Intermediaries So, who are the retailing

part? So, here let me first start by defining what is retailing.
Retailing is the business activities that is involved in selling
goods and services to consumers for their personal or
household use. It includes every sale of goods and services
to the final consumer. Please remember over here, it is to
the final consumer. So, retailing by definition is B to C. The
wholesale part of it is a different business as I have just
explained to you. So it is for personal consumption. So say
you are buying oil, oil for consumption of self either as a,
either for cooking purpose or for moisturizer or whatever
else you are using it and putting it on hair. So that is
retailing. But if you are buying oil for selling it to other
retailers or you are buying oil to convert it to glycerin soap
and then sell it, then that is not part of retail business. So
personal use and final consumer, these are the two things
that is important to identify as a retail business. A retail by
itself is a full course. I will explain a few of the things that
associated with retail business, which normally we talk
about. What are the different retail formats? There is a brick
and mortar formats, conventional retail stores. Here there
are food and grocery business when you are talking about.
So there it is supermarkets, hypermarkets, convenience
stores. So, these are called food and grocery based
business. And then there are general merchandisers,

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people who carry a lot of other items like apparels and
lifestyle products and it may, it may have very small
percentage of food, but predominantly it is soft goods,
apparels, lifestyle products, could be even hard goods like
tools and equipments. They are called general
merchandisers. So these are examples are like department
stores or discount stores. I am not giving you names of
specific retailer here because every large format retailer
they are in all this space. They are in food and grocery also,
they are in general merchandise also, they are in speciality
also.
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. The speciality
stores are typically called category killers. So Chroma kind
of stores are called category killers. So one particular
category which is the white goods and electronic items,
they have everything under that. So that is called a
category killer. Or boutique stores, as you know, the fashion
and lifestyle kind of stores, small boutique stores, speciality
stores. So those are called speciality formats. So these are
the different kind of brick and mortar formats. And then
you have got online formats like Amazon, which are mega
stores. And then there are smaller players, so those are
only dealing with fashion, those are only dealing with
clothes, they are only dealing with say fruits and
vegetables. They are called specialty stores in the online
format. And then the hybrid ones, brick and click. That is
what, that is the term that we use in retail. So you have a
brick and mortar store plus you have a click option. So most
of these guys today are in the hybrid format. So, any large
format retailer that if you see that they are in all these
spaces. Maybe later on I am going to spend a little more
time on this if time permits.

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Types of Retailing Intermediaries:

Retailing is the business activity that involves selling goods and services to consumers for
personal or household use. It is specifically B2C (Business to Consumer) and involves the
final transaction between the business and the consumer for their personal consumption.

Here’s an overview of the different retailing formats:

1. Brick-and-Mortar Retail Formats:

Food and Grocery Retailing:

These retailers focus on providing food, beverages, and household grocery

products. Examples include:

Supermarkets: Large stores offering a variety of food and grocery items.

Hypermarkets: Larger than supermarkets, they carry a wider range of goods,

including non-food items like electronics, clothing, and home goods.

Convenience Stores: Small stores offering essential grocery items, often open
for extended hours.

General Merchandisers:

These stores offer a wide variety of goods, not limited to just food. They could carry
apparel, lifestyle products, tools, and sometimes a small selection of groceries.
Examples include:

Department Stores: Large retailers offering various types of products across

multiple categories like clothing, electronics, and home goods.

Discount Stores: Stores that offer products at lower prices than typical retailers,
often through bulk purchases or lower margins.

Specialty Stores (often called Category Killers):

These stores focus on a specific category and aim to dominate that category. They
usually carry a wide selection within their niche. Examples include:

Category Killers: Large specialty retailers that focus on one particular product
category, such as electronics or home improvement (e.g., Chroma).

Boutiques: Smaller stores specializing in fashion, accessories, or niche lifestyle

products. They cater to a specific segment of the market.

2. Online Retail Formats:

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 Mega Stores:

Large online stores like Amazon, which sell a wide range of products across various
categories. These are online versions of hypermarkets or department stores.

Specialty Online Stores:

These online retailers specialize in a particular category. For example:

A website selling only fashion items, or only groceries, or a site dedicated to

selling fresh produce.

3. Hybrid Retail Formats (Brick and Click):

Brick and Click Retailing:

These retailers operate both physical stores (brick-and-mortar) and online platforms
(click). This hybrid model allows them to offer customers the flexibility of both in-
person shopping and the convenience of online shopping.

Most large retail chains today are adopting this hybrid format, where customers can
shop both in-store and online, often with the option of click-and-collect (buy online,
pick up in-store) or home delivery.

These retail formats reflect the diversity of ways in which products are offered to consumers,
both in physical stores and through digital platforms.

Functions of Distribution Channels At the end, before I start

talking about the channel decisions, so what are the
different functions of the distribution channel? If I
summarize that, the distribution channel, they of course
transport the goods from one end to the other. Product
information, product customization, sometimes they,
because retail means, retails, the meaning of the term is
breaking the bulk. So, large items or large bulk items they
bring it down to smaller formats which is acceptable, which
is useful for consumers like us. For example, if somebody is
buying, again if I take the same oil. The oils are produced in
quintals and tons, but we need it in grams or liters. So,
breaking the bulk, standardizing, customizing, branding,
this job is done by the retailers, by the wholesalers. So, the
product customization, they assure the quality, when it is
not a brand, when you are buying it from various suppliers,
there is something called private labels. All the large

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retailers, they have their own labels. So, for that, they
procure it from the different suppliers. So, then they have
to do a quality control check also, because if the things are
available in Reliance or things are available in Shopper Stop
or any such kind of retailer, D Mart, so then their brand, D
Mart's brand name is there on the merchandise, on the
product that you are buying. So, D Mart, if it is not a
branded product, then D Mart has to ensure that it is of
good quality. So, that is called private label. And, then they
also do the quality assurance, then lot size as I told you
bigger size to smaller size. They create the assortment that
is see a manufacturer manufactures only one type of
product. Somebody makes toothpaste, somebody makes
toothbrush, somebody makes comb, somebody makes face
cream, somebody makes moisturizer. So, all these things
are made by different, different people. But for us, we do
not have to go to each of these guys to buy the items. We
can go to one store and buy all these items together. So
which means the stores are creating that assortment which
is useful for us. This is one of the functions of the
distribution channels. Then of course availability. I told you
time and place
Marketing Fundamentals
Prof. Ashis Mishra Module 7 © All
Rights Reserved. This document has been authored by Prof.
Ashis Mishra and is permitted for use only within the
course "Marketing Fundamentals" delivered in the online
course format by IIM Bangalore. No part of this document,
including any logo, data, illustrations, pictures, scripts, may
be reproduced, or stored in a retrieval system or
transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise –
without the prior permission of the author. utility.
Sometimes you are in a hurry, you order it online, it comes
in 10 minutes. Sometimes you have time, you go to the
store, spend your whole day over there and buy items.
Sometimes you want to buy multiple items together, that is,
if I am buying this pair of shirt and with that what type of
trouser will go? If I am buying another pair of shirts, what
kind of shoes will go with it? Now all these combinations,
what kind of tie will go with it? All these combinations,
suggestions and all that also you get over here. And then

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 after sales service and of course the logistics from one part
to the other part. So these are some of the major functions
of the distribution channels

Functions of Distribution Channels:

The distribution channel plays a critical role in delivering products from manufacturers to the
final consumer. Here are the key functions:

1. Transportation of Goods:
The distribution channel facilitates the movement of goods from the manufacturer or
producer to the retailer or consumer. It ensures that products reach their destination on
time and in the required quantities.

2. Product Information:
Distribution channels help in disseminating product information to consumers. This
includes details about the features, benefits, and usage of products, allowing consumers
to make informed purchasing decisions.

3. Product Customization:
Retailers and wholesalers often adjust products to meet the needs of consumers. This
includes breaking bulk products into smaller, more usable quantities. For example, oils
that are produced in large quantities (e.g., tons or quintals) are packaged in smaller sizes
(liters or grams) for consumer use.

4. Breaking Bulk:
Retailers take large quantities of goods and break them down into smaller units that are
suitable for individual consumption. For example, a wholesaler may purchase a large
shipment of bulk oil, but a retailer will sell it in smaller bottles or jars.

5. Branding:
Many distribution channels, especially retailers, engage in creating and promoting their
own private labels. They source goods from suppliers, rebrand them with their store's
name, and sell them under their own label. This includes quality control to ensure
products meet the retailer’s standards.

6. Quality Assurance:

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 Retailers, particularly those selling private label goods, ensure that the products they
offer meet specific quality standards. This includes overseeing quality control to ensure
the products meet consumer expectations.

7. Creating Assortments:
Retailers gather products from various manufacturers and create assortments of
complementary goods. For instance, a retailer may sell toothpaste, toothbrushes, and
face cream, which are made by different manufacturers. Retailers offer these
assortments to provide convenience for consumers, allowing them to buy multiple items
in one place.

8. Availability (Time and Place Utility):

The distribution channel ensures that products are available when and where
consumers need them. For instance, customers may need products urgently, so online
platforms can deliver products quickly, while physical stores provide a traditional
shopping experience. This function enhances the convenience for the consumer.

9. After-Sales Service:
Many distribution channels offer after-sales services, such as product repairs, returns,
exchanges, and customer support. This adds value to the consumer experience and
helps build brand loyalty.

10. Logistics and Inventory Management:

Efficient logistics is crucial in managing the movement of products within the
distribution channel. This includes maintaining inventory at various points in the supply
chain to ensure that products are available when needed.

These functions ensure that goods are made available to consumers in the right quantities,
at the right time, and at the right place, while also providing added value such as
information, service, and customization.

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