UNIT-III NOTES

MARKETING MANAGEMRNT 22BAS5EA0

UNIT II

Pricing and Distribution Channels

Pricing – Policies - Types of Pricing – Pricing Strategies.
Channels of Distribution -- Factors influencing the Selection of Channels –Types of Channels.

TOPICS (Should match with the Teaching Plan in CAMU)

NO. TOPICS
1 Pricing
2 Pricing Policies
3 Types of Pricing
4 Pricing Strategies
5 Channels of Distribution
6 Factors influencing the Selection of Channels
7 Types of Channels

UNIT III

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WHAT IS PRICE?

The price of a product or service is its worth and is expressed in monetary terms. In simple
terms, the price of a product or service is the monetary sacrifice made by a consumer, while
buying it. However, the prices of different goods and services are called by different
names. For example, the price for education is tuition fees, the price for services provided by a
broker is a brokerage, etc.

IMPORTANCE OF PRICE MIX

 Price mix directly impacts a company’s revenue stream, affecting overall

profitability and financial stability.
 Proper pricing strategies can help a business stand out in the market, attracting
price-sensitive customers and gaining a competitive edge.
 Prices convey a message about the quality and value of a product or service,
shaping how customers perceive the brand.
 Strategic pricing allows businesses to enter new markets, attract a broader
customer base, and expand their market share.
 An Effective price mix helps in optimizing profits by balancing production costs,
demand, and customer willingness to pay.
 Appropriate pricing enhances the brand image, positioning the product as
premium, affordable, or offering great value for money.
 Prices can complement promotional activities, such as discounts and special
offers, driving sales and creating buzz around products.
 A flexible price mix enables businesses to adjust prices swiftly in response to
market fluctuations and changing consumer demands.
 Fair and consistent pricing fosters trust among customers, encouraging repeat
business and building long-term customer relationships.

FACTORS AFFECTING PRICING

Production Costs: The expenses incurred in manufacturing or acquiring the product, including
raw materials, labor, and overhead costs, directly influence the pricing strategy.

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Market Demand: The level of demand for the product in the market affects its price. Higher
demand often allows for higher prices, while low demand may require competitive pricing
strategies.

Competitor Pricing: Prices set by competitors influence a company’s pricing decisions. It is

essential to analyze competitor pricing strategies to remain competitive in the market.

Perceived Value: Customers’ perception of the product’s value, quality, and uniqueness
influences the price they are willing to pay. Effective marketing and branding can enhance
perceived value.

Seasonal Demand: Price elasticity often varies with seasonal demand. Companies may adjust
prices during peak seasons to maximize revenue or offer discounts during off-peak periods to
stimulate sales.

Consumer Preferences: Identifying the preferences and buying habits of the target audience
helps in creating prices that line with what consumers are ready to pay for the goods.

Distribution Channels: The costs involved in distribution, including shipping, storage, and
retailer margins, determine the final retail cost of the product.

PRICING OBJECTIVES

 Survival:
 Profit:
 Sales:
 Market share:
 Image:

 Attracting new customers to increase revenues,

 Retaining existing customers,
 Preventing competitors from entering the market,
 Preventing competitors from gaining market share,
 Attracting customer attention to the release of a new product or brand,
 Increasing sales of a specific product line.

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TYPES OF PRICING STRATEGIES

The different types of pricing strategies are classified based on the end goal of the company,
such as maximizing profits, obtaining a greater market share or reducing the inventory. Here are
some of the common pricing strategy types used in businesses:

1. Premium pricing

Premium pricing is the process of establishing higher prices than most of the competitors in the
market. It helps create perceived value, luxury and quality. Companies that sell exclusive high-
tech products often use this pricing strategy, as customers pay a premium price if they have a
positive brand perception. When a company implements this market strategy, it may charge more
than its production costs to get a high-profit margin. It is essential to note that this strategy works
mostly when users perceive the product as a premium one.

2. Penetration pricing

This is the process of establishing comparatively low prices to draw customers' attention from
high-priced competitors and earn sales. New businesses often use this marketing strategy while
entering the market. Initially, the company may charge low prices to reach new customers. They
may raise the prices once the new customers become loyal followers of the brand.

This strategy makes it easier to gain a market share. It can help increase market share and sales
volume, leading to lower production costs and faster inventory turnover. Penetration pricing is
often helpful for achieving short-term business goals, but, depending on the business, it may not
be sustainable for the long term as it can attract bargain hunters and those with low customer
loyalty.

3. Skimming pricing

Skimming pricing involves charging maximum prices for new products and reducing them
gradually to maximize profit and make up for production costs. The strategy can work well if
you sell products with varying life cycle lengths. Products often go out of trend after a period, so
you have limited time to gain your profit in the initial stage of the product life cycle. Price
skimming allows businesses to retain customer interest in the long term, but may not always be
an ideal strategy for populous markets.

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4. Psychological pricing

Psychological pricing is the process of studying consumer buying patterns to influence buyer
decisions and make higher value sales. These methods work well when you have an intimate
understanding of the target market. Some psychological pricing techniques include promoting
offers such as buy-one-get-one-free or setting the price to an odd figure instead of a round
number. Psychological pricing simplifies the decision-making process for customers and can
increase sales as it allows you to get direct customer attention. It is essential to maintain
transparency while using this method to ensure retaining loyal customers.

5. Bundle pricing

Bundle pricing is when you sell two or more products or services at a single price. It is a great
way to market products to customers who may want to pay extra for multiple products. Beauty
salons, cosmetics brands, restaurants and retail stores often use this pricing strategy to increase
sales as customers discover more products with this strategy and end up purchasing additional
products.

6. High-low pricing

High-low pricing can help you increase revenue by attracting new customers by advertising low-
pricing products and later displaying high-cost products. To implement this strategy, you can
evaluate the prices and popularity of your products and leverage low or high pricing to increase
sales during a slow period. For example, if a certain product is in high demand, you can charge a
high price while introducing it. Subsequently, as the demand decreases, you can reduce the price
in the lower-selling months through discounts and clearance sales. This strategy typically relies
heavily on sale promotions and often requires significant marketing efforts.

7. Competitive pricing

In competitive pricing, you set the product prices on par with all the other competitor products
available in the market. The prices may differ slightly from the market rate but are ultimately
within the range of prices set by the other companies. This strategy can help you stay
competitive if the company you work for is in a saturated market . Customers often compare the
market prices, so charging competitive or slightly low prices can give you a chance to gain more
customers.

8. Cost-plus pricing

Some businesses use a cost-plus pricing strategy when their focus is to recover the production
cost of the product. This strategy involves taking the amount invested and increasing it by adding

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a fixed percentage. For example, if you invested ₹100 in making the product and want to make a
profit of ₹100 on each sale, you can set a price of ₹200. Retailers who sell physical products
often use this strategy, as their products offer greater value than the cost of creation. The
advantage of this type of pricing strategy is that as you set the market price to a fixed rate for the
products, the profits are more predictable.

9. Dynamic pricing

Dynamic pricing, also known as demand or surge pricing, matches the current market demand. It
is a flexible strategy, used when the prices keep fluctuating daily or even hourly. Industries like
airlines, hotels, utility companies and event management companies may use dynamic pricing
based on market trends. It helps companies to shift prices to match the customers' willingness to
pay. You can charge varying prices for different user intents, to reduce challenges at the time of
purchase and develop customer loyalty.

10. Captive-product pricing

This is a pricing strategy that considers captive or secondary products along with core or main
products while determining the price. For example, if a printer is the core product, printer ink is a
captive product. Companies put higher prices on captive products, increasing the revenue margin
as compared to core products. Captive-product pricing can increase traffic flow from a core
product and can increase customer loyalty for a specific brand. It is crucial to ensure that
customers see the value offered by the captive product and find its quality satisfactory.

11. Geographical pricing

Geographical pricing is the process of charging product prices depending on geographical

location or market. With geographical pricing, you can set prices according to local consumer
interests, requirements and preferences. While executing this strategy, it is important to conduct
extensive research about local region-specific taxation laws and have a streamlined accounting
process to ensure its success.

WHAT IS A DISTRIBUTION CHANNEL?

A distribution channel is the network of individuals and organizations involved in getting a
product or service from the producer to the customer. Distribution channels are also known
as marketing channels or marketing distribution channels.

A distribution channel is a way a product gets to the buyer. Marketing distribution channels are
the ways brands get their products to customers. Efficiency and cost-effectiveness are priorities

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in choosing them. Channels are companies that analyze the market, promote products, and
negotiate with customers.

o It can be short or long, depending on the intermediaries needed.

o A distribution channel is the path from production to consumption.
o It ensures products reach customers and generates sales and brand awareness.
o The network has producers, wholesalers, retailers, and consumers.
o It affects product prices.
o It includes middlemen such as wholesalers, retailers, distributors, or the Internet.
o Functions include supplying market information. Managing financial operations. While
promoting products, maintaining prices, and minimizing risk.

TYPES OF DISTRIBUTION CHANNELS

There are three types of distribution channels: direct, indirect and hybrid.

1. Direct. With the direct channel, the company sells directly to the customer. For example, a
brewery that brews its own beer and sells it to customers at its own brick-and-mortar location
employs a direct channel of distribution. The seller delivers the product or service directly to
customers. The vendor might also maintain its own sales force or sell its products or services
through an e-commerce The direct channel approach requires vendors to take on the expense
of hiring and training a sales team or building and hosting an e-commerce operation.
2. Indirect. Indirect channels use multiple distribution partners or intermediaries to distribute
goods and services from the seller to customers. Indirect channels can be configured in the
following ways:
 With the single-tier distribution model, vendors develop direct relationships with channel
partners that sell to the customer.
 In the two-tier distribution model, the vendor sells to distributors that provide products to
channel partners, which, in turn, package products for the end customer. Two-tier distribution
helps smaller channel partners that would have difficulty establishing direct sales
relationships with large vendors.
3. Hybrid. Hybrid channels combine the characteristics of direct and indirect channels. The
seller uses both direct and indirect methods. For example, a manufacturer might sell an item
on its e-commerce website, but then an intermediary delivers the physical product to the
customer. The customer still has a direct interaction with the seller, but an intermediary is
also involved.

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IMPORTANCE OF DISTRIBUTION CHANNELS & MARKETING CHANNELS

Distribution and marketing channels are crucial components of any successful business strategy.
They help companies to reach their customers effectively and efficiently. Here is the Importance
of Distribution Channels & Marketing Channels.

IMPORTANCE OF DISTRIBUTION CHANNELS

 On-time Delivery

Distribution channels ensure that products are delivered to customers on time. This is important
because customers can get unhappy if products are unavailable when needed.

 No Distance Issues

Distribution channels remove distance barriers for businesses. This means businesses can serve
customers who are far away.

 Enough Stock

Distribution channels play a crucial role in keeping enough products in stock. They store
products in warehouses and supply them as per market demand. This helps prevent shortages of
goods in the market.

 Market Information

Businesses use distribution channels to get important market information. They learn about
things like demand, price, and competition from the intermediaries in the channel. Customers
also give feedback and suggestions, which helps businesses make good decisions and plan their
strategies.

 Product Promotion

Distribution channels promote products by using intermediaries who inform customers about the
products. These intermediaries introduce new products and explain their features to customers,
motivating them to buy. As a result, distribution channels play an important role in the efficient
marketing and promotion of goods.

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  Financial Assistance

Businesses receive financial aid from distribution channels. Intermediaries buy products in bulk
from producers and pay them. They sell products to customers in desired quantities and offer
credit facilities. This helps regulate business funds and ensures timely payments to producers.

 Employment Opportunities

Distribution channels create jobs by employing many people in the economy. Wholesalers,
retailers, and agents earn a living in these channels. Therefore, distribution channels provide
employment opportunities for people.

 Delivery Risk Management

Businesses face risks, but distribution channels help. They take on the risk of delivering products
safely and on time to customers. Intermediaries handle the delivery, so producers can focus on
production without worrying about logistics.

Examples of distribution channel intermediaries

Intermediaries are used in indirect channels to distribute, sell and promote goods and services.
Intermediaries may more commonly be referred to as middlemen. Examples of intermediaries
include the following:

 Wholesalers are intermediaries between manufacturers and retailers.

 Agents represent a person or entity and serve as an intermediary between buyers and
sellers.
 Brokers are similar to agents but represent a person or entity on a limited, per-transaction
basis.
 Catalogs are collections of products gathered in a publication and distributed at regular
intervals.
 Consultants are individuals who connect distributors with intermediaries lower on
the supply chain and give advice on how to distribute product effectively.
 Distributors are in direct contact with the manufacturer but sell to end users.

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  Retailers either buy from the manufacturer or another intermediary and distribute to
consumers through shops, grocery stores or websites.
 Independent software vendors are vendors that sell their software using a marketplace.
 Managed service providers (MSPs) offer managed software services.
 Online marketplaces are e-commerce sites that connect buyers and sellers.
 Original equipment manufacturers, or OEMs, are companies that sell a product and
markets itself as the company that originally manufactured the product.
 Value-added resellers (VARs) are resellers that add value to a product or service before
reselling it.
MIDDLEMAN

An intermediary in a distribution or transaction chain who facilitates interaction between the

involved parties
WHO IS A MIDDLEMAN?

A middleman plays the role of an intermediary in a distribution or transaction chain who

facilitates interaction between the involved parties. Middlemen specialize in performing crucial
activities involved in the purchase and sale of goods in their flow from producers to the ultimate
buyers. They typically do not produce anything but possess extensive knowledge of the market,
thereby charging a commission or a fee for their services.

TYPES OF MIDDLEMEN

Middlemen can be classified into two categories, namely merchants and agents.

1. Merchants

Merchants, such as wholesalers and retailers, buy and re-sell their goods. They take ownership of
inventory and bear the expense of storing and distributing the product. They make money by
selling the goods at a higher price than its cost to them. The difference is called the “markup.”

Merchant middlemen range from a shopkeeper to a large multinational corporation with

international operations. Larger middlemen may focus on a core competency, such as delivery,
advertising, warehousing, or a particular market segment.

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 2. Agents

Agents, such as brokers or real estate agents, specialize in negotiations involved in transactions.
They do not take ownership of what they are selling. Instead, they make money by charging a
commission or a fee for facilitating a transaction.

For example, brokers act as intermediaries between investors and the securities exchange. They
provide trading services, investment advice, and solutions to their clients and charge a brokerage
fee in return.

FUNCTIONS OF MIDDLEMEN

1. Information provider
2. Price stability
3. Promotion
4. Financing
5. Title
6. Help in production function
7. Pricing
8. Matching Buyers and Sellers
9. Standardizing Transactions

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10. Matching Demand and Supply
The matching process is undertaken by performing the following functions:
a. Contractual: - Finding out buyers and sellers.
b. Merchandising: Producing goods that will satisfy market requirements.
c. Pricing: process of attaching value to the product in monetary terms.
d. Propaganda: Sales promotion activities.
e. Physical Distribution: Distribution activities.
f. Termination: Settlement of contract i.e. paying the value and receiving the goods.

Middlemen perform the following functions in a marketplace:

1. They provide valuable information and feedback to producers about consumer behavior,
changing tastes and fashions, upcoming rival businesses, etc.
2. They enable manufacturers to concentrate on the primary function of production by
handling the ancillary functions of warehousing, distribution, advertising, insurance, etc.
They promote the goods to the consumers on behalf of the producers.
3. Middlemen like banks and other financial institutions render financial services to
manufacturers.
4. They make the goods and services available to consumers at the right place, at the right
time, and in the right quantity.
5. Buyers and sellers are often unwilling to assume the market risk for fear of a possible
loss. It is the middlemen in the process chain who assume the risks of theft, perishability,
and other potential hazards.

IMPORTANCE OF MARKETING CHANNELS

Marketing channels are important for businesses because they provide various benefits that help
manufacturers and customers. Pointers explaining the importance of marketing channels are
shown below.

 Information Provider

Middlemen give market information to manufacturers. They tell about changes in customer
demographics, psychographics, media habits, competition, and customer preferences.

 Price Stability

Middlemen maintain price stability. They often absorb price increases to keep prices low for
customers. They also control overheads to maintain prices.

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  Promotion

Middlemen promote products in their territory. They may create sales incentive programs to
build customer traffic at other outlets.

 Financing

Middlemen finance manufacturers by providing necessary working capital. They pay in advance
for goods and services, which helps manufacturers fund their operations.

 Title

Most middlemen take title to goods, services, and trade in their name. This diffuses risks
between manufacturers and middlemen. It also enables middlemen to have physical possession
of goods, which helps them meet customer demand quickly.

 Help In Production Function

Producers can focus on production, while middlemen specialize in marketing. Their services are
best utilized for selling the product. The finance needed for marketing can be used in production
for greater returns.

 Matching Demand and Supply

Intermediaries assemble goods from many producers to make buying easy for customers.
Marketing's goal is to match supply and demand.

IMPORTANCE OF MIDDLEMEN

Intermediaries are important players in every market. Both consumers and producers stand to
benefit from their services. In addition to constantly matching the supply and demand in the
market, middlemen provide valuable feedback to the producers about their market offering. By
specializing in functions such as banking, warehousing, transportation, underwriting, etc., they
bring the economic benefits of specialization and division of labor to the market.

Buyers gain access to the right quantities of goods and services close to their homes through the
intermediary channels. They benefit from other services of middlemen, such as advertising and
delivery.

DISADVANTAGES OF MIDDLEMEN

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Despite the many advantages that middlemen can offer, some people believe that middlemen do
more harm than good and should be eliminated. As goods exchange hands from one middleman
to the other, their prices inflate.

A higher price is charged at each junction to cover the cost of warehousing, insurance,
transportation, advertising, etc. When a profit margin for each middleman is also factored in,
consumers ultimately must bear the price of having intermediaries in the channel.

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