Module-5-Pricing Decisions and Marketing channels

Unit-5 (10 hours)

Pricing decisions: Significance of pricing, factor influencing pricing (Internal factor and
External factor), objectives, Pricing Strategies-Value based, Cost based, Market based,
Competitor based, Pricing Procedure.
Marketing Channels: Meaning, Purpose, Factors Affecting Channel Choice, Channel Design,
Channel Management Decision, Channel Conflict, Designing a physical Distribution System,
Network Marketing.
Significance of Pricing:
 Price is the amount of money charged for a product or service.
 Total value that customers exchange for the benefits of having or using products or
services.
 Of all the elements, price is the only one that generates revenue. All other generates only
cost.
 Most important determinant of the profitability of any company.
 By manipulating the price, the company adjusts the level of cash flow and funds available
for other elements of the marketing mix.

Factors Influencing pricing

Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost involved in producing the
product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the
firm must be able to recover both the variable and fixed costs.

2. The predetermined objectives:

While fixing the prices of the product, the marketer should consider the objectives of the firm.
For instance, if the objective of a firm is to increase return on investment, then it may charge a
higher price, and if the objective is to capture a large market share, then it may charge a lower
price.

3. Image of the firm:

The price of the product may also be determined on the basis of the image of the firm in the
market. For instance, HUL and Procter & Gamble can demand a higher price for their brands, as
they enjoy goodwill in the market.

4. Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance,
during the introductory stage the firm may charge lower price to attract the customers, and
during the growth stage, a firm may increase the price.
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5. Credit period offered:

The pricing of the product is also affected by the credit period offered by the company. Longer
the credit period, higher may be the price, and shorter the credit period, lower may be the price
of the product.

6. Promotional activity:
The promotional activity undertaken by the firm also determines the price. If the firm incurs
heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in
order to recover the cost.

B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree of competition in the
market. If there is high competition, the prices may be kept low to effectively face the
competition, and if competition is low, the prices may be kept high.

2. Consumers:
The marketer should consider various consumer factors while fixing the prices. The consumer
factors that must be considered includes the price sensitivity of the buyer, purchasing power, and
so on.

3. Government control:
Government rules and regulation must be considered while fixing the prices. In certain products,
government may announce administered prices, and therefore the marketer has to consider such
regulation while fixing the prices.

4. Economic conditions:
The marketer may also have to consider the economic condition prevailing in the market while
fixing the prices. At the time of recession, the consumer may have less money to spend, so the
marketer may reduce the prices in order to influence the buying decision of the consumers.

5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their expectations. The
longer the chain of intermediaries, the higher would be the prices of the goods.

Pricing Objectives:

Pri1`cing can be defined as the process of determining an appropriate price for the product, or it
is an act of setting price for the product. Pricing involves a number of decisions related to setting
price of product. Pricing policies are aimed at achieving various objectives. Company has several
objectives to be achieved by the sound pricing policies and strategies. Pricing decisions are based
on the objectives to be achieved. Objectives are related to sales volume, profitability, market
 Module-5-Pricing Decisions and Marketing channels

shares, or competition. Objectives of pricing can be classified in five groups as shown in figure
1.

1. Profits-related Objectives:
Profit has remained a dominant objective of business activities.

Company’s pricing policies and strategies are aimed at following profits-related objectives:

i. Maximum Current Profit:

One of the objectives of pricing is to maximize current profits. This objective is aimed at making
as much money as possible. Company tries to set its price in a way that more current profits can
be earned. However, company cannot set its price beyond the limit. But, it concentrates on
maximum profits.

ii. Target Return on Investment:

Most companies want to earn reasonable rate of return on investment.

Target return may be:

(1) fixed percentage of sales,
 Module-5-Pricing Decisions and Marketing channels

(2) Return on investment,

Company sets its pricing policies and strategies in a way that sales revenue ultimately
yields average return on total investment. For example, company decides to earn 20%
return on total investment of 3 crore rupees. It must set price of product in a way that it
can earn 60 lakh rupees.

(3) A fixed rupee amount.

Company sets its pricing policies and strategies in a way that sales revenue ultimately
yields average return on total investment. For example, company decides to earn 20%
return on total investment of 3 crore rupees. It must set price of product in a way that it
can earn 60 lakh rupees.

2. Sales-related Objectives:

The main sales-related objectives of pricing may include:

i. Sales Growth:
Company’s objective is to increase sales volume. It sets its price in such a way that more and
more sales can be achieved. It is assumed that sales growth has direct positive impact on the
profits. So, pricing decisions are taken in way that sales volume can be raised. Setting price,
altering in price, and modifying pricing policies are targeted to improve sales.

ii. Target Market Share:

A company aims its pricing policies at achieving or maintaining the target market share. Pricing
decisions are taken in such a manner that enables the company to achieve targeted market share.
Market share is a specific volume of sales determined in light of total sales in an industry. For
example, company may try to achieve 25% market shares in the relevant industry.

iii. Increase in Market Share:

Sometimes, price and pricing are taken as the tool to increase its market share. When company
assumes that its market share is below than expected, it can raise it by appropriate pricing;
pricing is aimed at improving market share.

3. Competition-related Objectives:
Competition is a powerful factor affecting marketing performance. Every company tries to react
to the competitors by appropriate business strategies.

With reference to price, following competition-related objectives may be priorized:

i. To Face Competition:
Pricing is primarily concerns with facing competition. Today’s market is characterized by the
severe competition. Company sets and modifies its pricing policies so as to respond the
 Module-5-Pricing Decisions and Marketing channels

competitors strongly. Many companies use price as a powerful means to react to level and
intensity of competition.

ii. To Keep Competitors Away:

To prevent the entry of competitors can be one of the main objectives of pricing. The phase
‘prevention is better than cure’ is equally applicable here. If competitors are kept away, no need
to fight with them. To achieve the objective, a company keeps its price as low as possible to
minimize profit attractiveness of products. In some cases, a company reacts offensively to
prevent entry of competitors by selling product even at a loss.

iii. To Achieve Quality Leadership by Pricing:

Pricing is also aimed at achieving the quality leadership. The quality leadership is the image in
mind of buyers that high price is related to high quality product. In order to create a positive
image that company’s product is standard or superior than offered by the close competitors; the
company designs its pricing policies accordingly.

iv. To Remove Competitors from the Market:

The pricing policies and practices are directed to remove the competitors away from the market.
This can be done by forgoing the current profits – by keeping price as low as possible – in order
to maximize the future profits by charging a high price after removing competitors from the
market. Price competition can remove weak competitors.

4. Customer-related Objectives:
Customers are in center of every marketing [Link] wants to achieve following
objectives by the suitable pricing policies and practices:

i. To Win Confidence of Customers:

Customers are the target to serve. Company sets and practices its pricing policies to win the
confidence of the target market. Company, by appropriate pricing policies, can establish,
maintain or even strengthen the confidence of customers that price charged for the product is
reasonable one. Customers are made feel that they are not being cheated.

ii. To Satisfy Customers:

To satisfy customers is the prime objective of the entire range of marketing efforts. And, pricing
is no exception. Company sets, adjusts, and readjusts its pricing to satisfy its target customers. In
short, a company should design pricing in such a way that results into maximum consumer
satisfaction.

5. Other Objectives:
Over and above the objectives discussed so far, there are certain objectives that company wants
to achieve by pricing.

They are as under:

 Module-5-Pricing Decisions and Marketing channels

i. Market Penetration:
This objective concerns with entering the deep into the market to attract maximum number of
customers. This objective calls for charging the lowest possible price to win price-sensitive
buyers.

ii. Promoting a New Product:

To promote a new product successfully, the company sets low price for its products in the initial
stage to encourage for trial and repeat buying. The sound pricing can help the company introduce
a new product successfully.

iii. Maintaining Image and Reputation in the Market:

Company’s effective pricing policies have positive impact on its image and reputation in the
market. Company, by charging reasonable price, stabilizing price, or keeping fixed price can
create a good image and reputation in the mind of the target customers.

iv. To Skim the Cream from the Market:

This objective concerns with skimming maximum profit in initial stage of product life cycle.
Because a product is new, offering new and superior advantages, the company can charge
relatively high price. Some segments will buy product even at a premium price.

v. Price Stability:
Company with stable price is ranked high in the market. Company formulates pricing policies
and strategies to eliminate seasonal and cyclical fluctuations. Stability in price has a good
impression on the buyers. Frequent changes in pricing affect adversely the prestige of company.

vi. Survival and Growth:

Finally, pricing is aimed at survival and growth of company’s business activities and operations.
It is a fundamental pricing objective. Pricing policies are set in a way that company’s existence is
not threatened.

Pricing Strategies:

Value Based Pricing strategy- pricing a product based on the value the product has for the
customer and not on the cost of production or any other factor. Value based pricing sells the
product at the price based on customer’s perceived value of the product. Such pricing is used on
the luxury items where the actual value is quite different from the perceived value. The luxury
item may not actually cost nearly as much to make as what people are prepared to pay for it. It is
important to note that this method of pricing is based on a sound understanding of how
customers judge value , for determining the value the companies generally find the value through
customer surveys, focus groups, which is then used to determine the price.

Value = perceived benefits received/perceived price paid.

 Module-5-Pricing Decisions and Marketing channels

Cost based pricing strategy- cost of production is the most important variable and most
important determinant of its price. There may be many types of costs such as fixed cost, variable
cost, total cost, average cost and marginal cost.

a) Mark – up pricing or cost plus pricing : in this method, the marketer estimates the total
cost of producing or manufacturing the product and then adds it a mark up or the margin
that the firm wants. This is indeed the most elementry pricing methods and many of
services and projects are priced accordingly.

b) Full cost or Absorption cost pricing : Absorption costing means that all of the
manufacturing costs are absorbed by the units produced. In other words, the cost of a
finished unit in inventory will include direct materials, direct labour, and both variable
and fixed manufacturing overhead. Absorption costing is also referred as full costing or
full absorption method. Absorption costing is costing system which treats all costs of
production as product costs, whether they are variable or fixed.

c) Break even pricing : Break even point is the volume of sales at which the total sales
revenue of the product is equal to its total cost. It can also be said that break even point is
the volume of sales at which there is no profit and no loss. Therefore this method is also
known as “ No profit no loss Zone “

In the short run the enterprise will not make any pofit but in long run, it will start to earn
profit and higher be the scale of production, more will be the amount of profit to the
enterprise because all fixed costs remain constant at all levels of production and as the
fixed costs are recovered in the beginning, the enterprise starts to get profit with increase
in sales above break even point.

d) Rate of return or target pricing method : under this method of price determination, a rate
of return desired by the enterprise on the amount of capital invested by its determined.
The amount of profit desired by the enterprise is calculated on the basis of this rate of
return. This amount of profit is added to the cost of production of the product and thus,
the price per unit of the product is determined. This method of price determination can be
used by an enterprise to get a certain return on invested capital. The use of this method is
possible only when there is no competition in the market.

Market based Pricing strategy or Competitor based pricing : most companies fix the prices of
their products after a careful consideration of the competitor’s price structure. Four pricing
methods are available under this method.

Parity pricing or Going Rate pricing :Here the price of the product is determined on the basis of
the price of competitor’s products. This method is used when the firm is new in the market or
when the existing firm introduces a new product in the market. This method is used when there is
a tough competition in the market. The method is based on the assumption that a new product
 Module-5-Pricing Decisions and Marketing channels

will create demand only when its price is competitive. In such case the firm follows the market
leader.

Price below competitive level or discount pricing : discount pricing means when the firm
determines the price of its products below the competitive level i.e below the price of the same
products of the competitors. This method is used by new firms entering the market.

Pricing above Competition level or Premium Pricing : premium pricing means where the firm
determines the price of its product above the price of the same products of the competitors. Price
of the firm’s product remains higher showing that its quality is better. The price poloicy is adpted
by the firms of high reputation only because, they have created the image of quality producer in
the minds of the public. They became the market leader.

Competitive Bidding/ sealed Bid/ Tender pricing : In a large number of projects, and marketing
to the government , suppliers are asked to submit their quotations, as a part of tender. The price
quoted reflects the firm’s cost and its understanding of competition.

If the firm has to price its offer only at its cost level, it may be the lowest bidder and may even
get the contract but may not make any profit out of the deal. So it is important that the firm uses
expected profit at different price levels to arrive at the most profitable price. This can be arrived
at by considering the profits and profitability of getting a contract at different prices. This
method obviously assumes that the firm has complete knowledge or information about the
competition and the customer.

Customer Demand based pricing : under this method of pricing, price is fixed by adjusting it to
the market conditions. A high price is charged when or where the demand is intense and a low
price is charged when the demand is low. The following methods are used under this category

a) What the traffic can bear pricing/purchasing power pricing method : here the pice of he
product is determined on te basis of what the purchaser can bear or pay. What purchases
can pay depends upon their purchasing power. Generally, luxury goods or fashion goods,
cosmetics, are price on this basis. It is more used by retailers rather than by
manufacturing firms.

This method brings high profits in short run. But in the long run, this concept is not safe.
Chances of errors in judgements are very high.

b) Skimming Based pricing : one of the most commonly discussed pricing methods is
skimming prcing. This pricing method to the firm’s desire to skim the market, by selling
at a premium price. This pricing method delivers results in the following situation :

1) When the target market associates quality of the product with its price, and high price
is perceived to means of high quality of the product.

2) When the customer is aware and is willing to buy the product at a higher price just to
be an opinion leader.
 Module-5-Pricing Decisions and Marketing channels

3) When the product is perceived enhancing the customer’s status in the society.

4) When competition is non – existent or the threat from potential competition exists in
the industry because of low entry and exit barriers.

5) When the product represents significant technological breakthroughs and is

perceived as a high technology product.

Penetration Based pricing : the objective of penetration pricing method is to gain a

foothold in a highly competitive market. The objective of this pricing method is
market share or market penetration. Here, the firm prices its product lower than the
others do in competition. This method delivers results in the following situations:

 when the size of the market is large and it is a growing market.

 When the customer loyalty is not high, customers have been buying the
existing brands more because of habit rather than any specific preferences for
it.

 When the market is characterized by intensive competition

 When the firm uses it as an entry strategy.

Steps for Setting the Price

Selecting the pricing objective

Determining demand

Estimating costs

Analyzing competitor’s costs,

prices and offers
 Module-5-Pricing Decisions and Marketing channels

Selecting a pricing method

Selecting the final price

I. Selecting the pricing objective –

1. Survival – Plagued with overcapacity, intense competition or changing consumer wants
and the motive is just to survive in the market. Eg. Asian paints reduced the price across
all the paint items to survive in the market.
2. Maximum current profit – Estimate the demand and costs associated with alternative
prices and choose the one that produces maximum current profit. Eg. British Airways is
concentrating more on premium class passengers by reducing economy class seats to earn
maximum profit.
3. Maximum market share – Higher sales volume lead to lower unit costs and higher long
run profit. Marketers set a large plant, set its price as low as possible, win a large market
share, experience falling costs and cut its price further as costs fall. Eg. LG came with
reasonably priced products in the beginning to gain maximum market share.
[Link] Demand –
1. Price sensitivity – Buyers are less price sensitive to low cost items or items they buy
infrequently, there are few or no substitutes or competitors, they think high prices is justified
and price is only a small part of the total cost.
2. Price elasticity of demand – Products where change in price does not cause much difference
in the quantity demanded have inelastic demand. Marketers can charge high price for these
products.
If the change in price causes much difference in the quantity demanded, then such products
have elastic demand. A small reduction in price can increase the sales of the product.
III. Estimating Cost – Demand sets the ceiling and cost sets the floor. Manufacturer has to
cover its cost of producing, distributing and selling the product including return for its effort and
risk.
1. Types of cost and production – Fixed Cost – Does not vary with production level or
sales revenue. Eg. Salary, light, rent, heat, interest etc.
Variable cost – Vary directly with the level of production. Eg. For calculators, cost of plastic,
microprocessor chip and packaging vary with the level of production.
Total cost = FC + VC
Average cost = Total Costs
No. of units produced
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[Link] competitor’s costs, prices and offers – Firm should consider nearest
competitor’s price. If the firm’s offer contains features, not offered by the nearest competitor, it
3should evaluate their worth to the customer and add that value to the competitor’s price. If the
competitor’s offer contains some features not offered by the firm, the firm should subtract their
value from its own price.
V. Selecting a pricing method –
1. Mark-up pricing – Add a standard markup for profit to the producer’s cost.
Variable cost per unit = Rs. 10
Fixed Cost = Rs. 300000
Expected unit sales = 50000
Unit cost is given by = VC + FC
Unit sales = 10 + 300000
50000 = Rs. 16
sw Earn 20% mark up on sales
Mark up price = Unit cost + .2 * unit Cost
= 16 + .2 * 16 = Rs 19.2
2. Target Return Pricing -Firm determines the price that would yield its target rate of a ROI.
For eg. Invested Rs. 10,00000 in the business and wants to set a price to earn a 20% ROI,
specifically Rs. 200000.

Target Return price = Unit cost + Desired Return x Invested capital

Unit sales
= 16 + 0.20 x 1000000 = Rs. 20
50000
3. Perceived Value Pricing – Customer is ready to pay little amount extra if the product
has got high perceived value. Perceived value is made up of several elements : buyer’s
image of the product’ s performance, the channel deliverables, the warranty quality,
customer support, supplier’s reputation, trustworthiness and esteem.
4. Going – Rate Pricing – The firm bases its price largely on competitor’s price, charging
the same, more or less than its major competitors. Premium pricing involves pricing
above the competitor’s price. Discount pricing is pricing below such level. Parity pricing
is matching the price of competitors. For eg. In steel, paper or fertilizer industry, firms
charge the same price and follow the market leader.
VI Selecting the final price – Company must consider the additional factors :
i. Impact of other marketing activities – Brand quality, advertising, customer support, on
time delivery and product shipping and handling relative to the competitors are
considered. Brands with average relative quality but high relative advertising budgets
were able to charge premium prices.
ii. Impact of price on other parties – Impact on distributors, dealers, sales force
competitors, suppliers and government.
iii. Psychological pricing - Lower price threshold below which prices signal inferior
quality and upper price threshold above which prices are prohibitive. Bata quote price
like 399, 499 in order to affect the psychology of the customers.
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Distribution Channels:

Martgketing channels / Distribution channels are sets of interdependent organizations involved in

the process of making a product or service available for use or consumption.
They are the set of pathways a product or service follows after production, resulting in purchase
and use by the final end users.
It connects the manufacturer with the consumer and help in the distribution of goods.

Manufacturer Intermediaries Consumer

Distribution Channels

Purpose
 Buying – Purchasing a broad assortment of goods from the producer or other channel
members.
 Carrying Inventory – Assuming the risks associated with purchasing and holding an
inventory. Successive storage and movement of goods.
 Selling – Performing activities required for selling goods to consumers or other channel
members.
 Transporting – Arranging for the shipment of goods to the desired destination.
 Financing – Providing funds required to cover the cost of channel activities.
 Promoting – Contributing to national and local advertising and engaging in personal
selling efforts.
 Negotiating – Attempting to determine the final price of goods and the terms of payment
and delivery.
 Marketing Research (Information) – Providing information regarding the needs of
customers.
 Servicing – Providing a variety of services, such as credit, delivery and returns.

Factors affecting Channel Choice:

Important factors affecting the choice of channels of distribution by the manufacturer are:

(A) Considerations Related to Product:

1. Unit Value of the Product:

When the product is very costly it is best to use small distribution channel. For example,
Industrial Machinery or Gold Ornaments are very costly products that are why for their
distribution small distribution channel is used. On the other hand, for less costly products
long distribution channel is used.

2. Standardised or Customised Product:

Standardised products are those for which are pre-determined and there has no scope for
alteration. For example: utensils of MILTON. To sell this long distribution channel is
 Module-5-Pricing Decisions and Marketing channels

[Link] the other hand, customised products are those which are made according to the
discretion of the consumer and also there is a scope for alteration, for example; furniture.
For such products face-to-face interaction between the manufacturer and the consumer is
essential. So for these Direct Sales is a good option.

3. Perishability:

A manufacturer should choose minimum or no middlemen as channel of distribution for

such an item or product which is of highly perishable nature. On the contrary, a long
distribution channel can be selected for durable goods.

5. Technical Nature:

If a product is of a technical nature, then it is better to supply it directly to the consumer. This
will help the user to know the necessary technicalities of the product.

(B)Considerations Related to Market

Market considerations are given below:

1. Number of Buyers:
If the number of buyer is large then it is better to take the services of middlemen for the
distribution of the goods. On the contrary, the distribution should be done by the
manufacturer directly if the number of buyers is less.

2. Types of Buyers:
Buyers can be of two types: General Buyers and Industrial Buyers. If the more buyers of the
product belong to general category then there can be more middlemen. But in case of industrial
buyers there can be less middlemen.

3. Buying Habits:
A manufacturer should take the services of middlemen if his financial position does not permit
him to sell goods on credit to those consumers who are in the habit of purchasing goods on
credit.

4. Buying Quantity:
It is useful for the manufacturer to rely on the services of middlemen if the goods are bought in
smaller quantity.
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5. Size of Market:
If the market area of the product is scattered fairly, then the producer must take the help of
middlemen.

(C) Considerations Related to Manufacturer/Company

Considerations related to manufacturer are given below:

1. Goodwill:
Manufacturer’s goodwill also affects the selection of channel of distribution. A manufacturer

enjoying good reputation need not depend on the middlemen as he can open his own branches
easily.

2. Desire to control the channel of Distribution:

A manufacturer’s ambition to control the channel of distribution affects its selection. Consumers
should be approached directly by such type of manufacturer. For example, electronic goods
sector with a motive to control the service levels provided to the customers at the point of sale
are resorting to company owned retail counters.

3. Financial Strength:
A company which has a strong financial base can evolve its own channels. On the other hand,
financially weak companies would have to depend upon middlemen.

(D) Considerations Related to Government

Considerations related to the government also affect the selection of channel of distribution. For
example, only a license holder can sell medicines in the market according to the law of the
government.

In this situation, the manufacturer of medicines should take care that the distribution of his
product takes place only through such middlemen who have the relevant license.

(E) Others
 Module-5-Pricing Decisions and Marketing channels

1. Cost:
A manufacturer should select such a channel of distribution which is less costly and also useful
from other angles.

2. Availability:
Sometimes some other channel of distribution can be selected if the desired one is not available.

3. Possibilities of Sales:
Such a channel which has a possibility of large sale should be given weight age.

Channel Design Decisions

Analysis of customer’s desired service output level

Establishing channel objectives and constraints

Identifying major channel alternatives

Evaluating major channel alternatives

Opting for multi-channel model

Choosing channel intensity and number of tiers

I Analysis of Customer’s desired Service output levels – Marketer must understand the
service output levels its target customers want. Channels produce five service outputs.
1. Lot size – The number of units the channel permits a typical customer to purchase on one
occasion. A household wants a channel that permits buying a lot size of one. Wholesalers
buy in bulk.
2. Waiting and Delivery time – Average time customers of that channel wait for receipt
of the goods. For electronic items, customers are ready to wait so online channel is a
good option.
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3. Spatial Convenience – Expresses the degree to which the marketing channel makes it
easy for the customers to purchase the product. Eg. FMCG products in nearby localities.
4. Product Variety – Assortment breadth provided by marketing channel. Customers prefer
a greater assortment because more choices increase the chance of finding what they need.
5. Service backup – Add on services (credit, delivery, installation, repairs) provided by the
channel.

II. Establishing objectives and constraints -

Broad objectives include :
 Availability of product in the target market.
 Smooth movement of the product from the producer to the consumer.
 Cost effective and economic distribution.
 Information communication from the producer to the consumer.
For eg. In case of Lifebuoy, the objective of HUL Is to cover 80% of the rural market –
So Intensive distribution available in every nook and corner of Rural India.
For Louis Phillippe , it has been promoted as a complete and premium wardrobe line – So
exclusive showrooms; ensure availability of the whole line at these outlets.
Channel objectives vary with product characteristics. Perishable products require more
direct marketing. Bulky products such as building materials require channels that
minimize the shipping distance and the amount of handling. Complex machinery are sold
directly by company sales representative.
III. Identifying major channel alternatives – Each channel has its own strengths and
weaknesses. Sales force is expensive but can handle complex products.
1. Types of Intermediaries – For eg. Car perfume manufacturer identifies the following
channel alternatives: Sell its car perfumes to automobile manufacturers.
 Auto dealers
 Retail automotive – equipment dealers
 Mass merchandisers such as Spar or eZone.
 Authorized servicecenters.
2. Innovative Channel Alternatives – HUL’s Operation Shakti involves Self Help Group
women to distribute the product in rural areas. Avon’s – Chain Marketing, ITC’s e-
choupal
3. Number of Intermediaries – Exclusive Distribution – Gucci
Selective Distribution – Nokia, Intensive distribution – FMCG Products.

IV. Evaluating the major alternatives –

1. Economic Criteria – Estimate how many sales are likely to be generated by a company
sales force.
 Cost of selling different volume through each channel
 Comparing sales and cost.
2. Control and adaptive criteria – Sales agency poses a control problem. Seeking to
maximize the profit. Agents concentrate on the customer who buy the most, not
necessarily who buy the manufacturer’s goods. It is easy to control in case of exclusive
distribution. Manufacturers seek to choose such distribution channel which will provide
them the flexibility to adapt to any changing marketing environment.
For eg. Apple opened its own exclusive showroom because of control problems only.
 Module-5-Pricing Decisions and Marketing channels

Economic Criteria
Sales force
High
Value added
Partners
Distributors
Value added
Retail Outlet
Telemarketing

Internet
Low

Cost per High

Low
Transaction

V Deciding on Multichannel Model – Companies have to decide whether to go for

multichannel model or single channel model. For [Link] has got offline as well as online
channel. Coca Cola is available in Restaurants, Airlines, Bars and Clubs and supermarkets.
VI. Deciding on the number of tiers and intensity of Distribution – Number of levels of
channel (zero level, one level, two level, three level) and intensity of distribution (Intensive
distribution, exclusive or selective distribution)is being decided.

Channel Management Decisions

Selecting Channel Members

Training & Motivating Channel

Members

Evaluating Channel Members

Modifying Channel Design and

Arrangements
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I. Selecting Channel Members – Company should select channel partners based on

number of years in business, other lines carried, growth and profit record, financial
strength, cooperativeness and service reputation. If the intermediaries are department
stores, the producer should evaluate locations, future growth potential and type of
clientele.
II. Training and motivating Channel Members – A company has to plan and implement
careful training program and Capability building program to improve intermediaries’
performance. For eg. SBI Life Insurance training the agents and SBI Bank employees to
sell the policies.
Producers draw on the following types of power for motivating their channel partners:
Coercive Power – Manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate.
Reward Power – Offers an extra benefit for performing specific acts or functions.
Legitimate Power – Requests the behavior that is warranted under the contract.
Referent Power – Manufacturer is so highly respected that intermediaries are proud to
be associated with it. Eg. IBM, HP, Caterpillar etc.
III. Evaluating Channel Members – Producers must periodically evaluate intermediaries’
performance against such standards as sales quota attainment, average inventory levels,
customer delivery time, treatment of damaged and lost goods, and cooperation in
promotional and training programs. Underperformers need to be counseled, retrained,
motivated or terminated.
IV. Modifying Channel design and arrangements – Manufacturers periodically review and
modify channel design and arrangements when the distribution channel is not working as
planned, consumer buying patterns change, the market expands, new competition arises,
innovative distribution channels emerge and the product moves into the later stages in the
PLC.
[Link] office copiers were initially marketed through manufacturers direct sales force,
then through office equipment dealers, then mass merchandisers and now through
Internet Markets.
Apple was distributing Laptops initially through Retail Stores but got disappointed by
poor retail presentation by others. Now they are selling the product exclusively through
company stores where there is a full line of Apple products, software and accessories and
Apple specialists providing technical support. They conduct in store presentations and
workshops for tech savvy customers.
Pantaloons opened its online store as well.

Channel Conflict
Channel conflict is generated when one channel member’s actions prevent another
channel from achieving its goal.
Eg. General Motors came into conflict with its dealers in trying to enforce policies on
service, pricing and advertising.
Types of Conflict
 Vertical channel conflict – Conflict between two members at different levels within the
same channel. A manufacturer having a conflict with a distributor is an example of
vertical conflict. For eg. HUL came into conflict with its distributors in Kerala on the
issue of commissions.
 Module-5-Pricing Decisions and Marketing channels

 Horizontal channel Conflict – Involves conflict between members at the same level
within the channel. For eg. Bangalore Ford Dealers complained about other Ford Dealers
advertising and pricing too aggressively.
 Multichannel conflict – When the manufacturer has established two or more channels
that sell to the same market. For eg. Companies getting into direct online sales through
Web marketing have also received boycott threats from the established distributors.

Causes of Channel Conflict

 Goal Incompatibility – Manufacturers may want to achieve rapid market penetration
through a low price policy. Dealers, in contrast, may prefer to work with high margins
and pursue short run profitability.
 Unclear roles and rights –Geographical territory boundaries , credit for sales and
commission, roles performed issues always create conflict. For eg. Nearby territories of
Bangalore coming under which dealer, Transportation expenses borne by whom,
manufacturer or distributor.
 Differences in perception – Manufacturer may be optimistic about the short term
economic slowdown and want dealers to carry higher inventory. Dealers may be
pessimistic and assume that slowdown will last long and are not ready to carry high
inventory.
 Intermediaries’ dependence on the manufacturer – Fortunes of exclusive dealers such
as auto dealers are profoundly affected by the manufacturer’s product and pricing
decisions.

Impact of channel conflict :

Decrease in productivity : when an organization spends much of its time dealing with
conflict, members take time away from focusing on the core goals they are tasked with
achieving. Conflict causes members to focus less on the project at hand and more
gossiping about conflict or venting about frustrations. As a result, organizations can lose
money.
Members leave organizations
Violence.
Inspire Creativity : some channel members view conflict as an opportunity for finding
creative solutions to solve problems. Conflict can inspire members to brainstorm ideas,
while examining problems from various perspectives.
Improve Future communication : conflict can bring group members together and help
them learn more about each other.
Mental health Concerns : Channel conflict can cause members to become frustrated if
they feel as if there’s no solution insight, or if they feel that their opinions go
unrecognized by other group members. As a result members become stressed, which
affect their professional and personal lives. channel members may have problems of
sleeping, loss of appetite or overeating, headaches and become unapproachable. In some
cases channel members may avoid meetings to prevent themselves from expressing stress
and stress related symptoms.

Managing Channel Conflict

 Module-5-Pricing Decisions and Marketing channels

Effective conflict management can be done by –

 Adoption of superordinate goals – Channel members come to an agreement on the
fundamental goal they are jointly seeking, whether it is survival, market share, high
quality or customer satisfaction.
 Exchange of employees – GM executives might agree to work for a short time in some
dealerships and some dealership owners might work in GM’s dealer policy department.
Participant will grow to appreciate each other’s point of view.
 Co-optation – An effort by one organization to win the support of the leaders of another
organization by including them in advisory councils, boards of directors and the like.
Eg. Few representatives of the Dealers of GM in the advisory council of GM.
 Diplomacy, Meditation and Arbitration – Diplomacy when each side sends a person or
group to meet with its counterparts to resolve the conflict.
Meditation means resorting to a neutral third party skilled in maintaining the two parties’
interests.
Arbitration occurs when the two parties agree to present their arguments to one or more
arbitrators and accept the arbitration decisions.
 Legal recourse – File a lawsuit if nothing works.

Designing Physical Distribution system:

Physical distribution is the group of activities associated with the supply of finished
product from the production line to the consumers. The physical distribution considers
many sales distribution channels, such as wholesale and retail, and includes critical
decision areas like customer service, inventory, materials, packaging, order processing,
and transportation and logistics.
The various elements of Physical Distribution system are :

 Order Processing : order processing is the receipt and transmission of sales order
information. Efficient order processing facilitates product flow. Order processing
directly affects the firm’s ability to meet its customer service standards. A
company may have to compensate for inefficiencies in its order processing system
by shipping products via costly transportation modes or by maintaining large
inventories at many expensive field warehouses.

Order processing involves three main tasks: Order Entry : Order entry begins when
customers or sales people place purchase orders via telephone, mail,-mail, or websites.

Order handling : Once an order is entered, it is transmitted to a warehouse, where product

availability is verified, and to the credit department where prices, terms and the
customer’s credit rating are checked. If approved, the order is assembled.

Order Delivery : when the order has been assembled and packed for shipment, the
warehouse schedules delivery with an appropriate carrier.

 Managing inventory/stock or inventory controls : inventory management involves

developing and managing adequate assortments of products to meet customer’s
Module-5-Pricing Decisions and Marketing channels

needs. It will be obvious that without effective management of finished product

inventory, it is impossible to run any business efficiently and profitably.
inventory decision making involves knowing when to order and how much to
order. Management must know at what stock level to place a new order, which is
called as re-order point. An order point of 10 means reordering when the stock
falls to 10 units.

Material handling : The physical handling of products is an important factor in

warehouse operations, as well as transportation from point of production to point
of consumption. Efficient procedures and techniques for materials handling
minimise inventory management costs, reduce the number of times a good is
handld, improve customer service, and increase customer satisfaction.
Material handling is the area of physical distribution that has experienced the
greatest change and improvement in efficiency. Two major changes took place in
this area are :
Elimination of man handling : The improvement was the replacement of man
handling by machine handling but still I is used in retail of final buyer stage.
Improved conveyer systems and left equipments have changed to total
mechanisation.
Containerisation: it is a method in which a large number of units of a product are
combined into a single compact unit for storage and transportation. It reduced
material handling cost and time.

Warehousing : Any firm can choose to either have its own dedicated network of
warehouses or share space with others in third party operated warehouses. The
farmer offers greater flexibility in design to meet product characteristics and
storage needs, greater control over warehouse operations, effective market
feedback and lower cost per unit as opposed to a third party arrangement.
However third party warehouses require no fixed investment by the firm.
Also flexibility in location and space utilisation make this an attractive alternative.
By using the right type of warehouse, a company may reduce transportation and
inventory costs or improve service to customers, the wrong ware house may drain
the company resources.

Transportation : the movement of products from where they are made to where
they are used, is the most expensive physical distribution function. Transportation
confers time utility, place utility to the product , it determines the company’s
customer service. It also has a crusial bearing on the other elements of physical
distribution and marketing like marketing, inventory control and channel
management.
There are five important transportation modes, each offering distinct advantages .
Railroads : railroads carry heavy, bulky freight that must be shipped long
distances overland.

Trucks : Trucks provide the most flexible schedules and routes of all major
transportation modes because they can go almost anywhere.
 Module-5-Pricing Decisions and Marketing channels

Waterways ; this is a cheapest method of shipping heavy, low-value, non-

perishable goods.
Air – transportation : It is the fastest yet most expensive form of shipping.
Pipelines : Pipelines, the most automated transportation mode, usually belong to
the shipper and carry the shipper’s products.

Types of markting channels :

Direct Marketing Channel or Zero Level Channel

This type of channel has no intermediaries In this distribution system, the goods go from
the producer direct to the consumer. Companies use their own sales force to reach
consumers. Eg. Eureka Forbes which markets water purifiers in Indian market, Dell
Computers.
Zero Level Channel

Producer consumer
Producer Consumer

Under direct channel of distribution , the manufacturer can adopt one of the following
methods of selling.
Selling at manufacturer’s Plant : it is also known as direct selling . here the goods are sold
by the producers directly to the consumers. Direct selling is generally preferred in case of
perishable products like bread.\, milk, icecreams, fish, meat, egg, vegetables and
agricultural products etc.
Door to door sales : here the sales agent travels from house to house , attempting to sell a
product or service face to face.
Sales by mail order method : a method of selling in which orders are taken and products
are delivered by mail. Mail order is a term which describes the buying of goods or
services by mail delivery. The buyer places the order through telephone or through
website.
Sales by opening own shops : manufacturers of perishable or non perishable products
commonly sell their products to customers by opening their own shops.

Indirect Marketing Channel – These are typical channels in which a third party is
involved in the distribution of products and services of a firm. It can be classified into
following categories:
1. One-Level Channel- In this type of channel there is only one intermediary
between producer and consumer. This intermediary may be a retailer or a
distributor. It is used for specialty products like washing machines, refrigerators,
Automobiles etc.
 Module-5-Pricing Decisions and Marketing channels

Producer Distributor / Retailer Consumer

 Two-Level Channel – This type of channel has two intermediaries, namely,

wholesaler/distributor and retailer between producer and consumer. It can be seen in
pharmaceuticals, liquor, expensive readymade garments.

Producer Distributor / Wholesaler Retailer Consumer

 Three-Level channel – This type of channel has three intermediaries namely distributor,
wholesaler and retailer. This pattern is used for convenience products like soaps,
toothpaste, icecreams, soft drinks etc.

Producer Distributor Wholesaler Retailer Consumer

Hybrid distribution channel : when the firm sets up two or more marketing channels to reach one
or more customer segments .

Here the producer sells directly to consumer segment 1 using direct mail catalogues and
telemarketing and reaches consumer segment 2 through retailers. It also sells indirectly to
business segment 1 through distributors and dealers and to business segment 2 through its own
sales force.

Multilevel Marketing or Network Marketing

Multilevel selling and network marketing– Multilevel (network) marketing, consists of
recruiting independent businesspeople who act as distributors. The distributor then
recruits further members under him/her. The distributor’s compensation includes a
percentage of sales of those the distributor recruits as well as earnings on direct sales to
customers. Eg. Amway, Tupperware, Oriflame etc.

Lady 1

Lady 2 Lady 3

Lady 4 Lady 5

Network marketing, also known as multi-level marketing, is a business model which involves a
pyramid structured network of people who sell a company’s products. The participants in this
network are usually remunerated on a commission basis. That is, people in this network get
commission every time they perform the specified task, like –

 Make a sale of a product.

 Module-5-Pricing Decisions and Marketing channels

 Their recruits make a sale of the product.

In simple words, this model involves a pyramid structure of non-salaried participants who get
paid whenever they or a person below them in the pyramid makes a sale.

In this system, consumers are the participants. Their family and friends are their customers, and
this cycle goes on.

Network Marketing

Characteristics Of Network Marketing

Direct Sales

Network marketing organizations sell their product directly don’t make use of any well-defined
channel of trade. The responsibility to sell the products is transferred to the non-employed
individuals (the participants) who get the commission everytime they make a sale.
 Module-5-Pricing Decisions and Marketing channels

Independent Business Owners (IBO)

The participants are called IBO as they work as if they are promoting their own business.

Selling Philosophy

This model involves participants to use the selling philosophy of marketing. The main focus is
on recruiting and selling as much as you can to earn more commission. No relationships are
built. People may even trick you to buy the products or to join them.

System Of Hierarchy

Suppose a person ‘A’ has a person ‘B’ under him. Now ‘A’ will get the commission whenever he
makes a sale and also a part of commission when ‘B’ makes a sale. Now, to earn more money,
‘B’ will also try to recruit a person ’C’ under him and so on. This makes the system a big
hierarchy.

Less Or No Advertising

Dependency on direct sales helps the organization to rely less on advertising as personalized
contact have more convincing power than advertisements.

No Fixed Salaries

This is a commission based network where participants (not employees) are paid commissions to
perform the specific task.

Accountability

Everyone is accountable only to himself. The more he sells, the more he earns.

Benefits To The Participants

Participants are also the consumers of the network. Hence, they also get discounts and other
attractive offers to when they join the network.

Examples of Network Marketing

 Module-5-Pricing Decisions and Marketing channels

Amway – been in business for around 57 years now, this company is one of the biggest example
of a successful MLM/network marketing company.

Other companies that use network marketing model include – Tupperware, Nu skin, Juice
Plus, etc.

Difference Between A Pyramid Structure And Network

Marketing
Pyramid structure is said to exist when you get paid to get a new recruit and there is no
involvement of any product. It’s an ill-practice which makes a person earn money by taking
advantage of his friends and family. Companies having a pyramid structure model tend to
deceive people while making them believe that they’ll earn in future (which they do by deceiving
more people). For e.g. a person will be asked to pay $100 to be a part of the company with a
promise that he’ll get 25% of every new recruit’s admission fees who he refers. This is a money
making strategy of the company where the participants are at a loss.

Whereas network marketing involves multiplying efforts by selling of products. This is a win-
win situation where the users get what they want and participants earn a commission.