Think Marketing

Third Edition

Chapters 11 and 12
Pricing Decisions and Supply
Chain Management

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Learning Outcomes (1 of 2)
1. Explain the importance of price in the development of
marketing strategy.
2. Describe the various factors that influence price
decisions.
3. Explain the various pricing tactics an organization
employs to motivate purchase.
4. Describe how legal issues can affect pricing strategy.

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Learning Outcomes (2 of 2)
1. Define distribution planning and describe the role of
intermediaries in the distribution channel.
2. Describe the structure of different types of distribution
channels.
3. Evaluate new channel strategies as a means of gaining
competitive advantage.
4. Explain the concept of integrated marketing systems.
5. Explain how supply chain management systems are
improving operational efficiency in the channel of
distribution.

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Price
“The exchange value of a good or service in the marketplace.”

Value is based
on:
• Tangible and
intangible
benefits
• Consumers
perception of
a brand

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Importance of Price
An organization must establish fair and competitive prices
while generating adequate profit.

Achieves profits goals by offering lower

Wal-Mart prices (better perceived value) to its
customers.

Achieves profit goals by charging high

Harry Rosen prices; customers expect good quality
and are willing to pay for it.

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Influences on Price
Several major influences are considered when establishing
price:

1. Nature of the Market (Market Structure)

2. Consumer Demand
3. Production and Marketing Costs
4. Channel Member Profit Expectations

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Consumer Demand and Price
Price Elasticity - two types of demand:

Elastic Demand – A situation where a small change in price

results in a large change in volume.
Example: A price increase of 10% results in a volume decrease of 25%.
In this case total revenues would go down.

Inelastic Demand – A situation in which a change in price

does not have a significant impact on the quantity
purchased.
Example: A price increase of 5% results in a volume decrease of only
2%. In this case total revenues would go up.
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Elastic Demand vs Inelastic Demand

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 Channel Members Influence Price

Manufacturer Wholesaler Retailer Consumer

Each level (member) of channel must make adequate profit.

Price of a product increases each time it changes hands.

Periodic price reductions (promotions) are offered by the

manufacturer to encourage marketing support.

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Costs Influence Price (1 of 2)
To protect profit margins a manufacturer will consider
programs to reduce costs.

• Improve operational efficiency

• Use less expensive parts and materials
• Shrink the size of the product (packaged good)
• Relocate manufacturing facilities (lower labour rates)

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Costs Influence Price (2 of 2)
Production, marketing, and other costs must be considered
when establishing price.
Figure 11.3 Cost Components of a Packaged-Goods Product
Cost Items Actual Cost
Ingredients $15.75
Packaging (inner/outer) 1.79
Shipping case 0.68
Labour 1.48
Manufacturing 0.20
Warehousing 0.34
Total Plant Cost 20.24
Add: Freight cost 1.36
Total Product Cost 21.60
Add: Gross profit margin (40%) 8.64
List Price 30.24
Add: Retail profit margin (25%) 7.56
Retail price (per case of 24) 37.80
Selling Price at Retail 1.57
This example assumes a desired profit margin of 40% for the manufacturer of the product and a 25% markup at
retail. The manufactured item is a case good that contains 24 packages in a shipping case. After all costs and
profit margins are considered for the manufacturer and distributor, the price at retail is $1.57.

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Pricing Objectives
Typically, there are three basic pricing objectives:

1. Maximizing Profit

2. Maximizing Sales Volume

3. Establishing a Competitive Position

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Competitive Pricing
The price decision helps establish a desired competitive
position in the market.

• Above competition Q-tips sets its prices well

above its competitors.

• Equal to competition
Walmart sets its prices
below all other
• Below competition department stores.

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Price Skimming
Establishing a high entry price so that a company can
maximize its revenue early.

Apple launched the iPod, iPhone

and iPad with a skimming strategy.

Companies known for innovation

have an advantage in terms of
setting prices.

Setting high prices attracts competitors to a market.

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Price Penetration

Establishing a low entry price to gain wide market

acceptance quickly.

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Competitive Pricing (Status Quo Pricing)
Placing prices above, equal to, or below those of competitors.

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Trade or Functional Discounts (1 of 3)

Slotting Off-Invoice Performance

Allowance Allowance Allowance

To secure retail To encourage To secure

shelf space. volume buying. merchandising
activity.

A package of incentives offered together encourages

stronger action among distributors.
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Trade or Functional Discounts (2 of 3)
A performance allowance
is a price discount given
by a manufacturer to a
distributor that performs a
promotional function on
the manufacturer’s behalf.

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Flexible Pricing
A policy that allows for price negotiation. Different
customers may pay different prices for the same product or
service.

• Airlines
• Hotels When flying don’t ask your seat
neighbours how much they
• Houses paid. It might ruin your trip!
• Cars

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Psychological Pricing (1 of 2)
“Establishing prices that appeal to tendencies in consumer
behaviour.”

There are many options:

• Prestige Pricing

• Odd-Even Pricing

• Customary Pricing

• Price Lining

• Unit Pricing

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Psychological Pricing (2 of 2)
Figure 11.13 Psychological pricing tactics get people to
spend more.
How the price of a product is presented to consumers can have a significant
influence on their reaction, and reaction will vary. It's all about psychology. Here are
a few techniques that can influence buying decisions.
Eliminate the Dollar Sign
A restaurant menu shows a price of 25 instead of $25. Research by Cornell
University showed people pay more when they only see a whole number and no
dollar sign.
Reduce the Font Size
Research by the University of Connecticut revealed that the size of the price on a
tag is linked in our brains with its magnitude. Price tags in smaller font sizes were
more likely to be purchased than price tags in bigger fonts.
An Anchor Helps
The best way to sell a $600 handbag is to place a $1500 handbag beside it. People
rarely know things are really worth so the more expensive bag is an anchor from
which a person can make a decision.

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Pricing and the Law
Ignorance of the law is no excuse for a marketing manager.

• Ordinary Price Claims

• Double Ticketing and Bar Code Violations
• Bait and Switch
• Predatory Pricing
• Price Fixing

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Economies of a Distribution System

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Channels of Distribution

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Wholesaling Functions
A wholesaler may perform some or all of these functions:
• Provide Market Coverage
• Hold Inventory
• Process Orders
• Perform Market Intelligence
• Provide Customer Service
• Provide Merchandise Assortment
• Break Bulk

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Channel Length and Width
Channel length refers to the number of intermediaries or
levels in the channel of distribution.

Channel width Refers to the number of intermediaries at

any one level of the channel of distribution.

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Electronic Marketing and Multi-Chaneling
A company uses different types of intermediaries at the
same level in the channel to reach various customer groups.

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Factors Influencing Channel Selection

Factors to consider:
• Product and Service Characteristics
Should the
channel be a • Competition
direct or indirect
• Financial Resources Available
channel?
• Desired Intensity of Distribution

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Intensity of Distribution

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Channel Relationships
Customer relationship management programs are
improving relations among members of a channel. However,
conflict does occur among channel members.

• Horizontal conflict between similar organizations at the

same level in the channel of distribution.

• Vertical conflict occurs when a channel member feels

that another member at a different level is engaging in
inappropriate conduct.

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Channel Control (1 of 2)
A channel captain is a leader who integrates and
coordinates the objectives and policies of other members in
the channel.

Control can be at any level of the channel:

• Manufacturer Control
• Distributor (Wholesaler) Control
• Retailer Control

Economic clout often determines who controls the channel.

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Channel Control (2 of 2)
Showrooming
Consumers physically review a product in a retail store and
then search the Internet for a supplier offering the same
product at a lower price.

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Administered VMS
The organization with the most economic influence has
control.
Example:

P&G, Kraft and Nestle are multinational companies but they

must adhere to the shelf space guidelines established by
Loblaws and Sobeys.

In Canada, big supermarket chains have the economic

clout.

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Horizontal Marketing System
A situation in which many channel members at one level in
the channel have the same owner.

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Supply Chain Management
Technology is playing a key role in improving distribution
systems. Supply chain management programs involve all
members of the channel.

• Supply Chain – A sequence of companies that perform

activities related to the creation and delivery of goods to
customers.
• Supply Chain Management – The integration of information
among members of a supply chain to facilitate efficient
production and distribution of good to customers.

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A Seamless Supply Chain

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Supply Chain Management System

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