Ch5. Pricing and Distribution Strategy — Price-Setting and Channel Management

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

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

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

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

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

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.