3/19/2013

BUSN 1200 Fundamentals of Business

Understanding Marketing

CH17- Pricing and Distribution of Goods and Services

Instructor: Shari Ann Herrmann

Pricing: Learning Objectives

After this lesson you should be able to: Identify the various pricing objectives that govern pricing decisions and describe the price-setting tools used in making these decisions. Calculate contribution margin and perform a break-even analysis Discuss pricing strategies and tactics for existing and new products.

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Distribution: Learning Objectives

After this lesson you should be able to: Describe the distribution mix and various channels of distribution Name and describe three different distribution strategies. Explain the difference between merchant wholesalers and agents/brokers and describe the activities of e-intermediaries. Identify the different types of retailing and retail stores. Define physical distribution and describe the major activities in warehousing operations.
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The Marketing Mix Four Ps

Pricing
Pricing Objectives: Profit-maximizing

pricing to maximize profit (bottom line) must consider all costs

Market-share pricing to gain the greatest possible market percentage

The price level is dependent on how much consumers are willing to pay for the product
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Cost-Oriented Pricing (retail)

This type of pricing adds a mark-up to the cost of the product and to arrive at a final cost
A light bulb costs $0.45 to the retailer The retailer sells the light bulb for $0.75 (a mark -up of 0.30)
Profit Usual

The mark-up as a percent of selling price is Markup % = Markup / Sales Price =.30/.75 = 40% The markup as a percent of cost is Markup % = Markup / Cost = .30/.45 = 67%

Variant
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Break-Even Analysis:
Cost-Volume-Profit Relationships
Break-even analysis how many units a firm must sell before it makes a profit (covers all costs) Fixed costs costs unaffected by the number of goods produced or services sold

rent, administrative salaries, insurance, equipment

Variable costs costs that change with the number of goods or services produced and sold
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materials, labour

Break-Even Analysis:
Cost-Volume-Profit Relationships
Breakeven point (in units) Total Fixed Costs price variable cost

Higher price = lower breakeven point Must also consider demand of consumers and competitors prices

Total Revenue
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Total Costs

Total Profit

Pricing Strategies

Pricing existing products

Pricing strategy is the pricing plan based on the marketing mix
Potential pricing strategies for existing products:

above market below market at market

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Pricing Strategies

Pricing New Products

New products are often introduced using one of two common pricing strategies:
Penetration pricing

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pricing the product as low as possible to sell the most units and generate consumer loyalty Skimming pricing pricing the product as high as possible to earn maximum profit on each unit sold

Pricing Tactics
Discounting Some common discounts are:
Cash discount for payments made in cash Seasonal end of season discounts Trade for professionals or businesses

E.g. building supply stores give trade discounts to contractors or skilled trade workers

Quantity discounts when large quantities are purchased

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Pricing Tactics
Price Lining: pricing a product line with low, medium and high price points to appeal to different customer types.

i.e: base model, upgraded model and deluxe model. Helps customers recognize that there are differences between products that are not noticeably different (interior features, quality, etc.).

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Pricing Tactics
Psychological Pricing Customer reactions to pricing are not completely logical Odd-even pricing

consumers react more favourably to odd dollar amounts ($0.99, $1.99, $19.99)

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Pricing Tactics
International Pricing Income and spending trends must be analyzed in new market Other factors to consider that may affect prices:
Exchange rates Tariffs Shipping and storage costs Number of intermediaries and additional costs for distribution

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The Marketing Mix Four Ps

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Distribution

Moves the product from the producer to the end user.

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Distribution
Distribution Channel Individuals and firms who distribute a product the path a product follows from producer to the end-user Distribution Mix the combination of distribution channels a firm uses

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Distribution Mix
Intermediary an entity other than the producer who participates in the distribution of products to final consumers Wholesaler an intermediary who sells products to other businesses for resale (other wholesalers, or retailers) Retailer an intermediary who sells products to final consumers
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Intermediaries and Distribution Channels

Direct distribution No intermediaries Non-direct distribution Retail Distribution Wholesale Distribution Sales agent

represents a business and receives commission

Broker brokers match numerous sellers and buyers as needed

Each intermediary adds cost but also adds value

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Distribution Strategies
Intensive As many channels and members as possible

Provide different degrees of market coverage

Low cost consumer goods (candy bars)

Selective use of a limited number of outlets

Consumer products with special displays (hand tools)

Exclusive use of only one intermediary in a market area

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High cost prestige items (Jaguar cars)

Retail Outlets
Product Line Retailers
Department stores Supermarkets Specialty stores

Bargain Retailers
Discount houses Catalogue showrooms Factory outlets Wholesale clubs

Convenience stores
Extended hours, fast service
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Higher prices

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Wholesaling
Wholesalers
Buy and take legal title to goods Resell items to retailers or industrial users Usually provide storage and delivery May provide credit, advice, and other services

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Wholesaling
Agents
Serve as sales and merchandising

arms of manufacturers
Receive commission for sales Do not take legal title Perform wide range of services

Brokers
Match buyers and sellers, do not

always know who they will be i.e. real estate, stocks

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Channel Conflict
Channel conflict happens when members disagree about roles or rewards. Typical sources of conflict:
some members receiving more favourable terms inconsistencies in pricing differences in sales incentives

Most powerful member is referred to as the channel captain.

Channels must be managed to be successful

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Non-store Retailing Direct Distribution

Direct-Response Marketing = firms contact customers directly to sell their products
Vending machines Direct selling door-to-door, home parties Mail-order catalogues Telemarketing Direct-response TV ads infomercials Electronic retailing on-line stores
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E-Intermediary
Internet-based channel members who perform one or both of these functions 1. They collect information about sellers and present it to consumers. 2. They help deliver Internet products to buyers. Three types: syndicated sellers shopping agents e-retailers
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E-Intermediary
Syndicated sellers
when a web site offers other web sites a

commission for referring customers

Example: Expedia.ca refers customer to

car rental companies, tour operators and hotels.

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E-Intermediary
Shopping agents (e-agents)
helps Internet consumers by gathering and sorting

information they need to make purchases

Examples:

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Electronic Retailing (e-tailing)

E-catalogues

display products on-line

Internet-based stores

inform, sell to and distribute to customers

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Physical Distribution
Physical Distribution is the activities needed to move

products from the manufacturer to the customer

warehousing transporting distribution for e-customers

Goals:
keep customers satisfied make good available when customers want keep costs low
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Warehousing
The storing of goods during the distribution process in various types of warehouses:
storage: facility used to store goods for long

time periods
distribution

centre: facility used to store goods for short periods of time pending distribution to retailers

private: owned and used by one company public: independently owned by a separate

company who rents out space to other firms

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E-commerce Distribution
Physical Distribution and E-commerce
Order fulfillment = all activities from making the

sale to on-time delivery to the customer

Some e-tailers maintain their own warehouses

and distribution centres, others use distribution specialists (e.g. UPS, FedEx)

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Recap: Pricing
Can you identify the various pricing objectives that

govern pricing decisions?

Can you describe the price-setting tools used in

making these decisions?

Can you calculate contribution margin and perform a

break-even analysis?
Can you explain the difference between penetration

and skimming pricing strategies and explain the benefits of each? Can you name four common discounting approaches and explain the business benefits of each?
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Recap: Distribution

Can you describe the distribution mix and name various channels of distribution ? Can you describe three different distribution strategies? Can you explain the difference between merchant wholesalers and agents/brokers ? Can you describe the activities of e-intermediaries ? Can you name different types of retailing and retail stores? Can you define physical distribution and describe the major activities in warehousing operations?

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Questions?

47

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