Course Title : BUSINESS ECONOMICS

Course Code : ECO 224

Note 1
Topic: PATTERN OF DISTRIBUTION

The way that resources, income, or wealth are distributed among various individuals, families, or
other entities within an economic system is referred to as the "pattern of distribution" in business
economics. The distribution pattern in question has significant implications for economic
performance, societal well-being, and policy problems. When it comes to the distribution pattern
in business economics, it's crucial to keep the following in mind:
One of the distribution-related subjects that is most commonly studied is income distribution. It
has to do with how the total amount of money generated in an economy circulates among
households or people. Metrics like the income quintiles, Lorenz curve, and Gini coefficient are
just a few that are used to analyze the income distribution.
Distribution of Wealth: The distribution of wealth is influenced by the ownership and usage of
resources and assets. The routes by which goods or services travel from the producer or
manufacturer to the final customer are referred to as "distribution channels" or "channels of
distribution". Products must be distributed through efficient and effective routes in order to reach
their intended consumers on schedule and under budget. When talking about distribution, keep
the following considerations in mind.
Types of Distribution Channels:
(1). Direct Distribution: In this mode of distribution, goods travel straight from the producer to
the final customer, cutting out middlemen. Manufacturer-owned retail outlets and internet sales
are two examples.
(2). Indirect Distribution: Products that are distributed indirectly go via one or more middlemen
before being purchased by customers. Retailers, agents, and wholesalers may fall under this
category.
(3). Dual distribution: It refers to the simultaneous use of direct and indirect routes. With this
strategy, a business can reach more people while still having some degree of distribution control.
Multichannel Distribution: Reaching different consumer segments by using different distribution
channels. Distributors, e-commerce, and real retail locations may all be involved.
(4). The internet as a route for distribution: To supply goods and services, producers today
employ marketplaces like Amazon (which also offers warehousing services for manufacturers'
products) and other middlemen like aggregators (uber, instacart). The internet has also led to the
elimination of needless intermediaries for goods like software that are sold straight online.
Distributed Channel Participants:
(1). Producer: The entity is responsible for creating the good or service. Retailers and other
companies purchases goods in large quantities from producers and resell them to wholesalers.
(2). Retailers: They deal directly with customers, usually in lesser amounts.
(3). Agents and brokers: These are the middlemen, who frequently work on a commission basis,
assist transactions between buyers and sellers.

(4). Distributors: Distributors are involved in delivering goods to merchants in a particular

geographic area and might be regional in nature.

Factors or Elements Affecting Channel Selection or choice:

(1). Product Characteristics: A product's price, complexity, perishability, and type can all affect
distribution route.
(2). Market characteristics: Channel decisions are impacted by factors like consumer preferences,
geographic dispersion of customers, and market size.
(3). Expenses: One important consideration is the cost of running and sustaining a specific
distribution channel.
(4). Competitive Environment: Channel selection or choice can also be influenced by rival
strategies and the state of the distribution market.
(5). Managing Channels: Channel design is the process of choosing the best distribution channel
plan depending on the features of the product and the market.
(6). Channel Recruitment and Selection: This entails finding and collaborating with middlemen
who share the objectives of the business.
(7). Channel members: They are encouraged and motivated to the market and sell the company's
goods through incentives.

Functions of Distribution channel or Distribution Channels' Purposes:

(1). Information: Channels offer useful details about market trends, competition activity, and
customer preferences.
(2). Promotion: Through marketing initiatives, in-store displays, and advertising, intermediaries
can help promote items.
(3). Negotiation: When it comes to conditions, such as price and delivery dates, intermediaries
frequently bargain with producers.
(4). Physical Distribution: Channels oversee the actual movement of commodities, which
includes inventory control, warehousing, and transportation.
(5). Short Channels: This is typically found in businesses with specialized or sophisticated
product offerings, short channels involve fewer intermediaries.
(6). Long Channels: This is usually found in sectors that produce goods for the mass market,
long channels include a greater number of middlemen.
(7). Channel Layout: For businesses to effectively and economically reach their target clients,
distribution routes must be carefully designed.
When designing a channel, factors including the competitive landscape, customer preferences,
product attributes, and regional considerations should all be taken into account.
Distribution channels play a crucial role in shaping the overall customer experience. A seamless
and convenient distribution channel can enhance customer satisfaction.
Evaluation and Optimisation:
Businesses assess their distribution channels' performance on a regular basis and make necessary
adjustments to increase productivity and profitability.

In summary, distribution channels are essential parts of the company ecosystem and marketing.
They are essential to bringing goods and services to customers, and a company's ability to
succeed in the market can be greatly impacted by the way they are managed and designed. In
order to succeed in a competitive market, organizations must comprehend the dynamics of
distribution networks.
PRICING AND PRICE POLICY

Definition: Pricing refers to the process of determining the monetary value (price) at which a
product or service will be offered to customers. Price to a buyer is what is exchanged, that is
something of value, usually purchasing power for satisfaction or utility. The income, credit, and
wealth of a buyer determine their purchasing power. It is incorrect to think that a price is always
expressed in terms of money or other financial considerations. Bartering goods is the oldest form
of exchange. A transaction entails the exchange of values between two parties and marketing
facilities exchange. There might be money involved or not. Pricing is a process of fixing the
value that a manufacturer will receive in the exchange of services and goods. Pricing method is
exercised to adjust the cost of the producer’s offerings suitable to both the manufacturer and the
customer. The pricing depends on the company’s average prices, and the buyer’s perceived value
of an item, as compared to the perceived value of competitors’ product. In our society the
financial price is the measurement of value commonly used in exchanges.
For example, looking at a painting by an artist may be valued, or priced at #500,000. Financial
price, then quantifies value, and it is the basis of most market exchanges. The pricing policy and
pricing method depend on the objective a firm sets for itself. It was earlier observed that there is
a good deal of controversy between the marginalists and empericists on the objective of business
firms. Marginalists hold the view that, given the demand curve, price is determined in imperfect
markets where MR = MC. On the other hand, some economic researchers produce the evidence,
though inadequate, that the firms follow a pricing rule other-than one suggested by the
marginality rules. In a complex business world, business firms follow a variety of pricing rules
and methods depending on the conditions faced by them and every businessperson starts a
business with a motive and intention of earning profits.
The following points should be considered while fixing the cost of a product and services. Every
businessperson starts a business with a motive and intention of earning profits. This ambition can
be acquired by the pricing method of a firm. While fixing the cost of a product and services the
following point should be considered:
(1) The identity of the goods and services.
(2) The cost of similar goods and services in the market
(3) The target audience for whom the goods and services are produces
(4) The total cost of production (raw material, labour cost, machinery cost, transit, inventory
cost etc.).
(5) External elements like government rules and regulations, policies, economy, etc.,
 TERMS USED TO DESCRIBE PRICE

Price is expressed in different terms for different exchanges, as the following

commentary shows: price is all around us. You pay tuition for your education, rent for
your apartment, and a fee to your physician, the airline, railway, taxi, and bus companies.
All the transportation companies mentioned charge you a fare, the local utilities call price
a rate, and the local bank charges you interest for the money it loans. The price for
driving your car on any expressway in Nigeria is a toll, and the company that insures
your car charges a premium. The guest lecturer charges an honorarium to tell you about a
government official who took a bribe to help a shady character steal dues collected by a
trade association. Clubs or societies to which you belong may make a special assessment
to pay unusual expenses. A lawyer you use regularly may ask for a retainer to cover his
services. The “price” of an executive is a salary, the price of a salesman may be a
commission and the price of a worker is a wage. Finally, although economists would
disagree, many of us feel that income taxes are the price we pay for the privilege of
making money according to David I. Schwartz

THE IMPORTANCE OF PRICE TO BUSINESS

1. It can take fairly a long time to develop a product
2. It takes time to plan promotion and to communicate the benefits of a product.
3. Distribution usually requires a long-term commitment to dealers who will handle the
product.
4. Often, only price can be changed quickly to respond to changes in demand or to the
actions of competitors. Price, therefore plays an important part in efficient marketing.
5. Price often has a psychological impact on customers. Therefore, marketers can use price
symbolically.
By raising a price, they can emphasize the quality of a product and increase its snob
appeal. By lowering a price, they can emphasize a bargain and gain customers who go
out of their way spending extra time and effort to secure a small amount. Price therefore,
can have a strong effect on sales.
Because price times quantity equals revenue (P×Q = R), price is important in
determining profits. Efficiency and lower costs can be goals that decrease price and
develop a more competitive marketing mix. The economic role of price is to allocate
products that must be matched to market opportunities which develop from increase or
decrease in demand.

PRICING OBJECTIVES

Price help to develop the marketing strategy which begins with the consideration of
objectives. Pricing objectives are overall goals that describe the role of price in an
organization’s long range plans. Since pricing objectives will influence decisions in most
functional areas which include finance, accounting and production. Its objectives must be
consistent with the organization‘s overall mission and purpose. Some of the typical
pricing objectives are as follows:
(1) PRICING FOR RETURN ON INVESTMENT:

Pricing objectives means to attain a specified return on the company’s investment.

These goal is used by general motors, however, most profit oriented pricing
objectives are achieved by trial and error because not all cost and revenue data needed
to project the return on investment are available when prices are set.

(2) SURVIVAL:

The fundamental objective is survival. This objective was observed by Joel Dean in
1950 in New Jessey. Most organizations will tolerate short –run losses, internal
upheaval, and many other difficulties if these are necessary to continue in existence.
Since price is a flexible and convenient variable to adjust; it’s sometimes used to
increase sales volume to levels that match the organizations expenses. For example,
majority of the supermarket in Nigeria like Shoprite, Lever brothers, Leventis stores,
Robban stores etc., shift its pricing policy to include large rebates in order to maintain
cash flow and reduce inventory during a slump in sales, this however, results in an
increase in sales that reduce inventory and provide the cash necessary to meet
operating expenses.

(3) CASH FLOW:

Some organizations sets prices as fast as possible. Financial managers are interested
in recovering capital spent to develop products. This objective may have the support
of the marketing manager if a short life cycle is anticipated for the product. A
disadvantage of the pricing objective could be high prices, which might allow
competitors to gain a large share of the market with lower prices.

(4) MARKET–ORIENTED PRICING:

This means that the prices are set to match the attitudes and expectations of
customers. Firms that serve low income customers, for example are the develop
prices and terms of sale to fit the market. Sometimes prices must be maintained at a
high level to appeal to groups that associate quality with price. For instance in our
country Nigeria, especially the illiterate ones, believe that high cost of a product
denotes high quality. Also, at times, prices are set low for one product to draw
attention to an entire product line. Market-oriented pricing starts with the wants and
needs of customers and attempts to provide the product at an acceptable price by
matching organizational resources to the market.

(5) PRICING A NEW PRODUCT:

In pricing a new product, two kinds of pricing strategies are suggested, which are (i)
Skimming price policy and (ii) penetration price policy.

(1) The skimming price policy: It is intended to skim the cream of the market ie
consumers surplus, by setting a high initial price, three or four times the ex-
factory price, and a subsequent lowering of prices in series of reductions. The
initial high price would generally be accompanied by heavy sales promoting
expenditure.

Policy that succeeds for the following reasons:

(i) In the initial stage of the introduction of a product, demand is relatively

inelastic because of consumers’ desire for distinctiveness by the consumption
of a new product.
(ii) Cross-elasticity is usually very low for lack of a very close substitute.
(iii) Step-by-step price –cuts aid skimming consumer’s surplus available at the
lower segments of demand curve.
(iv) Initial advertisement elasticity is considerably high.
(v) High initial prices are helpful in recouping the development cost.
The post-skimming includes the decisions regarding the time and size of price
reduction. The appropriate occasion for price reduction is the time of saturation of the
top level demand or when a strong competition is apprehended. The rate of reduction
is determined by the distinctive of the product. When the product is on its way to
losing its distinctiveness, the price cut should be appropriately large. But if however
the product has retained its exclusiveness, a series of small price reduction would be
more appropriate.
(2) Penetration price policy: Penetration price policy is a reverse to strategy. This
type of pricing policy is applied generally in case of new products for which
substitutes are available. This policy requires fixing a lower initial price designed
to penetrate the market as quickly as possible and it is designed to maximize
profit at the long-run. For this reason, the firms pursuing the penetration price
policy set a low price of the product in the initial stage to attract customers
immediately the product catches the market, price is gradually raised up. The
success of this penetration type of price policy needs the existence of the
following conditions:

(i)The short-run demand for the product has an elasticity greater than unity. This
helps to capture the market at lower prices.
(ii) Economies of large –scale production are available to the firm. If not increase
in production would result in increase in cost which might reduce the
competitiveness of the price.
(iii)The potential market for the product is fairly large and has a good deal of
future prospects.

(iv)The product should have a high cross-elasticity in relation to rival products for
the lower initial price to be effective.
(v)The product should be such that can be easily accepted and adopted by the
consumers.

CHOICE BETWEEN SKIMMING PRICE AND PENETRATION PRICE

POLICIES

This choice between two strategic price policies depends on the following:
(a) The rate of market growth.
(b) The rate of erosion of distinctiveness
(c) The cost-structure of the producers.

If the rate of market growth is slow for such reasons due to lack of
information, consumers’ hesitation etc., and penetration price policy would
not be suitable. If the pioneer product is likely to lose its distinctiveness at a
quicker rate, skimming price policy would not be suitable. It should followed
when lead time ie the period of distinctiveness is fairly long. Penetration price
policy would be more suitable if cost-structure shows an increasing return
over time since it will enable the producer to reduce his cost and prevent
potential competitors from entering the market within the short-run.

PRICING STRATEGY AND MATURITY PERIOD.

Maturity period is the second stage in the life-cycle of a product. It is a stage

between growth period and decline period of sales. This period can also be
defined as the period of decline in growth rate of sales and the period of zero
growth rate. The concept of maturity period is useful because it gives out
signals for taking precaution in regard to pricing policy. Even though the
concept itself does not provide guidelines for the pricing policy however Joel
Dean suggests that first step for the manufacturer whose specialty is about to
slip into the commodity category is to reduce actual prices as soon as the
system of deterioration exists. He also warns that this does not mean that the
manufacturer should declare open price war in the industry. The manufacturer
should rather try to improve his product as well as moving in the direction of
market segmentation.