Business•Chapter 5•3 min read

Pricing and Distribution Strategy — Price-Setting and Channel Management

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1. Pricing Approaches

Cost-Based

  • Cost-plus pricing: cost + a fixed markup
  • Target-return pricing: price to achieve a target ROI

Competition-Based

  • Reference competitors’ prices
  • Follow market price or differentiate

Value-Based

  • Center on customer-perceived value
  • Determine perceived value before setting price

Demand-Based

  • Elasticity analysis
  • High elasticity → lower price
  • Low elasticity → higher price

2. Pricing Strategy Types

Skimming Pricing

  • High price at launch → gradual reductions
  • High price signals quality
  • Maximize early revenue

Penetration Pricing

  • Low price to rapidly capture market share
  • Price increases possible later
  • Goal: achieve economies of scale

Psychological Pricing

  • Odd-even pricing: $9.99 (creates a discount perception)
  • Prestige pricing: high price to signal quality
  • Reference pricing: provide a comparison anchor

Bundle Pricing

  • Sell multiple products as a package
  • Capture total willingness to pay

3. Distribution Channel Structure

Channel Length

  • Direct distribution: manufacturer → consumer
  • Indirect distribution: manufacturer → wholesaler → retailer → consumer

Channel Breadth

  • Intensive distribution: maximum number of intermediaries
  • Selective distribution: some intermediaries
  • Exclusive distribution: designated intermediaries only

Channel Selection Criteria

  • Product characteristics (perishability, bulk, price)
  • Accessibility to target customers
  • Balance of cost and control

4. Distribution Channel Management

Vertical Marketing Systems (VMS)

  • Corporate VMS: single ownership and integration
  • Contractual VMS: franchising
  • Administered VMS: coordination based on power/influence

Horizontal Marketing Systems

  • Cooperation between companies at the same channel level

Conflict Management

  • Vertical conflict: manufacturer vs. retailer
  • Horizontal conflict: between intermediaries at the same level
  • Causes: conflicting interests, role ambiguity

Omnichannel

  • Seamless, integrated experience across online and offline touchpoints

5. Key Concept Cards

3 Pricing Approaches: Cost · Competition · Value ★★★★★ : Cost-based, competition-based, and value-based pricing. Memory tip: start from costs, look at competitors, then think about the value you deliver

Intensive · Selective · Exclusive = Channel Breadth ★★★★★ : Classification of distribution methods by number of intermediaries. Memory tip: wide → narrow, like a funnel

Odd-Even Pricing = $9.99 Effect ★★★★☆ : Makes consumers perceive the price as lower than it actually is. Memory tip: the classic retail trick — one cent below the round number

6. Practice Quiz

Q. Why might a premium wine brand see sales fall after lowering its price?

Prestige pricing effect. A high price signals high quality. Cutting the price damages the quality and premium image. For Veblen goods (conspicuous consumption), demand increases with price. Luxury goods, fine wines, and art exhibit this reverse demand relationship. Once the price-quality link is broken, the strategy backfires.

Q. Why is franchising classified as a Vertical Marketing System?

A VMS integrates and coordinates the entire channel from production to consumption. Franchising is a contractual VMS: the franchisor uses contracts to standardize operations across franchisees. The franchisor controls product, pricing, and marketing uniformly. In exchange for reduced franchisee autonomy, system efficiency is maximized. McDonald’s and Starbucks are the classic examples.

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The OIYO editorial desk researches money, law, lifestyle, and self-understanding topics against primary sources and public statistics. Every piece carries source notes and is reviewed on a regular cycle for accuracy and usefulness.