Part 3: Managing the Marketing Channel

11
CHAPTER

Pricing Issues in
Channel
Management

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 ① The importance of pricing to channel strategy
Learning Objectives

② Anatomy of channel pricing structure

③ Influencing pricing strategy
④ Channel pricing guidelines
⑤ Caveat to pricing guidelines
⑥ Other channel pricing issues

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Objective
The Importance of Pricing
1

Pricing decisions cause top-level marketing

executives more concern than any other
strategic marketing decision area.

Pricing is viewed as
having a more direct
link to the firm’s bottom
line.

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Objective
Anatomy of Channel
2 Pricing Structure

Channel participants each

want a part of the total price
sufficient to cover their
costs and provide a
desired level of profit.

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 The “Golden Rule”
of Channel Pricing

It is not enough to base pricing decisions solely on

the market, internal cost considerations, and
competitive factors. Rather, for those firms using
independent channel members, explicit consideration
of how pricing decisions affect channel member
behavior is an important part of pricing strategy.

Pricing decisions can have a

substantial impact
on channel member performance.
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Objective
Influencing Pricing Strategy
3

The major challenge for the channel manager:

To help foster pricing strategies that

promote channel member cooperation and
minimize conflict

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 Channel Manager’s Role
Major areas of
consideration in a
manufacturer’s pricing
decision

Internal Target Competitive Channel

cost market considerations considerations
considerations considerations

Channel manager must

focus
on the channel
considerations
and work to incorporate
them
into the firm’s pricing
decisions
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 Channel Manager’s Role

To find out about channel member

views
and to appraise their
effects on channel
member performance

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 Channel Manager’s Role

Have
channel members’
viewpoints on pricing issues included as
an integral part of the manufacturer’s
price-making process

Such action anticipates

and hopefully avoids problems
that may arise after pricing
decisions have
taken effect
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Objective
Channel Pricing Guidelines
4
1. To help those involved in pricing decisions
to focus more clearly on the channel
implications of their pricing decisions

2. To provide general prescriptions on how to

formulate pricing strategies that will help
promote channel member cooperation and
minimize conflict

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 Profit Margins

Guideline #1: Each efficient reseller must

obtain unit profit margins in excess of unit
operating costs.

Channel members who believe that the

manufacturer is not allowing them sufficient
margins are likely to seek out other suppliers
or establish and promote their own private
brands.

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

1. Do channel members hold inventories?

2. Do they make purchases in large or small quantities?
3. Do they provide repair services?
4. Do they extend credit to customers?
5. Do they deliver?
6. Do they help train the customers’ sales force?

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 Rival Brands

Guideline #3: At all points in the vertical chain

(channel levels), prices charged must be in line
with those charged for comparable rival brands.

Channel managers should attempt to weigh any margin

differentials between their own and competitive brands in
terms of what kind of support their firms offer and what
level of support they expect from channel members.

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

The margin structure should reflect any changes in

the usual allocation of distribution tasks
between the manufacturer and the channel
members.

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 Conventional Norms in Margins

Guideline #5: Margins allowed to any type of

reseller must conform to the conventional
percentage norms unless a very strong case
can be made for departing from the norms.

Exceptions are possible if they can be justified in the

eyes of the channel members. However, it is the
job of the channel manager to attempt to explain
to the channel members any margin changes that
deviate downward from the norm.

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 Margin Variation on Models

Guideline #6: Variations in margins on individual

models and styles of a line are permissible and
expected. However, they must vary around the
conventional margin for the trade.

Channel members are often amenable to accepting

the lower margins associated with promotional
products so long as they are convinced of the
promotional value of the product in building
patronage.

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 Price Points

Guideline #7: A price structure should contain

offerings at the chief price points, where such
price points exist.

Price points are specific prices, usually at the retail

level, to which consumers have become
accustomed. Failure to recognize retail price points
can create problems for the manufacturer as well
as its channel members if consumers expect to
find products at particular price points and such
products are not offered.

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 Product Variations

Guideline #8: A manufacturer’s price structure

must reflect variations in the attractiveness of
individual product offerings.

If the price differences are not closely associated

with visible or identified product features, the
channel members will have a more difficult selling
job.

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Objective
Guideline Caveat
5

Particular circumstances and situations exist

in which the prior guidelines will not apply or
will be irrelevant.

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Objective
Other Channel Pricing Issues
6

Exercising control in channel pricing

Changing price policies

Passing price increases through the channel

Using price incentives in the channel

Dealing with the gray market & with free riding

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 Exercising Control in Pricing
Because channel members typically view pricing
as the area over which they have total control. . .

First: Rule out any type of coercive approaches

to controlling channel member pricing policies.

Second: The manufacturer should encroach on the

domain of channel member pricing policies only if
the manufacturer believes that it is in his or her
vital long-term strategic interest to do so.

Third: If the manufacturer believes that it is necessary to

exercise some control over member pricing, he or she
should do so through “friendly persuasion.”

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 Changing Price Policies

Changes in
manufacturer pricing policies
or related terms of sale cause
reactions among
channel members.

Channel members fear such changes because they have

become accustomed to the strategy, or their own pricing
strategies may be closely tied to those of the manufacturer.

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 Passing Price Increases Through
the Channel
Strategies for channel members to use in order
to avoid simply passing along price increases
through the channel:

First: Manufacturers should consider the long- and the

short-term implications of such increases versus
maintaining the current prices.

Second: Manufacturers should do whatever possible if

passing on the price increase is unavoidable.

Third: Manufacturers could change their strategies in

other areas of the marketing mix to help offset
the effects of such increases.

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 Using Price Incentives
in the Channel

Manufacturers face difficulties gaining strong

retailer acceptance and follow-through on
pricing promotions.

Possible Solutions:

• Make pricing promotions as simple and

straightforward as possible.

• Design price-promotion strategies to be at least as

attractive to retailers as they are to consumers.

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 Gray Market & Free Riding

Gray Market
The sale of brand-name products at
very low prices by unauthorized
distributors or dealers

Channel design decisions that result in closely

controlled channels and selective distribution as well as
changing buyer preferences may help limit the growth
of the gray market and free riding.

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 Discussion Question #1
Apple CEO Steve Jobs has been quoted as saying: “We
don’t know how to build a sub-$500 computer that is not a
piece of junk.” Job’s disdain for the under $500 price point
for personal computers reflects his belief that price should
not be the driver of product developments. Through much
of its history, Apple has pursued a premium pricing
strategy to complement its reputation for offering more
innovative and superior products. So, even if Apple
resellers were to clamor for Apple to offer lower-priced
computers (as well as other products) to compete at price
points that Apple is missing, Apple is likely to say no.

Discuss Apple’s pricing strategy in terms of its future

implications for the company’s channel strategy.

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 Discussion Question #5
Anheuser-Busch InBev and MillerCoors LLC control about 80
percent of the U.S. beer market. Most of the beer distributed by
both companies is sold through independent beer distributors
who, in turn, sell the beer to retailers, restaurants and bars.
Anheuser-Busch InBev, which had been acquired by Belgium-based
brewer InBev in mid-2008, soon after embarked on a cost-cutting
program. One key cost focus was distributor margins: Anheuser-
Busch distributors received about $1.00 for each case of Budweiser
distributed to retail channel members compared to $.85 paid by
MillerCoors to distributors. By eliminating that 15 cent difference
in margin, Anheuser-Busch InBev estimated it could save about
$200 million per year! But Anheuser-Busch distributors, many of
whom had decades-old relationships with the brewer, would not
be happy with the lower margins.

Should Anheuser-Busch InBev proceed with the margin cut?

Why or why not?
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