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Divine Word College of Legazpi
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Chapter Outline
Anatomy of Channel Pricing Strategy
Participants at the various levels in the channel each want a part of the total price (the price paid by the final buyer) sufficient to cover their cost and provide a desired level of profit.
The “golden rule” of channel pricing when developing a pricing strategy is stated as follows: “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 considerations of how pricing decisions affect channel member behaviour is an important part of pricing strategy.”
Pricing decisions can have substantial impact on channel member performance. If channel members perceive the manufacturer’s pricing strategy as congruent with their own interests, then a higher level of cooperation can be expected. And the re- verse is also true.
Therefore, the major challenge facing the channel manager in the area of pricing is to help foster pricing strategies that promote channel member cooperation and minimise conflict.
An evaluation of how the manufacturer’s existing or proposed pricing strategies in- fluence channel member behaviour would normally be included as part of the gen- eral evaluation of channel member needs and problems identified in Chapter 9.
Whenever possible, the channel manager should attempt to have channel mem- bers’ viewpoints on pricing issues included as an integral part of the manufacturer’s price making process.
Guidelines for Developing Effective Channel Pricing Strategies
Oxenfeldt offers a set of eight classic guidelines for developing pricing strategies that incorporate channel considerations. While not comprehensive, they do provide a basic framework and benchmark for pricing decisions that incorporate channel considerations, These are:
Each efficient reseller must obtain unit profit margins in excess of unit operating costs.
Each class of reseller margins should vary in rough proportion to the cost of the functions the reseller performs.
Profit Margins
Channel members need margins that are more than adequate to cover the costs as- sociated with handling a particular product.
Channel members generally will not carry, let alone enthusiastically support, prod- ucts whose margins are inadequate to cover their costs and provide room for profit.
Over time, those channel members who feel that the manufacturer is not allowing them sufficient margins are likely to seek out other suppliers or establish and pro- mote their own private brands.
Thus, the channel manager should be involved in a continuous review of channel member margin structures to determine if they are adequate and pay particular at- tention to changes in the competitive environment that is likely to influence channel member perception of the existing margin structures.
- Different Classes of Resellers
Ideally, the channel manager would like to set margins so that they would vary in direct proportion to the functions performed by different classes of channel mem- bers. In reality, however, margins at the wholesale and retail levels are typically governed by strong traditions that permeate the industry.
Nevertheless, periodic reviews of the margin structures available to different classes of channel members should be made, with a view toward making gradual changes if warranted.
Oxenfeldt suggests that the following questions be posed in this review:
A. Do channel members hold inventories? B. Do they make purchases in large or small quantities? C. Do they provide repair services? D. Do they extend credit to customers? E. Do they deliver? F. Do they help train the customers’ sale force?
The main point of periodically reviewing channel member services in relation to the margins granted them, is to find out whether there are any major inequities that are creating problems in the ranks of particular classes of channel members.
Rival Brands
Price Points
Key Term and Definition
• Price points: Specific prices, usually at the retail level, to which consumers have
become accustomed.
In other words, consumers come to expect certain products to be available at cus- tomary prices. While most price points rise, sometimes price points can actually move down, as in the case for the under $1,000 personal computer.
- Product Variations
When a manufacturer attaches prices to the various models within a given product line, it should be careful to associate price differences in product features. If the price differences are not closely associated with visible or identified product fea- tures, the channel members will have a more difficult selling job to the consumer.
Other Issues in Channel Pricing
The channel manager is faced with other channel pricing issues that require more specific and detailed attention. Five of the most important are discussed in this sec- tion.
- Exercising Control in Channel Pricing
As stated earlier, the manufacturer’s pricing strategies often require channel mem- ber support and cooperation if they are to be implemented effectively.
Of all of the elements of the marketing mix, channel members view pricing as the area that is most in their domain. As soon as the manufacturer seeks to exercise some control over channel members’ pricing strategies, channel members may feel that the manufacturer has stepped out of its proper boundary.
Yet, from the manufacturers’ point of view, some of the most important pricing strategies may call for having some degree of control over the channel members’ pricing policies. In attempting to influence some control, the manufacturer is faced with the difficult and delicate task of enforcing pricing policies without alienating channel members.
Although there is no surefire way to avoid the problem, several guidelines can be offered. These are:
a. Any type of coercive approaches to controlling channel member pricing poli- cies should be ruled out. b. Encroachment by the manufacturer into the domain of channel member pric- ing policies should be undertaken only if the manufacturer believes that is is in his or her vital long-term strategic interests to do so.
c. If the manufacturer does feel that it is necessary to exercise some control over channel member pricing policies, an attempt should be made to do so through what might be called “friendly persuasion”.
- Changing Price Policies
Another important channel pricing issue that the manufacturer is almost sure to face at one time or another is dealing with channel member reactions to major changes in the manufacturer’s pricing policies and related terms of sale.
Major changes in the manufacturer’s pricing policies are bound to affect channel members. Typically, channel members become very uneasy when they hear about significant changes in manufacturer pricing policies or terms of sale. Indeed, chan- nel members’ own pricing strategies may be closely tied to the existing policies of the manufacturer.
Hence, a significant amount of communication and research into the problems and issues of channel members is needed to prevent channel conflicts from developing.
- Passing Price Increases through the Channel
So long as each channel member is able to pass along manufacturer-initiated price increases to the next channel member, and ultimately to the final user, the price in- crease issue is not too worrisome.
But, when the increased prices cannot be totally passed through the channel, and hence channel members have to begin absorbing some or all of the price in- creases by cutting into their margins, price increases become a critical issue. Added to the direct monetary difficulties arising from such nontransferable price in- creases is the ill will that they can create as each channel member blames the next for the price increase.
Unfortunately, such price increases are too simply passed along in rote fashion by the manufacturer (and other channel members) before other alternatives or strate- gies that could help mitigate the effects of the price increase are given adequate consideration.
Such alternatives and strategies include the following:
a. More thought to the long- and short-term implications of going through with the price increase versus attempting to hold the line on prices should be con- sidered. d. If passing on the price increase is unavoidable, the manufacturer should do whatever possible to mitigate the negative effects of the increase on channel members. Examples include: additional financial assistance, more liberal pay- ment terms, special deals, or other price-related strategies. e. The manufacturer could change its strategies in other areas of the marketing mix, particularly product strategy, to help offset the effects of price increases. For example, the product could be “improved” or the product could be “down- graded” to maintain a price point.
- Free riding: A term used to describe the behaviour of distributors and dealers who offer extremely low prices but little if any service to customers.
The discounters get a “free ride” from the services provided by the higher-priced full-service distributors and dealers when the consumer uses the full-service distrib- utors and/or dealers for product information, and then buy from lower-priced ven- dor.
Gray markets and free riding can both be of serious concern to the manufacturers of the products involved if these practices are widespread enough to disrupt the manufacturers’ ability to manage their marketing channels.
Channel design decisions that result in more closely controlled channels and selec- tive distribution as well as changing buyer preferences may help to limit the growth of the fray market and free riding.
Distribution Reporting
Course: Business
University: Divine Word College of Legazpi
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