Term
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Definition
| Decisions which cause top-level executives more concern than any other strategic marketing decision area. Reason: This is seen as having a direct link to the firm’s bottom line. |
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Term
| Anatomy of Pricing Structure |
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Definition
| Participants at the various levels in the channel each want a part of the total price sufficient to cover their costs and provide a desired level of profit. |
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Term
| The “golden rule” of channel pricing when developing pricing strategy |
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Definition
| “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.” |
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Term
| 8 Guidelines for Developing Effective Channel Pricing Structure |
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Definition
1. Each efficient reseller must obtain unit profit margins in excess of unit operating costs
2. Each class of reseller margins should vary in rough proportion to the cost of the functions the reseller performs.
3. At all points in the vertical chain (channel levels), prices charged must be in line with those charged for comparable rival brands.
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.
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.
6. Variations in margins on individual models and styles of a line are permissible and expected. They must, however, vary around the conventional margin for the trade.
7. A price structure should contain offerings at the chief price points, where such price points exist.
8. A manufacturer’s price structure must reflect variations in the attractiveness of individual product offerings. |
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Term
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Definition
| Channel members need margins that are more than adequate to cover the costs associated with handling a particular product. Thus the channel manager should be involved in a continuous review of channel member margin structures to determine if they are adequate. |
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Term
| 2. Different Classes of Resellers |
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Definition
| Margins at the wholesale and retail levels and for various types of agent intermediaries 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. |
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Term
| Six suggested questions to pose in this review of margin structure: |
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Definition
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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Term
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Definition
| Differentials in the margins available to channel members carrying competitive brands should be kept within tolerable limits. If a particular manufacturer’s brand is at a clear disadvantage compared to the margin a channel member can obtain from it relative to another brand (and this cannot be offset by higher volumes), the channel member will not devote much effort to promoting it. |
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Term
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Definition
| If the usual allocation of distribution tasks between the manufacturer and channel members changes, the margin structure should reflect this. |
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Term
| 5. Conventional Norms in Margins |
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Definition
| In most trades, resellers have come to regard some particular percentage margin as normal, fair, and proper. This strong commitment among channel members to what they consider to be the normal, fair, or proper margin makes it very difficult for the manufacturer to deviate from the conventional margin structures. 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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Term
| 6. Margin Variation on Models |
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Definition
| Variations in margins on individual models and styles in a product line are common. Promotional products are usually the lowest price in the line and yield relatively low margins for both the manufacturer and channel members. For example, automobile manufacturers frequently advertise “stripped down” versions of various models at low prices, to build traffic in the showroom. This gives dealers greater opportunity to trade-up the prospective buyer to a higher priced model, or sell optional add-on equipment. |
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Term
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Definition
| 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 customary prices. Failure to recognize retail (and in some cases wholesale) price points can create problems for the manufacturer if consumers expect to find products at particular price points and such products are not offered. |
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Term
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Definition
| When a manufacturer attaches prices to the various models within a given product line, it should be careful to associate price differences with differences in product features. 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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Term
| Other Issues in Channel Pricing |
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Definition
- Exercising Control in Channel Pricing
- Changing Price Policies
- Passing Price Increases Through the Channel |
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Term
| - Exercising Control in Channel Pricing |
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Definition
1. Any type of coercive approaches to controlling channel member pricing policies should be ruled out immediately.
2. Encroachment by the manufacturer into the domain of channel member pricing policies should be undertaken only if the manufacturer believes that it is in his or her vital long-term strategic interest to do so.
3. 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.” |
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Term
| - Changing Price Policies |
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Definition
| Typically, channel members become very uneasy when they hear about significant changes in manufacturer pricing policies or terms of sale. Their own pricing strategies may be closely tied to the existing pricing policies of the manufacturer. |
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Term
| - Passing Price Increases Through the Channel |
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Definition
| As long as each channel member is able to pass along a manufacturer-initiated price increase to the next channel member, and ultimately to the final user, the price increase issue is not too worrisome. But when increased prices cannot be totally passed through the channel, and channel members have to begin absorbing some or all of the price increases by cutting into their own margins, price increases become a critical issue. |
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Term
| Alternatives or strategies that could help mitigate the effects of price increases |
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Definition
- Before passing on a price increase, manufacturers could give more thought to the long and short-term implications of increasing prices versus attempting to hold the line t the greatest extent possible.
- If passing on a price increase is unavoidable, the manufacturer should do whatever possible to mitigate the negative effects of the increase on channel members.
- The manufacturer could change its strategies in the other areas of the marketing mix, particularly product strategy, to help offset the effects of price increases. |
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Term
| - Using Price Incentives in the Channel |
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Definition
| Price promotion strategies should be designed to be at least as attractive to retailers as they are to consumers. Manufacturers may give a great deal of thought to how much of a price incentive they need to offer to stimulate consumer demand through a price promotion. But if manufacturers expect strong retailer support for their price promotion, they also need to make a similar effort to determine just how much of a price incentive they need to offer retailers (or wholesalers) in order to secure it. But even with such efforts, in highly competitive markets such as those for consumer packaged goods, retailers and wholesalers will often take advantage of price promotions so as to maximize their profit potential whether or not it helps the manufacturer or the final consumer. |
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Term
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Definition
| Refers to the sale, usually at very low prices, of brand-name products by unauthorized distributors or dealers. Sometimes the origin of the products is from overseas manufacturers such as those in Japan or Europe. Sometimes they may be produced by a U.S. manufacturer for sale overseas. |
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Term
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Definition
| A term used to describe the behavior of distributors and dealers who offer extremely low prices but little if any service to customers. By undercutting the prices charged by distributors or dealers who display a full selection of the products and provide information, sales assistance, and after-sale service, the discounters get a “free ride” from the services provided by the higher-priced full-service distributors and dealers. |
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