DISTRIBUTION AND PRICING
GUEST LECTURER: SLADE RICHARDSON
A bit about me…
• My name is Slade, I am a tutor for this course and a
PhD candidate here at the University of Adelaide
• I have been at the Uni since 2017 where I studied a
B.Comm Marketing and ended up doing Honours
because research is cool and good and also fun.
• My research is in music scenes, I absolutely love
music and have been going to gigs and playing in
bands since forever, so I’m very stoked that I can
make a career out of research in music while also
being able to work here at the Uni J
Marketing Mix Assignment
• While listening to this lecture, start
thinking about how you could apply
these theories to brands that your
group is considering
• You will likely apply 1-2 concepts
per marketing mix element J
The University of Adelaide
Slide 3
Distribution (Place)
Chapter 11
Key learning concepts
Distribution (Chapter 11):
1.
Marketing channels and channel members
2.
Marketing channels and reducing transactions
3.
Channel intermediaries
4.
Marketing channels for consumer products
5.
Factors affecting channel choice
6.
Levels of distribution intensity (intensive, selective,
exclusive)
The University of Adelaide
Slide 5
Marketing channels
Marketing channel
(channel of distribution)
Channel members
A set of interdependent organisations that facilitate
the transfer of ownership as products move from
producer to business user or consumer
All parties in the marketing channel who negotiate with
one another, buy and sell products, and facilitate the
change of ownership between buyer and seller in the
course of moving the product from the manufacturer
into the hands of the final consumer
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Slide 6
Reducing transactions
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Slide 7
Marketing channels for consumer
products
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Slide 8
Factors affecting channel choice
Market factors
Product factors Producer factors
Considerations surrounding a
brand’s target market
Considerations around the
product/s a brand sells
Factors regarding the
producer/brand themselves
Who are the potential customers?
Standardised vs customised
How many resources do we have?
What/where/when/how do they
buy?
Product’s life cycle
Direct distribution and control
Delicacy: fragility, perishability
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Slide 9
Levels of distribution intensity
Intensity Level
Distribution intensity
objective
Number of intermediaries
in each market
Examples
Intensive
Achieve mass-market
selling; product must be
available everywhere
Many
Coca-Cola, potato chips,
chocolate bars
(Convenience goods)
Selective
Work closely with selected
intermediaries who meet
certain criteria
Several
Printers, surfboards, jeans
(Shopping goods)
Exclusive
Work with single
intermediary for products
that require special
resources or positioning
One
Rolex watches, luxury
cars/jewellery
(Specialty goods)
The University of Adelaide
Slide 10
Intensive distribution
•
Goods must be available in as many outlets and locations as
possible for maximum consumer convenience
•
Some products, usually convenience goods, have their total
sales linked with outlets at which they are available (the more
locations, the more sales)
•
•
(eg, beer, cigarettes, chocolate bars and snacks)
For example, if you cannot find Coca-Cola at your nearest
supermarket or corner store, you can always pick an alternative
product that is similar (Pepsi, LA Ice, different kind of soft drink,
etc)
The University of Adelaide
Slide 11
Selective distribution
• Limited number of wholesalers or retailers
• Manufacturing brands select specific retailers to stock their
product, may have criteria for selection and have ongoing
business relationships
• Consumers should be able to find/purchase product, but not
as easily as those distributed intensively
• This works best for products where brand is important to
customers and it is expected people in the market for that
product will spend more time on their purchase decision.
The University of Adelaide
Slide 12
Exclusive distribution
• Only one wholesaler/distributor/retailer used in specific
geographic area
• For brands that wish to maintain image of luxury and prestige
• By having exclusive distribution rights, manufacturer has
control over all decisions – pricing, promotion, service, policies
• Allows aggressive selling through one point of purchase as
there are few or no alternatives
The University of Adelaide
Slide 13
Pricing
Chapter 14
Key learning concepts
Pricing (Chapter 14):
1.
Pricing objectives (Profit-oriented, sales-oriented, status quo)
2.
Elasticity of demand
3.
The cost determinant of price (loss-leader, variable, fixed,
mark-up)
4.
4 steps in setting the right price for a product
5.
Pricing strategies: skimming, anchoring, penetration pricing
6.
Pricing tactics: discounts, allowances, rebates, value-based
pricing, geographic pricing
7.
Special pricing tactics: flexible, professional services pricing,
leader, bait, odd-even, price bundling, two-part pricing
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Slide 15
The importance of price
Concept
Definition
Example
Price
What is given in exchange for a
good or service
$30 t-shirt
Revenue
The price charged to customers
multiplied by the number of
units sold (1,000 units sold =
$30,000)
$30 x 1,000
= $30,000
Profit
Revenue minus expenses
$30,000 - $20,000 cost
= $10,000
To earn a profit:
Managers must choose a price that isn’t too high or too low
The University of Adelaide
Slide 16
Pricing objectives
Profit-Oriented Sales-Oriented Status Quo
Pricing
Pricing
Pricing
A pricing policy that revolves
around profit maximisation,
satisfactory profits and a target
return on investment (ROI)
A pricing policy that revolves
around market share or on dollar
or unit sales
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A pricing objective that maintains
existing prices or meets the
competition’s prices
Slide 17
Profit-oriented pricing
• Profit-oriented pricing is a pricing objective where a company
tries to maximise profits.
• Products are priced in such a way that the price of a product
exceeds variable and fixed costs of production and will yield
return on investment.
• Goods are rarely sold for cost, as a brand needs to earn some
profit to stay viable (go above “breaking even”), but some
goods are sold higher above cost so that, at a predicted sales
volume, the company maximises profit.
The University of Adelaide
Slide 18
Sales-oriented pricing
•
•
•
•
The goal with sales-oriented pricing is to set price at a point that
maximises unit sales or market share (the amount of consumers in
a market who buy from you).
Unlike profit-oriented, this strategy is not as concerned with making
a profit on a certain product with sales, but about achieving higher
usage or higher sales numbers.
This is effective in a competitive market to ensure consumers are
enticed to purchase your product over competitors, but may also be
used to shift products quickly (for example old stock).
More successful companies could employ this tactic more
successfully if they are not entirely dependent on profits from that
product, but it may not be viable for a small, independent business
who relies on profit to survive.
The University of Adelaide
Slide 19
Status quo pricing
•
•
•
•
This pricing strategy is about maintaining ‘status quo’, which is
maintaining existing price points or meeting the price of
competitors.
This is a very passive strategy in that you are not differentiating
your prices at all (no discount pricing, no premium pricing) but are
basically just “doing what everyone else is”.
May be a method of surviving in volatile markets that do not allow
for great variations in price without great risk.
Worth noting that brands conspiring and setting a price together for
a higher status quo price in the market (known as price fixing) is
considered illegal in Australia.
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Slide 20
• Perfectly Elastic Demand
• Perfectly Inelastic Demand
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Slide 21
• Elastic Demand
• Inelastic Demand
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Slide 22
• Unitary Demand
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Slide 23
Elasticity of demand
Elasticity of
Demand
Elastic Demand
Inelastic
Demand
Refers to how sensitive consumers
are to changes in price
If demand is elastic, it means
consumers will respond quickly to
changes in price, lower prices will
increase demand and higher prices
will lower demand
If demand is inelastic, it means
consumers will not respond
significantly to changes in price;
price changes, whether lower or
higher, will not influence demand
as much
‘Demand’ refers to ‘demand from
consumers’
‘Elastic’ refers to the property of
being elastic; how far can it be
stretched
Elastic demand = price sensitive
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Inelastic demand = not sensitive to
price
Slide 24
Elasticity of demand
Concept
Definition
Example
Elastic demand
When consumers respond
quickly to price changes, either
buying more or less of a
product when the price drops
or rises
Specials, deals, discounts, price
organically lowers
A situation in which an increase
or a decrease in price won’t
significantly affect demand for
the product
Petrol, insulin, cigarettes
Inelastic demand
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Items that are not necessary
may be more elastic as
consumers are able to go
without
Necessary items are often
inelastic due to their
importance
Slide 25
Factors affecting elasticity
Availability of substitutes
Price relative to purchasing power
Product durability
Product’s other uses
The University of Adelaide
Slide 26
The cost determinant of price
Loss-leader pricing: companies set prices below cost to
attract consumers into their stores
Variable cost: varies with changes in the level of output
Fixed cost: doesn’t change as output is increased or
decreased
Mark-up pricing: the cost of buying the product from the
producer, for expenses not otherwise accounted for, plus
amounts of profit
The University of Adelaide
Slide 27
4 steps in setting the right price
1. Establish pricing goals
Estimate demand, costs, profits
Select a pricing strategy to help determine a
base price
Fine-tune base price with pricing tactics
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Slide 28
Choose a price strategy
A basic, long-term pricing framework, which
establishes the initial price for a product
and the intended direction for price
movements over the product life cycle
Pricing strategies
• Skimming
Price
Skimming Price Anchoring Penetration
• • AAnchoring
pricing policy whereby an
• The practice of first showing a
Pricing
organisation charges a high
high price for an item, so that
• introductory
Penetration
pricing
price, often
coupled with heavy promotion
customers’ expectations for the
value of that item will shift
upwards
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• A pricing policy whereby an
organisation charges a
relatively low price for a
product initially as a way to
reach the mass market
Slide 30
Price skimming
A price policy whereby
an organisation
charges a high
introductory price, often
coupled with heavy
promotion, and
gradually lowers price
over time.
Comes from “skimming
off the top”.
Successful when:
• Inelastic demand
• Superior product
• Legal protection of
product
• Technological
breakthrough
• Limited production
Price skimming
What are some examples?
• New product enters a market, and using price skimming, the organisation implies high value
towards the product, the price then slowly dropping to accrue more buyers and establish a
feasible and sustainable base price.
• Reliant on the ‘newness’ of products and the mystery surrounding it, may benefit from
perceived innovation or a lack of broad understanding of the product’s actual worth that
causes initial buyers to be more willing to pay the high price.
• Brand has perception of quality and intrigue around it already, brands that have an established
reputation and are known for being luxury, limited, status-symbols, or higher quality may be able
to release products with higher prices initially that then drop over time.
• Brands like Nike, Apple, Supreme can all release products initially with high prices
somewhat due to their broader appeal and reputation, but also due to limited nature of some
of their drops, which helps create this high value, being limited makes them coveted.
Price Skimming
Successful when:
• Inelastic demand
• Superior product
• Legal protection of product
• Technological breakthrough
• Limited production
The University of Adelaide
Slide 33
Price skimming
• Advantages:
• Potentially high ROI
• Segment the market to
your advantage
• Early adopters act as
product testers
• Creates and maintains
brand image
Disadvantages:
• Relies on consistent high demand
• May not be able to maintain high
price for long
The University of Adelaide
Slide 34
Penetration pricing
An organisation
charges a relatively low
price for a product
initially as a way to
reach the mass market.
The price “penetrates”
the market at a point
lower than most
competitors.
• Lower profit per unit;
requires higher volume
sales to reach the
break-even
• Tends to discourage
competition
• Effective in a price
sensitive market
Penetration pricing
What are some examples?
• Home brands in supermarkets who emulate brand name products but are priced cheaper
• Eg Woolworths have Choccy Slams as an alternative to Tim Tams, as well as many other
cheaper emulation products that may dissuade new entrants into this market, as other
supermarkets also employ this tactic
• Purposely entering to the market and making a loss on a new product line as the company can
afford to do so in order to build a consumer base quickly; established companies may do this if
they have the resources to release new product lines or enter new markets.
• This strategy may rely on economies of scale where resources are already held that make
expansion ventures less costly for these companies, or means they are not reliant solely on
this product and can afford to “take a loss” on it.
Penetration pricing
• Lower profit per unit;
requires higher volume of
sales to reach break-even
• Tends to discourage
competition
• Effective in a price sensitive
market
The University of Adelaide
Slide 37
Penetration pricing
• Advantages:
• Take competitors by
surprise
• Discourage competitors
from entering same
market
• Cost control and cost
reduction pressures
• Expand into international
markets more successfully
Disadvantages:
• Long-term price
expectations
• Creates preconceptions
about brand and business
• Customers may not be loyal
for very long
• Low profit margins may be
unsustainable
The University of Adelaide
Slide 38
Price anchoring
The practice of first showing a
high price for an item so that
customers’ expectations of the
value of that item will shift
upwards.
The initial price is the “anchor”
that serves to anchor
consumer values to that,
before then showing a lower
price that is far more appealing
and looks like a bargain.
• Based upon first
impressions
• Provides a frame of
reference
• The concept of anchor
– affects how
customers perceive
value
Price anchoring
What are some examples?
• Showing the “original” price next to the discounted price (or members price, etc).
• Sometimes this was never the original price and is there to create the illusion of a bargain.
• Showing a generic competitor’s price and then your price which is more affordable.
• Showing a more expensive item first before showing other cheaper items that will, comparatively,
seem more reasonable.
• Showing a very expensive painting before showing cheaper ones that are more affordable.
• Displaying expensive menu items upfront to make the others look like better deals (some
restaurants do this to show how much you COULD be paying coupled with alternatives that
allow you to still eat but at far less of a price.
Price anchoring
Disadvantages:
• Advantages:
• Possibility of manipulation
• Decision making for
customers is simplified
• Increase sales for specific
products
The University of Adelaide
Slide 41
Base Price
•
•
1 or more of these strategies will determine the base price
Base price: the general price level at which the company
expects to sell the good or service, eg:
•
•
•
•
•
above market (skimming)
at market (status quo)
below market (penetration)
The base price will be finetuned with pricing tactics
Pricing tactics are short-term or conditional price changes, they
may be in response to market changes or certain demands or
opportunities, but do not seek to indefinitely alter the base price
and price strategy
The University of Adelaide
Slide 42
Pricing tactics
Value-Based
Pricing
A price that is set at a level that
the customers perceive to be a
good price compared to the
price of other options
The value is determined by an understanding of what
consumers want and consider valuable, the objective
is not to undercut competitors but to price according
to the actual perceived value and how much the
company believes it is worth and that consumers
would see it as being worth for a fair price.
Pricing tactics
Quantity
Discounts
A price reduction offered to buyers
who purchase multiple units or
above a specified dollar amount
Cash Discounts
A price reduction offered to a
consumer, an industrial user or a
marketing intermediary in return
for prompt payment of a bill
Functional
Discounts
A discount to wholesalers and
retailers for performing channel
functions
Can be cumulative or noncumulative
The University of Adelaide
Slide 44
Pricing tactics
Promotional
Allowances
Payment to a dealer for promoting
the manufacturer’s products
Rebates
Cash refund given for the purchase
of a product during a specific
period
Seasonal
Discount
A price reduction for buying
merchandise out of season
Helps to shift out-of-season stock
and ensures a steady production
schedule year-round
The University of Adelaide
Slide 45
Pricing tactics
Freight
Absorption
Pricing
A price tactic in which the seller
pays all or part of the actual
freight charges and does not pass
them on to the buyer
FOB Origin
Pricing
A price tactic that requires the
buyer to absorb the freight costs
from the shipping point
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Uniform
Delivered
Pricing
A price tactic in which the seller
pays the actual freight charges and
charges every purchaser an
identical, flat freight charge
Slide 46
Pricing tactics
Zone Pricing
Modification of uniform
delivered pricing that divides the
total market into segments or
zones, and charges a flat freight
rate to all customers in a given
zone
Flexible Pricing
(Variable
Pricing)
Professional
Services
Pricing
Different customers pay different
prices for essentially the same
merchandise bought in equal
quantities
Used by people with lengthy
experience, training and often
certification by a licensing board,
such as lawyers or doctors
May allow haggling, lower
prices based on competitors
eg “oh the store down the
road does it at this price”
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If a surgery costs $10,000
($2.5k/hour) for four hours
you’re paying for the unique
experience of that surgeon’s
education and ability
Slide 47
Special pricing tactics
Leader Pricing
Bait Pricing
Also known as loss-leader
pricing; a product is sold near or
even below cost in the hope
that shoppers will buy other
items once they are in the store
Lures customers with false or
misleading price advertising and
then uses high-pressure selling to
persuade consumers to buy more
expensive merchandise
Odd-even
Pricing
Also known as psychological
pricing
Uses odd-numbered prices to
connote bargains and evennumbered prices to imply quality
Product price not sustainable,
but will attract customers to
the purchase situation and
may buy other things.
May advertise something for
$100, but when you go to buy it,
the price is $200 and there are
non-negotiable “set-up” fees
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$49 looks better than $50,
because our brains “round down”
and we see the price “isn’t $50”
despite essentially being so
Slide 48
Special pricing tactics
Price Bundling
Unbundling
Marketing two or more products
in a single package for a special
price
Reducing the bundle of services
that comes with the basic product
Two-Part
Pricing
Price tactic that charges two
separate amounts to consume a
single good or service.
Gym memberships may charge a
“joining fee” on top of the regular fee,
or phone plans may charge for your
100gb of data, and then another fee if
you go over (somehow???).
The University of Adelaide
Slide 49