Chapter 14 Pricing and Distributing Goods and Services

Learning Objectives Identify the various pricing objectives that govern pricing decisions and describe the price-setting tools used in making these decisions. Discuss pricing strategies and tactics for existing and new products. Explain the distribution mix, the different channels of distribution, and different distribution strategies. Copyright © 2006 Pearson Education Canada Inc. 2

Learning Objectives Explain the differences between merchant wholesalers and agents/brokers, and describe the activities of e-intermediaries. Identify the different types of retailing and retail stores. Define physical distribution and describe the major activities in warehousing operations. Compare the five basic forms of transportation and explain how distribution can be used as a marketing strategy. Copyright © 2006 Pearson Education Canada Inc. 3

Pricing Market-share n Pricing to sell the greatest possible market percentage Profit-maximizing n Pricing to maximize profit (bottom line) Neither objective will result in automatically high or low prices The price level is dependent on how much consumers are willing to pay for the product Copyright © 2006 Pearson Education Canada Inc. 4

Cost-Oriented Pricing Considers the cost of the product and adds a “markup” to arrive at a final cost n n A light bulb costs $0. 45 to the retailer The retailer wishes to sell the light bulb for $0. 75 (a markup of $0. 30) The markup as a percent of selling price is n Markup % = Markup/Sales Price =. 30/. 75 = 40% The markup as a percent of cost is n Markup % = Markup/Cost =. 30/. 45 = 67% Copyright © 2006 Pearson Education Canada Inc. 5

Break-Even Analysis: Cost. Volume-Profit Relationships = Break-even analysis n how many units a firm must sell in order to cover costs Fixed costs n costs unaffected by the number of goods produced or services sold (rent, administrative salaries, insurance, equipment) Variables costs n costs that change with the number of goods or services produced and sold (materials, labour) Copyright © 2006 Pearson Education Canada Inc. 6

Pricing Strategies Pricing strategy n The pricing plan based on the marketing mix Potential strategies n Pricing Existing Products w Pricing relative to the market (at market, above market, below market) n n Pricing New Products w Skimming pricing w Penetration pricing Fixed Versus dynamic Pricing for Ebusiness Copyright © 2006 Pearson Education Canada Inc. 7

Skimming or Penetration Pricing Penetration pricing n Pricing the product as low as possible to sell the most units and generate consumer loyalty Skimming pricing n Pricing the product as high as possible to earn maximum profit on each unit sold Copyright © 2006 Pearson Education Canada Inc. 8

Pricing Tactics Price lining n n n The practice of offering all items in certain categories at a limited number of predetermined price points Having a product line priced with a low, medium, and high price point Sears may sell mattresses at $199. 99 (good), $299. 99 (better), $399. 99 (best) Copyright © 2006 Pearson Education Canada Inc. 9

Pricing Tactics Psychological Pricing n n The practice pf setting prices to take advantage of the illogical reactions of consumers to certain types of prices Odd-even pricing w consumers react more favourably to odd dollar amounts ($0. 99, $19. 99) n Threshold pricing n n consumers set a maximum price level that they will pay for an item pricing at the maximum allows firms to obtain the highest price Copyright © 2006 Pearson Education Canada Inc. 10

Pricing Tactics Discounting n Cash discount w customers get a lower price for paying cash n Seasonal discount w lower prices in the off-season to move stock n Trade discount w lower price granted to intermediaries who need to mark up the product for resale (retailers, wholesalers) n Quantity discount w lower prices for buying more units Copyright © 2006 Pearson Education Canada Inc. 11

Distribution Mix Distribution channel n The path a product follows from the producer to the end-user Intermediary n An entity other than the producer who participates in the distribution of the product Wholesaler n An intermediary who sells products to other businesses for resale (other wholesalers, retailers) Retailer n An intermediary who sells product to final consumers Copyright © 2006 Pearson Education Canada Inc. 12

Typical Channels Copyright © 2006 Pearson Education Canada Inc. 13

Distributive Strategies Intensive distribution n Readily available in the marketplace (candy bars) Selective distribution n Use of a limited number of intermediaries in a market area (hand tools) Exclusive distribution n Use of only one intermediary in a market area (jaguar cars) Copyright © 2006 Pearson Education Canada Inc. 14

Channel Conflict Channels must be managed to be successful Conflict occurs when intermediaries and the producer disagree about the way the channel should function Methods to control conflict n n Channel leadership through the channel captain Vertical marketing systems Copyright © 2006 Pearson Education Canada Inc. 15

Channel Leadership The channel member that is the most powerful in determining roles and rewards of organizations involved in a given channel of distribution n Channel Captain w One firm emerges as dominant and manages the channel Copyright © 2006 Pearson Education Canada Inc. 16

Vertical Marketing Systems (VMS) Corporate n Producer and intermediaries are owned by a single organization Contractual n Members sign contracts spelling out responsibilities (i. e. : Franchises) Administered n One member coordinates the system based on its power and influence Copyright © 2006 Pearson Education Canada Inc. 17

Wholesalers Merchant wholesalers n n Take legal title; Resell items to retailers or industrial users Perform other services such as storage and means of delivery Agents/brokers n n n Do not take legal title Handle the products between producers & retailers or industrial users Perform other services such as shelf and display merchandising and advertising layout Copyright © 2006 Pearson Education Canada Inc. 18

Types of Merchant Wholesalers Full-service n Perform all services including granting credit, marketing, and merchandising Limited-function n Perform fewer services, specializing in certain areas Drop-shipper n Take title, have goods shipped directly to final user from producer, do not physically handle the goods Rack-jobber n Specializes in non-food lines, sets up and maintains displays in retail stores Copyright © 2006 Pearson Education Canada Inc. 19

E-Intermediary Internet-based channel members who perform one or both of these functions 1. They collect information about sellers and present it to consumers. 2. They help deliver Internet products to buyers. Copyright © 2006 Pearson Education Canada Inc. 20

Retailing in Canada • Most Canadians buy nearly all the goods and services they consume from retailers • Most Canadian retailers are small businesses, often consisting of just owners and part-time help • Competition from American-owned retailers (like Wal-Mart) has had profound effects on Canadian retailers • Wal-Mart is the largest retailer in Canada at estimated sales of $9 billion annually Copyright © 2006 Pearson Education Canada Inc. 21

Product Line Retailers Department Stores n organized into specialized departments with a range of products and brands Supermarkets n Divided into departments of similar products (produce, bakery, meats, personal care, pharmacy) n Emphasis on self-service, low prices, & wide selection Copyright © 2006 Pearson Education Canada Inc. 22

Product Line Retailers Specialty Stores n n Small stores that carry one line of related products Sunglass Hut International, Jiffy Lube Category killers n n larger specialized retailers with a deep selection of goods greater expertise, & usually lower prices Staples, Home Depot Copyright © 2006 Pearson Education Canada Inc. 23

Bargain Retailers Discount houses n Bargain retailers offering large consumer durables at a discount price Catalogue showrooms n Sell primarily out of a catalogue with a showroom to display goods Factory outlet n Bargain retail stores located adjacent or convenient to the factories, owned by producers Copyright © 2006 Pearson Education Canada Inc. 24

Bargain Retailers Warehouse Clubs n n Membership-only retail outlets (Costco) Huge facilities with many separate departments of food and non-food items Convenience Stores n n Retail stores that are very accessible with extended hours of operation and fast service Prices tend to be higher (Mac’s, 7 -Eleven) Copyright © 2006 Pearson Education Canada Inc. 25

Non-store & Electronic Retailing n Direct-response retailing w Firms make direct contact with customers both to inform them about products and to receive sales orders n Direct selling w Form of non-store retailing typified by door-todoor sales n Mail-order (catalogue marketing) w Customers place orders for merchandise shown in catalogues and receive their orders via mail Copyright © 2006 Pearson Education Canada Inc. 26

Non-store & Electronic Retailing Telemarketing n Use of the telephone to sell directly to consumers (may also take calls in response to direct mail or video marketing) Ecatalogues n Use of internet to display products and services Copyright © 2006 Pearson Education Canada Inc. 27

Electronic Storefronts and Cybermalls Electronic storefront n A web site in which consumers collect information about products and buying opportunities, place sales orders, and pay for their purchase Cybermalls n Collections of virtual storefronts representing diverse products Copyright © 2006 Pearson Education Canada Inc. 28

E-Sales & Multilevel Marketing Multi-level marketing n salespeople earn commissions on their own sales, and the sales of anyone else that they recruit (Amway) E-sales occur when Web sites are used to conduct multi-level marketing Copyright © 2006 Pearson Education Canada Inc. 29

Interactive and Video Marketing Interactive marketing n selling products and services by allowing customers to interact with multimedia Web sites Video marketing n products showcased via television videos on home shopping channels that sell directly through telephone orders Copyright © 2006 Pearson Education Canada Inc. 30

Warehousing The storing of goods through the distribution process in various types of warehouses n n Private: owned by a company Public: independently owned by a separate company who rents out space to other firms Storage: facility used to store goods for long time periods Distribution centre: facility used to store goods for short periods of time pending distribution to retailers Copyright © 2006 Pearson Education Canada Inc. 31

Warehousing Costs Basic expenses n Rent or mortgage, insurance and wages Inventory control n Operations process that monitors amount of inventory on hand ensures adequate stock levels at all times Copyright © 2006 Pearson Education Canada Inc. 32

Warehousing Costs Materials handling n Transporting goods, arrangement and orderly retrieval of goods Unitization n A materials handling method that standardizes inventory by unit size and type to streamline the storage process Copyright © 2006 Pearson Education Canada Inc. 33

Transportation The process of moving goods physically through the distribution network Intermodal n Combined use of different means of transportation Containerization n Packing many items at once into a sealed, heavyduty container that is used with a variety of different methods of transportation (truck, railroad, water, plane, pipeline) Copyright © 2006 Pearson Education Canada Inc. 34

Hubs A central distribution outlet that controls all or most of a firm’s distribution activities n n n Supply side/pre-staging: large shipments destined for user are gathered in a single hub from various sources to eliminate the need for inventory & to streamline traffic Supplier-coordinated: several suppliers combine forces to gather shipments destined for a single user in a single “incoming” hub that is convenient to the user Distribution-side: hubs located adjacent to customer locations Copyright © 2006 Pearson Education Canada Inc. 35