Pricing decisions and channels of distribution
Marketing and Service Management · Unit III · Topic 9 of 15 · 5 min read
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1. Pricing: meaning and objectives
Price is the amount of money charged for a product or service, or the sum of values that customers exchange for the benefits of having or using it. Price is the only element of the marketing mix that produces revenue; the others produce costs. Pricing is the process of fixing that amount.
Objectives:
- survival in times of overcapacity or intense competition;
- maximum current profit, or a target return on investment;
- maximum market share (low price to build volume and lower unit cost);
- product-quality leadership (high price signalling quality);
- meeting or preventing competition;
- price stability (avoiding price wars);
- social objectives (low prices for essentials, in public enterprises).
2. Factors influencing pricing decisions
Internal factors: marketing objectives; the marketing-mix strategy (price must fit the product’s position and channel); costs (fixed and variable — the floor below which price cannot stay in the long run); the stage of the product life cycle; and organisational considerations (who sets prices).
External factors: nature of the market and demand (elasticity — the ceiling is what buyers will pay); competitors’ prices and offers; buyers’ perception of value; economic conditions (inflation, recession, interest rates); channel members’ margins; and government regulation. In India the Drugs (Prices Control) Order, 2013 fixes ceiling prices of scheduled medicines; the Legal Metrology rules prohibit selling a packaged commodity above the declared MRP; and predatory pricing by a dominant firm is an abuse of dominant position under section 4 of the Competition Act, 2002.
3. Methods of pricing
(a) Cost-based.
- Cost-plus (full cost) pricing: unit cost plus a fixed percentage profit.
- Mark-up pricing: used by traders; a mark-up on cost or on selling price.
- Break-even and target-return pricing: the price at which total revenue equals total cost, or yields the target profit at a forecast volume.
- Marginal-cost pricing: price covering variable cost and part of fixed cost, used to fill spare capacity or for export orders.
(b) Demand- or value-based: perceived-value pricing (what the buyer thinks the product is worth); differential or discriminatory pricing (different prices by customer, time, place or version — peak and off-peak fares).
(c) Competition-based: going-rate pricing (at, above or below the market level); sealed-bid or tender pricing (in government contracts).
Worked example. A manufacturer’s unit cost is: materials Rs. 120, labour Rs. 50, overheads Rs. 30. Total cost Rs. 200. With a 25% cost-plus mark-up, the price to the dealer is 200 + 50 = Rs. 250. A retailer who buys at Rs. 250 and wants a margin of 20% on selling price sets the price at 250 ÷ 0.80 = Rs. 312.50 (check: 20% of 312.50 = 62.50; 312.50 − 62.50 = 250). A 20% mark-up on cost would give only 250 × 1.20 = Rs. 300.
| Item | Rs. |
|---|---|
| Materials | 120.00 |
| Labour | 50.00 |
| Overheads | 30.00 |
| Total unit cost | 200.00 |
| Manufacturer’s profit (25% on cost) | 50.00 |
| Price to retailer | 250.00 |
| Retailer’s margin (20% on selling price) | 62.50 |
| Retail price | 312.50 |
4. Pricing strategies (“types of pricing”)
- Skimming pricing: a high initial price for a new product, lowered over time; suits innovative products with inelastic demand (new smartphones).
- Penetration pricing: a low initial price to win a large share quickly; suits elastic demand and economies of scale.
- Psychological pricing: Rs. 99 instead of Rs. 100; prestige pricing.
- Promotional pricing: loss leaders, festival discounts, cash-back.
- Geographical pricing: FOB (buyer pays freight) or uniform delivered price.
- Product-mix pricing: price lining, captive-product pricing (printers and cartridges), bundle pricing.
- Discounts and allowances: trade, quantity, cash and seasonal discounts.
- Administered pricing: price fixed by the producer or by government (controlled drug prices). A producer forcing dealers to resell only at its stated price (resale price maintenance) is an anti-competitive vertical agreement under section 3(4)(e) of the Competition Act, 2002, unless it causes no appreciable adverse effect on competition.
5. Channels of distribution
A channel of distribution is the set of independent organisations involved in making a product available to the consumer. Middlemen add value by bulk-breaking, assortment, storage, transport, credit and information.
Consumer-goods channels:
- Zero-level (direct): manufacturer → consumer (door-to-door, company outlets, online direct sales).
- One-level: manufacturer → retailer → consumer (cars, large retailers).
- Two-level: manufacturer → wholesaler → retailer → consumer (the usual FMCG route).
- Three-level: manufacturer → agent → wholesaler → retailer → consumer.
Industrial channels: manufacturer → industrial user; manufacturer → industrial distributor → user; manufacturer → agent → user; and manufacturer → agent → distributor → user. Modern channels also include multi-channel (store plus online) and vertical marketing systems (corporate, contractual such as franchises, and administered).
Intensity of distribution: intensive (as many outlets as possible: soft drinks), selective (a few chosen dealers: appliances), exclusive (one dealer per area: luxury cars).
6. Factors affecting choice of channel
- Product: perishability (short channels for milk), unit value (direct for costly items), bulk and weight, technical nature (needs service, so direct or selective), standard or custom-made, and stage in the PLC.
- Market: consumer or industrial; number and spread of buyers (many scattered buyers need long channels); order size; buying habits.
- Company: financial strength, reputation, desire for control, ability to manage its own sales force, width of product mix.
- Middlemen: availability, services offered, cost and margins, attitude.
- Environment and competition: economic conditions, legal restrictions, channels used by competitors.
How this is examined
“Define pricing. Explain the different types of pricing” is answered with sections 1 and 4; “methods of pricing” with section 3 (a worked mark-up example earns marks); “factors influencing pricing decisions” with section 2 under internal and external heads. “Explain the different channels of distribution” (10 marks) needs both consumer and industrial channels as flow lines and the levels of intensity; “factors to be considered for channels” (16 marks, June 2019) takes section 6 with an example under each head.
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