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UNIT IV PRICING DECISIONS, Syllabus:, Pricing; Definition, Objectives, factors affecting price determinations; methods of setting prices; cost, demand and competition factors; pricing policies and strategies., Channels of distributions- meaning and importance, types of distributions channels, Factors affecting choices of distributions channels, Wholesaling and retailing; Types of Retailers…………. e-retailing, physical distribution., ............................................................................................................, Pricing:, Definition, Price is the amount of money charged for a product or service., Price is the sum of all the values that consumer exchange for the benefits having or using the product or service., Price represents revenue for the marketers. Determination of monetary value of a product is pricing decision this is important part of marketing activity which generates revenue to the company., Pricing objectives :, 1) Survival, 2) Maximum current profit, 3)Target margin : target return on investment and target return on sales, 4) Increase sales volume, 5) Increase Market Share, 6) Image building, 7) Stabilization of price, 8) Meet competition bar win competition, 9) Recovery of costs, 10) Product Quality leadership, Factors affecting on Pricing decision:, Factors influences on pricing decision., 1. Internal factors, 2. External Factors, Internal factors, 1. market objectives, 2. Marketing mix strategy, 3. Cost of product and distribution, 4. Organisation consideration, External factors, 1. Nature of market and demand, 2. Competition, 3. Other factors, 4. Consumer perception over value and quality, Methods of setting Prices:, (Pricing Approach), General pricing Approach:-, A. Cost based pricing:, Adding profit marign to cost of the product., Advantages: It is very simple, Easy to follow., Disadvantages: ignores competitors price, ignores market demand., B. Value Based pricing:, Buyers perception is considered as base of pricing fixation., C. Going rate pricing/competition pricing/leader pricing, D. Demand based pricing:, Price is fixed according to the market demand., When demand is more hike the price and when demand is low reduce the price., E. Objective based pricing, Depending on the objective of the firm also price may be determined. Some have high profit policy where as some may have servicing motto or social welfare aim. Some may have Fair price policy. Some PSUs follow no profit no loss policy. They may adopt these kind of strategy., New product pricing Approach:-, 1. Market Skimming, Setting Prices High at the initial stages of a new product, which is unique and creative or special one. To catch the creamy layer., 2. Market penetration:, Keeping the price lower to face the competition, Product Mix pricing:, 1. Product line pricing, 2. Optional product pricing ; e.g. accessories, 3. Captive product pricing e.g. refill, 4. By product pricing, 5. Product bundle pricing, Pricing policies and strategies:, Policies are guidelines providing focus within which the company management administers the policies to match the market needs. A policy is a guide to thinking and action for those responsible for decision making., For example public sector enterprises follow no profit no loss pricing policy., Without definite price policies each price edition is time consuming tedious and pell mele affair., Policy should be consistent with objectives cost competition and demand. Price policies and strategies enable price setting easier and helps in rational and justifyable distribution too., Pricing policy:, A) Cost based, markup, absorption, break even, B) market or customer oriented or demand based, Skimming, penetration, traffic bear, C. Competition based, Parity, Discount, premium, tender, D. Other, Differential, Affordable, Pricing strategies, A. Market entry strategy, Skimming : example Pajero, Penetration : example Tata Docomo, B. Discount And allowance strategy, Quantity discount, Trade discounts, Cash discounts, Seasonal Discounts, Promotional discounts, C. Competition strategy, Predatory pricing; means setting very low price which they competitors cannot follow or wear or face., Price discrimination; different prices to different people depending on different grounds or basis., D. Geographical pricing strategies, Point of production :that is factory or outlet pricing, Uniform Delivered pricing example Maggie, Zone delivered pricing example bread, Freight obsorption Pricing : seller absorbs transport cost, E. Psychology pricing, Leader Pricing, Bait pricing, Prestige pricing, Channels of distribution:, Meaning, The flow that a good or service follows from a production or manufacturing to the final consumer are the ultimate buyer., Definition:, The path tekken by the good or service when they move from manufacturer to the end consumer., It is a chain of business or intermediate is through which a good or service passes the final buyer or end consumer., Importance of channels of distribution, Bridge the gap, Law of goods and delivery of market information, Reduces uncertainty cost and risk, Better management through promotion and information, Better Coordination, Barrier to competition, Generates employment, Provides Finance, Distribution of risk, Maintain stocks of the products, Distribution channel, Direct channel, Producer/manufacturer to consumer : zero level, Indirect Channel, single level - Produce retailer consumer, Two level - producer wholesaler retailer consumer, 3 level - producer agent/distributor wholesaler retailer consumer, Factors affecting the choice of channels of distribution:, Factors Determining the Marketing Channels:, There are certain factors related to the product, the company, the competitors, the market and the environment which determines the selection of an appropriate channel of distribution for a particular product., To know about these factors in detail, let us go through the following categories:, Factors Determining the Marketing Channels, Product-Related Factors, The product’s features, specifications, nature, usage, value and durability plays a vital role in the selection of marketing channels. Let us go through the related factors give below:, Nature of Product: If the product is a general product which is widely used like cosmetics, it requires a more extended channel. Whereas, the product which is customised or has limited customers like industrial machinery needs a shorter channel., Perishability: The goods which are perishable require to be sold through the shorter channel. However, the products which are non-perishable can be distributed through a longer channel., Unit Value of the Product: If the product is of low value it can be easily distributed through the longer channel, but for the products which are expensive and valuable the manufacturers prefer a shorter channel., Product Complexity: If the product is complicated to use and has technical specifications, it will require a shorter channel. The products which are user-friendly and easy to handle can be sold through longer channels., Company Related Factors, The company’s financial condition, objectives, privacy policies and level of control influences the selection of a particular marketing channel:, Finance Available: If a company is financially sound it can go for a shorter channel of distribution by opening its retail outlets otherwise it can opt for a longer marketing channel., Core Competency: If the manufacturing company focus on its core ability which is the production of goods it will be least interested in retailing. Thus it can opt for a longer marketing channel., The degree of Control: If the company wants to regulate its sale and the market segment it caters, it will prefer a shorter channel. The companies which do not exercise much control over its products go for a longer distribution channel., Competitive Factors, The competitors affect the company’s decisions related to the selection of marketing channels in the following ways:, Competitor’s Channel of Distribution: Sometimes the companies follow their competitors and use the same channel as adopted by them., Distribution Policy: Some companies have a different distribution policy, and they adhere to it. Multi-level marketing (MLM) companies usually stick to their chain marketing policy., Market-Related Factors, The market is the place where the customers are served. Thus, it has a crucial role in determining the type of channel for any product. Let us see these factors in detail:, Market Size: When the company needs to reach a large number of customers, it has to go for the longer channel. If the company has to cater a few customers, it can opt for a shorter channel of distribution., Geographical Concentration: If the potential customers are located in a vast geographic area, the company can reach them through a longer channel. The shorter channel will be preferred for the buyers located in the limited area., Quantity Purchased: If the product is purchased in bulk quantity by the limited customers, a shorter channel is suitable whereas the products which are bought in small quantities by multiple customers, a longer channel will work., Environmental Factors, Every business operates within an environment where it has to deal with some legal obligations as well as economic conditions. These factors include the following:, Legal Environment: The government imposes certain legal restrictions over trading activities which also affects the selection of a distribution channel. Like selling of weapons cannot take place through a longer channel., Economic Conditions: At the time of recession or depression in a country, the manufacturers prefer to reduce their distribution cost by going for a shorter marketing channel., (( Important factors affecting the choice of channels of distribution by the manufacturer are:, (A) Considerations Related to Products, When a manufacturer selects some channel of distribution he/she should take care of such factors which are related to the quality and nature of the product. They are as follows:, 1. Unit Value of the Product:, When the product is very costly it is best to use small distribution channel. For example, Industrial Machinery or Gold Ornaments are very costly products that are why for their distribution small distribution channel is used. On the other hand, for less costly products long distribution channel is used., 2. Standardised or Customised Product:, Standardised products are those for which are pre-determined and there has no scope for alteration. For example: utensils of MILTON. To sell this long distribution channel is used., On the other hand, customised products are those which are made according to the discretion of the consumer and also there is a scope for alteration, for example; furniture. For such products face-to-face interaction between the manufacturer and the consumer is essential. So for these Direct Sales is a good option., 3. Perishability:, A manufacturer should choose minimum or no middlemen as channel of distribution for such an item or product which is of highly perishable nature. On the contrary, a long distribution channel can be selected for durable goods., 4. Technical Nature:, If a product is of a technical nature, then it is better to supply it directly to the consumer. This will help the user to know the necessary technicalities of the product., (B) Considerations Related to Market, Market considerations are given below:, 1. Number of Buyers:, If the number of buyer is large then it is better to take the services of middlemen for the distribution of the goods. On the contrary, the distribution should be done by the manufacturer directly if the number of buyers is less., 2. Types of Buyers:, Buyers can be of two types: General Buyers and Industrial Buyers. If the more buyers of the product belong to general category then there can be more middlemen. But in case of industrial buyers there can be less middlemen., 3. Buying Habits:, A manufacturer should take the services of middlemen if his financial position does not permit him to sell goods on credit to those consumers who are in the habit of purchasing goods on credit., 4. Buying Quantity:, It is useful for the manufacturer to rely on the services of middlemen if the goods are bought in smaller quantity., 5. Size of Market:, If the market area of the product is scattered fairly, then the producer must take the help of middlemen., (C) Considerations Related to Manufacturer/Company, Considerations related to manufacturer are given below:, 1. Goodwill:, Manufacturer’s goodwill also affects the selection of channel of distribution. A manufacturer enjoying good reputation need not depend on the middlemen as he can open his own branches easily., 2. Desire to control the channel of Distribution:, A manufacturer’s ambition to control the channel of distribution affects its selection. Consumers should be approached directly by such type of manufacturer. For example, electronic goods sector with a motive to control the service levels provided to the customers at the point of sale are resorting to company owned retail counters., 3. Financial Strength:, A company which has a strong financial base can evolve its own channels. On the other hand, financially weak companies would have to depend upon middlemen., (D) Considerations Related to Government, Considerations related to the government also affect the selection of channel of distribution. For example, only a license holder can sell medicines in the market according to the law of the government., In this situation, the manufacturer of medicines should take care that the distribution of his product takes place only through such middlemen who have the relevant license., (E) Others, 1. Cost:, A manufacturer should select such a channel of distribution which is less costly and also useful from other angles., 2. Availability:, Sometimes some other channel of distribution can be selected if the desired one is not available., 3. Possibilities of Sales:, When sales are not good company may have to resort middleman., WHOLESALING, It includes of all the activities in selling the goods or services to those who buy it for the purpose of resale or for the use in business operations, these exclude retailers., There are many services provided by the wholesalers which are: Selling and promotion of goods, Bulk breaking, Warehousing, Transportation, RETAILING :For retailers it is very difficult to differentiate themselves from the other retailers, therefore they often differentiate themselves with the type of services they provide to the customers. Usually there are four levels of services that can be offered by the retailers which are:, Self Service- in this the customers are ready to carry out and locate and select the goods in order to save money, Self-Selection- customers search for the goods by themselves and can also ask for assistance., Limited Service- These retailers offer many verities of shopping goods and the customers demand more information than in the self-selection service., Full Service- Here the staff assist and help the customers in every phase of the purchase, and this often results in high retailing cost to serve., DEFINITION OF WHOLESALE VS RETAIL: Wholesalers purchase products in bulk from manufacturers and distributors. Then they resell these products to retailers. This is a B2B (business-to-business) model., Retailers purchase goods in bulk from wholesalers and then work to sell these products directly to consumers. This is a B2C (business-to-consumer) model., Both wholesale and retail businesses buy goods and then resell them with a price increase, known as “markup,” to cover expenses and make a profit., Retailing and Wholesaling consists of all the activities which includes the selling of goods and services directly to the end consumers for their personal use or for nonprofessional use. A retail market is an enterprise where all the goods are available under one room serving for the purpose of convenience to the customers and whose large sales volume comes from the process of retailing. Any organization who is serving for the purpose of providing goods to the customer is doing retailing., There are different types of retail stores that are made available for the customers, these are:, 1) Specialty Stores- these stores offer a narrow product line., 2) Departmental Stores- these types of stores offer various product lines., 3) Discount Stores- these are low price and high volume standard stores., 4) Supermarkets- these are low cost ,high volume self service stores specially designed to meet all the household needs of the customers., 5) Convenience Stores- these are the small stores in the residential areas which offer high range of convenience products and are opened all day long., 6) Off price Retailer Stores- these are for the left over goods which are not available anywhere and are sold at low rate, like factory outlets and are independent off retailers., 7) Superstores- these stores have a huge space for selling goods, they include all the food and household items and also offers services to the customers., ELECTRONIC RETAILING (E-TAILING):Electronic retailing (E-tailing) is the sale of goods and services through the internet. E-tailing can include business-to-business (B2B) and business-to-consumer (B2C) sales of products and services.E-tailing requires companies to tailor their business models to capture internet sales, which can include building out distribution channels such as warehouses, internet webpages, and product shipping centers.Notably, strong distribution channels are critical to electronic retailing as these are the avenues that move the product to the customer., TYPES OF ELECTRONIC RETAILING (E-TAILING), BUSINESS-TO-CONSUMER (B2C) E-TAILING, Business-to-consumer retailing is the most common of all e-commerce companies and the most familiar to most Internet users. This group of retailers includes companies selling finished goods or products to consumers online directly through their websites. The products could be shipped and delivered from the company's warehouse or directly from the manufacturer. One of the primary requirements of a successful B2C retailer is maintaining good customer relations., BUSINESS-TO-BUSINESS (B2B) E-TAILING, Business-to-business retailing involves companies that sell to other companies. Such retailers include consultants, software developers, freelancers, and wholesalers. Wholesalers sell their products in bulk from their manufacturing plants to businesses. These businesses, in turn, sell those products to consumers. In other words, a B2B company such as a wholesaler might sell products to a B2C company., ADVANTAGES OF E-RETAILING, E-Retailing, either as an extension of the existing retail/distribution business or an altogether new start-up, has many advantages. Traditional brick-store retailers are placing more emphasis on their electronic channels and evolving into multi-channel retailers to increase their reach and support their retail channels. The new start-ups in e-retailing can be launched from a small room with one PC attached with the outside world through the Internet., 1. The electronic channel gives the existing brick-store retailers an opportunity to reach new markets, 2. For the existing retailers, it is an extension to leverage their skills and grow revenues and profits without creating an altogether new business., 3. E-Retailing overcomes some limitations of the traditional formats, for instance the customers can shop from the comfort of their homes., 4. The e-commerce software that also traces the customers activities on the Net enables e-retailers to gain valuable insights into their customers shopping behaviour., 5. The e-retail channels transcend all barriers of time and space. The retailer’s server must be on 24*7. An order can come from any customer living any place at any time of the day., 6. E-Commerce channels are definitely efficient and retailers do not have to pay a heavy price for brick-n-mortar shops in costly shopping malls., PHYSICAL DISTRIBUTION, Definition: Physical distribution is the group of activities associated with the supply of finished product from the production line to the consumers. The physical distribution considers many sales distribution channels, such as wholesale and retail, and includes critical decision areas like customer service, inventory, materials, packaging, order processing, and transportation and logistics. You often will hear these processes be referred to as distribution, which is used to describe the marketing and movement of products., Accounting for nearly half of the entire marketing budget of products, the physical distribution process typically garnishes a lot of attention from business managers and owners. As a result, these activities are often the focus of process improvement and cost-saving initiatives in many companies., IMPORTANCE OF PHYSICAL DISTRIBUTION, The importance of physical distribution to a company can vary and is typically associated with the type of product and the necessity it has to customer satisfaction. Strategically staging products in locations to support order shipments and coming up with a rapid and consistent manner to move the product enables companies to be successful in dynamic markets., Physical distribution is managed with a systems approach and considers key interrelated functions to provide efficient movement of products. The functions are interrelated because any time a decision is made in one area it has an effect on the others. For example, a business that is providing custom handbags would consider shipping finished products via air freight versus rail or truck in order to expedite shipment time. The importance of this decision would offset the cost of inventory control, which could be much more costly. Managing physical distribution from a systems approach can provide benefit in controlling costs and meeting customer service demands., FUNCTIONS OF PHYSICAL DISTRIBUTION, The key functions within the physical distribution system are:, Customer service, Order processing, Inventory control, Transportation and logistics, Packaging and materials, The customer service function is a strategically designed standard for consumer satisfaction that the business intends to provide to its customers. As an example, a customer satisfaction approach for the handbag business mentioned above may be that 75% of all custom handbags are delivered to the customer within 72 hours of ordering. An additional approach might include that 95% of custom handbags be delivered to the customer within 96 hours of purchase. Once these customer service standards are set, the physical distribution system is then designed to attain these goals., Order processing is designed to take the customer orders and execute the specifics the customer has purchased. The business is concerned with this function because it directly relates to how the customer is serviced and attaining the customer service goals. If the order processing system is efficient, then the business can avoid other costs in other functions, such as transportation or inventory control. For example, if the handbag business has an error in the processing of a customer order, the business has to turn to premium transportation modes, such as next day air or overnight, to meet the customer service standard set out, which will increase the transportation cost., Inventory control is a major role player in the distribution system of a business. Costs include investment into current inventory, loss of demand for products, and depreciation. There are different types of inventory control systems that can be implemented, such as first in-first out (or FIFO) and flow through, which are methods for businesses to handle products., STEPS IN DESIGNING A PHYSICAL DISTRIBUTION SYSTEM, To design a physical distribution system for a product, following steps need to be followed −, Step 2 − Articulating customer requirement, Step 3 − Comparing the strategy with market competitors, Step 4 − Managing the cost of distribution to decrease cost without compromising on the quality of service, Step 5 − Building physical distribution system that is flexible for implementation of changes, if required, Designing of a physical distribution system involves these steps. It is necessary to consider all steps involved for smooth distribution of goods and services.