SPSS Assignment Data.savWeek 6, Using Marketing Channel.docx

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Week 6, "Using Marketing Channels and Price to Create Value
for Customers" was derived from Principles
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Week 6
Using Marketing Channels and Price to
Create Value for Customers
Sometimes when you buy a good or service, it passes straight
from the producer to you. But
suppose every time you purchased something, you had to
contact its maker? For some products or
services, such as a haircut, this would work. But what about the
items you purchase at the grocery
store? You couldn't begin to contact and buy from all the
makers of those products. It would be an

incredibly inefficient way to do business.
Fortunately, companies partner with one another, alleviating
you of this burden. So, for example,
instead of Procter & Gamble selling individual toothbrushes to
consumers, it sells many of them
to stores, which then sell them to everyone.
The specific avenue a seller uses to make a finished good or
service available for purchase—for
example, whether you are able to buy it directly from the seller,
at a store, online, or from a
salesperson—is referred to as the product's marketing channel
(or distribution channel). All of
the people and organizations that buy, resell, and promote the
product "downstream" as it makes
its way to you are part of the marketing channel.
Likewise, price creates value for customers and is the way the
company makes its revenue and
profit by exchanging value with the customer. When Chick-fil-
A opens new locations, the
company offers the first 100 customers a free meal every week
for a year. Customers camp out

overnight to get in line for the free meals. When KFC
introduced its grilled chicken, the company
put coupons good for a free piece of chicken in many Sunday
newspapers.
So how do sellers make any money if they always offer goods
and services on sale or for a special
deal? Many sellers give customers something for free, hoping
they'll buy other products, but a
careful balance is needed to ensure profit.
Price is the only marketing mix variable or part of the offering
that generates revenue. Buyers
relate the price to value. They must feel they are getting value
for the price paid. Pricing decisions
are extremely important. So how do organizations decide how to
price their goods and services?
This week, we explore both distribution and price as a means to
add value for customers.
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6.1 Marketing Channels and Channel Partners
L E A R N I N G O B J E C T I V E S
1. Explain why marketing channel decisions can result in the
success or failure of products.
2. Describe the types of organizations that work together as
channel partners and what each does.
Today, marketing channel decisions are as important as the
decisions companies make about the
features and prices of products (Littleson, 2007). Consumers
have become more demanding.
They are used to getting what they want. If you can't get your
product to them when, where, and
how they want it, they will simply buy a competing product. In
other words, how companies sell
has become as important as what they sell (CBSNews.com,
2007).
The firms a company partners with to actively promote and sell
a product as it travels through its

marketing channel to users are referred to by the firm as its
channel members (or partners).
Companies strive to choose not only the best marketing
channels but also the best channel
partners. A strong channel partner like Walmart can
successfully promote and sell a product that
might not otherwise turn a profit for its producer. In turn,
Walmart wants to work with strong
channel partners it can depend on to continuously provide it
with great products. By contrast, a
weak channel partner, like a bad spouse, can be a liability.
The simplest marketing channel consists of just two parties—a
producer and a consumer. Your
haircut is a good example. When you get a haircut, it travels
straight from your hairdresser to you.
No one else owns, handles, or remarkets the haircut before you
get it. However, many other
products and services pass through multiple organizations
before they get to you. These
organizations are called intermediaries (or middlemen or
resellers).
Companies partner with intermediaries not because they

necessarily want to (ideally they could
sell their products straight to users) but because the
intermediaries can help them sell the
products better than they could working alone. In other words,
they have some sort of capabilities
the producer needs: contact with many customers or the right
customers, marketing expertise,
shipping and handling capabilities, and the ability to lend the
producer credit are among the types
of help a firm can get by using a channel partner.
Intermediaries also create efficiencies by streamlining the
number of transactions an organization
must make, each of which takes time and costs money to
conduct. As Figure 6.1, "Using
3
Intermediaries to Streamline the Number of Transactions"
shows, by selling the tractors it makes
through local farm machinery dealers, manufacturer John Deere
can streamline the number of
transactions it makes from eight to just two.

Figure 6.1 Using Intermediaries to Streamline the Number of
Transactions
The marketing environment is always changing, so what was a
great channel or channel partner
yesterday might not be a great channel partner today. Changes
in technology, production
techniques, and your customer's needs mean you have to
continually reevaluate your marketing
channels and channel partners. Moreover, when you create a
new product, you can't assume the
channels that were used in the past are the best ones (Lancaster
& Withey, 2007). A different
channel or channel partner might be better.
Consider Microsoft's digital encyclopedia, Encarta, which was
first sold on CD and via online
subscription in the early 1990s. Encarta nearly destroyed
Encyclopedia Britannica, a firm that had
dominated the print encyclopedia business for literally
centuries. Ironically, Microsoft had
actually tried to partner with Encyclopedia Britannica to use its
encyclopedia information to make
Encarta but was turned down.

But today, Encarta no longer exists. It's been put out of business
by the free online encyclopedia
Wikipedia. The point is that products and their marketing
channels are constantly evolving.
Consequently, you and your company have to be ready to
evolve, too.
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Types of Channel Partners
Let's now look at the basic types of channel partners. To help
you understand the types of channel
partners, we will go over the most common types of
intermediaries. The two types you hear about
most frequently are wholesalers and retailers. Keep in mind,
however, that the categories we
discuss in this section are just that—categories. The lines
between wholesalers, retailers, and
producers have begun to blur. Microsoft is a producer of goods,
but it has opened its own retail
stores to sell products to consumers, much as Apple has done
(Lyons, 2009). Walmart and other

large retailers now produce their own brands and sell them to
other retailers. Similarly, many
producers have outsourced their manufacturing, and although
they still call themselves
manufacturers, they act more like wholesalers. Wherever
organizations see an opportunity, they
are beginning to take it, regardless of their positions in
marketing channels.
Wholesalers
Wholesalers obtain large quantities of products from producers,
store them, and break them
down into cases and other smaller units more convenient for
retailers to buy, a process called
"breaking bulk." Wholesalers get their name from the fact that
they resell goods "whole" to other
companies without transforming the goods. If you are trying to
stock a small electronics store, you
probably don't want to purchase a truckload of iPads. Instead,
you probably want to buy a smaller
assortment of iPads as well as other merchandise. Via
wholesalers, you can get the assortment of
products you want in the quantities you want. Some wholesalers
carry a wide range of different

products; others carry narrow ranges of products.
Most wholesalers "take title" to goods—or own them until
purchased by other sellers. Wholesalers
such as these assume a great deal of risk on the part of
companies farther down the marketing
channel. For example, if the iPad you plan to purchase is stolen
during shipment, damaged, or
becomes outdated because a new model has been released, the
wholesaler suffers the loss—not
you. Electronic products, in particular, become obsolete very
quickly. Think about the cell phone
you owned just a couple of years ago. Would you want it today?
Retailers
Retailers buy products from wholesalers, agents, or distributors
and then sell them to
consumers. Retailers vary by the types of products they sell,
their sizes, the prices they charge, the
level of service they provide consumers, and the convenience or
speed they offer. You are familiar
with many of these types of retailers because you have
purchased products from them.

5
Supermarkets, or grocery stores, are self-service retailers that
provide a full range of food
products to consumers, as well as some household products.
Supermarkets can be high, medium,
or low range in terms of the prices they charge and the service
and variety of products they offer.
Whole Foods and Central Market are grocers that offer a wide
variety of products, generally at
higher prices. Midrange supermarkets include stores such as
Albertsons and Kroger. Aldi and
Sack 'n Save are examples of supermarkets with a limited
selection of products and service but
low prices. Drugstores specialize in selling over-the-counter
medications, prescriptions, and
health and beauty products, and offer services such as photo
developing.
Convenience stores are miniature supermarkets. Many of them
sell gasoline and are open 24
hours. Often they are located on corners, making it easy and fast

for consumers to get in and out.
Some of these stores contain fast-food franchises such as
Subway. Consumers pay for the
convenience in the form of higher markups on products.
Specialty stores sell a certain type of product, but they usually
carry a deep line of it. Zales,
which sells jewelry, and Williams-Sonoma, which sells an array
of kitchen and cooking-related
products, are examples of specialty stores. The personnel who
work in specialty stores are usually
knowledgeable and often provide customers with a high level of
service. Specialty stores vary by
size. Many are small. However, giant specialty stores called
category killers have emerged.
A category killer sells a high volume of a particular type of
product and, in doing so, dominates
the competition, or "category." Petco and PetSmart are category
killers in the retail pet-products
market. Best Buy is a category killer in the electronics-product
market.
Department stores, by contrast, carry a variety of household and
personal types of

merchandise such as clothing and jewelry. Many are chain
stores. The prices department stores
charge range widely, as does the level of service shoppers
receive. Neiman Marcus, Saks Fifth
Avenue, and Nordstrom sell expensive products and offer
extensive personal service. Department
stores such as JCPenney, Sears, and Macy's charge midrange
prices, and offer a midrange level of
service. Walmart, Kmart, and Target are discount department
stores with cheaper goods and a
limited amount of service.
Superstores are oversized department stores that carry a broad
array of general merchandise as
well as groceries. Banks, hair and nail salons, and restaurants
such as Starbucks are often located
within these stores for the convenience of shoppers. You have
probably shopped at a SuperTarget
or a huge Walmart with offerings such as these.
Warehouse clubs are supercenters that sell products at a
discount. They require people to
become members by paying an annual fee. Costco and Sam's
Club are examples. Off-

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price retailers are stores that sell a variety of discount
merchandise that consists of seconds,
overruns, and the previous season's stock other stores have
liquidated. Big Lots, Ross Dress for
Less, and dollar stores are off-price retailers.
A new type of retail store that turned up in the last few years is
the pop-up store. Pop-up stores
are small, temporary stores. They can be kiosks that temporarily
occupy unused retail space. The
goal is to create excitement and "buzz" for a retailer that then
drives customers to their regular
stores. In 2006, JCPenney created a pop-up store in Times
Square for a month. Kate Coultas, a
spokesperson for JCPenney, said the store got the attention of
Manhattan's residents. Many
hadn't been to a JCPenney in a long time. "It was a real
dramatic statement," Coultas said. "It
kind of had a halo effect" on the company's stores in the
surrounding boroughs of New York City
(Austin, 2009).

Not all retailing goes on in stores, however. Nonstore
retailing—retailing not conducted in
stores—is a growing trend. Door-to-door sales; party selling;
selling to consumers via television,
catalogs, the Internet, and vending machines; and telemarketing
are examples of nonstore
retailing. So is direct marketing. Companies that engage in
direct marketing develop and send
promotional materials such as catalogs, letters, leaflets, e-mails,
and online ads straight to
consumers urging them to contact their firms directly to buy
products.
6 . 1 K E Y T A K E A W A Y
The specific way in which you are able to buy a product is
referred to as its marketing channel. Marketing
channel decisions are as important as the decisions companies
make about the features and prices of
products. Channel partners are firms that actively promote and
sell a product as it travels through its
channel to its user. Companies try to choose the best channels
and channel partners to help them sell
products because doing so can give them a competitive
advantage.
6.2 Typical Marketing Channels

1. Describe the basic types of channels in business-to-consumer
(B2C) and business-to-business (B2B)
markets.
2. Explain the advantages and challenges companies face when
using multiple channels and alternate
channels.
3. Explain the pros and cons of disintermediation.
4. List the channels firms can use to enter foreign markets.
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Figure 6.2, "Typical Channels in Business-to-Consumer (B2C)
Markets," shows the typical
channels in business-to-consumer (B2C) markets. As we
explained, the shortest marketing
channel consists of just two parties—a producer and a
consumer. A channel such as this is
a direct channel. By contrast, a channel that includes one or
more intermediaries—say, a
wholesaler, distributor, or broker or agent—is an indirect

channel. In an indirect channel, the
product passes through one or more intermediaries. That doesn't
mean the producer will do no
marketing directly to consumers. Levi's runs ads on TV
designed to appeal directly to consumers.
The makers of food products run coupon ads. However, the
seller also has to focus its selling
efforts on these intermediaries because the intermediary can
help with the selling effort. Not
everyone wants to buy Levi's online.
Figure 6.2 Typical Channels in Business-to-Consumer (B2C)
Markets
Disintermediation
You might be tempted to think middlemen, or intermediaries,
are bad. If you can cut them out of
the deal—a process marketing professionals call
disintermediation—products can be sold more
8
cheaply, can't they? Large retailers, including Target and
Walmart, sometimes bypass middlemen.

Instead, they buy their products directly from manufacturers and
then store and distribute them
to their own retail outlets. Walmart is increasingly doing so and
even purchasing produce directly
from farmers around the world (Birchall, 2010).
However, cutting out the middleman is not always desirable. A
wholesaler with buying power and
excellent warehousing capabilities might be able to purchase,
store, and deliver a product to a
seller more cheaply than its producer could alone. Likewise,
hiring a distributor will cost a
producer money. But if the distributor can help the producer sell
greater quantities of a product,
it can increase the producer's profits.
Moreover, when you cut out the middlemen, you have to
perform the functions they once did.
Those functions could include storing the product or dealing
with hundreds of retailers. More
than one producer has ditched its intermediaries only to rehire
them later.
The trend today is toward disintermediation. The Internet has

facilitated a certain amount of
disintermediation by making it easier for consumers to contact
one another without going
through any middlemen. The Internet has also made it easier for
buyers to shop for the lowest
prices. Today, most people book trips online without going
through travel agents. People also
shop for homes online rather than using real estate agents. To
remain in business, resellers need
to find new ways to add value to products.
However, for some products, disintermediation via the Internet
doesn't work so well. Insurance is
an example. You can buy it online directly from companies, but
many people want to buy through
an agent they can talk to for advice. Most large insurance
companies offer consumers both
options, and each method of selling insurance products has a
different pricing structure based on
the level of service.
Sometimes it's simply impossible to cut out middlemen. Would
the Coca-Cola Company want to
take the time and trouble to personally sell you an individual

can of Coke? No. Coke is no more
capable of selling individual Cokes to people than Santa is
capable of delivering toys to children
around the globe.
Even Dell, which initially made its mark by selling computers
straight to users, now sells its
products through retailers such as Best Buy as well. Dell found
that to compete effectively, its
products needed to be placed in stores alongside Hewlett-
Packard, Acer, and other computer
brands (Kraemer & Dedrick, 2002).
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Multiple Channels and Alternate Channels
Marketing channels can get a lot more complex than the
channels shown in Figure 6.2, "Typical
Channels in Business-to-Consumer (B2C) Markets," though.
Look at the channels in Figure 6.3,
"Alternate Channel Arrangements." Notice how in some
situations, a wholesaler will sell to

brokers, who then sell to retailers and consumers. In other
situations, a wholesaler will sell
straight to retailers or straight to consumers. Manufacturers also
sell straight to consumers, and,
as we explained, sell straight to large retailers like Target.
Figure 6.3 Alternate Channel Arrangements
The point is that firms can and do use multiple channels. Take
Levi's, for example. You can buy a
pair of Levi's jeans from a retailer such as Kohl's, or you can
buy a pair directly from Levi's at one
of the outlet stores it owns around the country. You can also
buy a pair from the Levi's website.
The key is understanding the different target markets for the
product and designing the best
channel to meet the needs of customers in each. Is there a group
of buyers who would purchase
your product if they could shop online from their homes?
Perhaps there is a group of customers
interested in your product, but they do not want to pay full
price. The ideal way to reach these
people might be with an outlet store and low prices. Each group
then needs to be marketed to

accordingly. Many people regularly interact with companies via
numerous channels before
making buying decisions.
Using multiple channels can be effective. At least one study has
shown that the more marketing
channels your customers use, the more loyal they are likely to
be to your products (Fitzpatrick,
2005). Companies work hard to integrate their selling channels
so users get a consistent
10
experience. For example, QVC's TV channel, website, and
mobile service—which sends alerts to
customers and allows them to buy products via their cell
phones—all have the same look and feel.
Would you like to purchase gold from a vending machine? You
can in Germany. Germans like to
purchase gold because it's considered a safe alternative to paper
money, which can become
devalued during a period of hyperinflation. So, in addition to
selling gold the usual way, TG-Gold-

Super-Market company has installed "gold to go" machines in
German-speaking countries. The
gold is dispensed in metal boxes, and cameras on the machine
monitor the transactions to
prevent money laundering (Wilson & Blas, 2009).
A direct marketing channel consists of just two parties—a
producer and a consumer. By contrast, a
channel that includes one or more intermediaries (wholesaler,
distributor, or broker or agent) is an
indirect channel. Firms often use multiple channels to reach
more customers and increase their
effectiveness. Some companies find ways to increase their sales
by forming strategic channel alliances
with one another. Other companies look for ways to cut the
middlemen from the channel, a process
known as disintermediation.
6.3 Functions Performed by Channel Partners
1. Describe the activities performed in channels.
2. Explain which organizations perform which functions.
Different organizations in a marketing channel are responsible
for different value-adding

activities. The following are some of the most common
functions channel members perform.
However, keep in mind that "who does what" can vary,
depending on what the channel members
actually agree to in their contracts with one another.
Disseminate Marketing Communications and Promote Brands
Somehow, wholesalers, distributors, retailers, and consumers
need to be informed—via marketing
communications—that an offering exists and that there's a good
reason to buy it. Sometimes, a
push strategy is used to help marketing channels accomplish
this. A push strategy (discussed in
greater detail in Week 7, "Public Relations and Sales
Promotions") is one in which a manufacturer
convinces wholesalers, distributors, or retailers to sell its
products. Consumers are informed via
advertising and other promotions that the product is available
for sale, but the main focus is to
sell to intermediaries.
11

By contrast, a pull strategy focuses on creating demand for a
product among consumers so that
businesses agree to sell the product. A good example of an
industry that uses both pull and push
strategies is the pharmaceutical industry. Pharmaceutical
companies promote their drugs to
pharmacies and doctors, but they now also run ads designed to
persuade individual consumers to
ask their physicians about drugs that might benefit them.
In many cases, two or more organizations in a channel jointly
promote a product to retailers,
purchasing agents, and consumers and work out which
organization is responsible for what type
of communication to whom. The actual forms and styles of
communication will be discussed more
in the promotions and sales section of the book.
Sorting and Regrouping Products
As we explained, many businesses don't want to receive huge
quantities of a product. One of the
functions of wholesalers and distributors is to break down large
quantities of products into
smaller units and provide an assortment of different products.

Storing and Managing Inventory
If a channel member has run out of a product when a customer
wants to buy it, the result is often
a lost sale. That's why most channel members stock, or "carry,"
reserve inventory. However,
storing products is not free. Warehouses cost money to build or
rent and heat and cool;
employees have to be paid to stock shelves, pick products, and
ship them. Some companies,
including Walmart, put their suppliers in charge of their
inventory. The suppliers have access to
Walmart's inventory levels and ship products when and where
the retailer's stores need them.
Distributing Products
Physical goods that travel within a channel need to be moved
from one member to another and
sometimes back again. Some large wholesalers, distributors, and
retailers own their own fleets of
trucks for this purpose. In other cases, they hire third-party
transportation providers—trucking
companies, railroads—to move their products.
Being able to track merchandise like you can track a FedEx

package is important to channel
partners. They want to know where their products are and what
shape they are in. Losing
inventory or having it damaged or spoiled can wreak havoc on
profits. Other problems include not
getting products on time or being able to get them at all when
your competitors can.
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Assume Ownership Risk and Extend Credit
If products are damaged during transit, one of the first
questions asked is who owned the product
at the time. In other words, who suffers the loss? Generally, no
one channel member assumes all
of the ownership risk in a channel. Instead, it is distributed
among channel members depending
on the contracts they have with one another and their free on
board provisions. A provision
designates who is responsible for what shipping costs and who
owns the
free on board (FOB) title to the goods and when.

Share Marketing and Other Information
Each of the channel members has information about the demand
for products, trends, inventory
levels, and what the competition is doing. The information is
valuable and can be doubly valuable
if channel partners trust one another and share it. More
information can help each firm in the
marketing channel perform its functions better and overcome
competitive obstacles (Frazier,
Maltz, Antia, & Rindfleisch, 2009).
Different organizations in a marketing channel are responsible
for different value-adding activities. These
activities include disseminating marketing communications and
promoting brands, sorting and regrouping
products, storing and managing inventory, distributing products,
assuming the risk of products, and
sharing information.
6.4 Marketing Channel Strategies
1. Describe the factors that affect a firm's channel decisions.
2. Explain how intensive, exclusive, and selective distribution

differ from one another.
3. Explain why some products are better suited to some
distribution strategies than others.
Channel Selection Factors
Selecting the best marketing channel is critical because it can
mean the success or failure of your
product. One of the reasons the Internet has been so successful
as a marketing channel is because
customers get to make some of the channel decisions
themselves. They can shop virtually for any
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product in the world when and where they want to, as long as
they can connect to the web. They
can also choose how the product is shipped.
Type of Customer
The Internet isn't necessarily the best channel for every product,
though. For example, do you
want to closely examine the fruits and vegetables you buy to
make sure they are ripe enough or

not overripe? Then online grocery shopping might not be for
you. Clearly, how your customers
want to buy products will have an impact on the channel you
select. In fact, it should be your
prime consideration.
First of all, are you selling to a consumer or a business
customer? Generally, these two groups
want to be sold to differently. Most consumers are willing to go
to a grocery or convenience store
to purchase toilet paper. The manager of a hospital trying to
replenish its supplies would not. The
hospital manager would also be buying a lot more toilet paper
than an individual consumer and
would expect to be called upon by a distributor, but perhaps
only semiregularly. Thereafter, the
manager might want the toilet paper delivered on a regular basis
and billed to the hospital via
automatic systems. Likewise, when businesses buy expensive
products such as machinery and
computers or products that have to be customized, they
generally expect to be sold to personally
via salespeople. And often they expect special payment terms.

Type of Product
The type of product you're selling will also affect your
marketing channel choices. Perishable
products often have to be sold through shorter marketing
channels than products with longer
shelf lives. For example, a yellowfin tuna bound for the sushi
market will likely be flown overnight
to its destination and handled by few intermediaries. By
contrast, canned tuna can be shipped by
"slow boat" and handled by more intermediaries. Valuable and
fragile products also tend to have
shorter marketing channels. Automakers generally sell their cars
straight to car dealers (retailers)
rather than through wholesalers. The makers of corporate jets
often sell them straight to
corporations, which demand they be customized to certain
specifications.
Channel Partner Capabilities
Your ability vs. the ability of other types of organizations that
operate in marketing channels can
affect your channel choices. If you are a massage therapist, you
are quite capable of delivering
your product straight to your client. If you produce

downloadable products like digital books or
14
recordings, you can sell your products straight to customers on
the Internet. Hypnotic World, a
United Kingdom producer of self-hypnosis recordings, is a
company such as this.
But suppose you've created a great personal gadget—something
that's tangible, or physical. You've
managed to sell it via two channels—say, on TV (via the Home
Shopping Network, perhaps) and
on the web. Now you want to get the product into retail stores
like Target, Walgreens, and Bed
Bath & Beyond. If you can get the product into these stores, you
can increase your sales
exponentially. In this case, you might want to contract with an
intermediary—perhaps an agent or
a distributor who will convince the corporate buyers of those
stores to carry your product.
The Business Environment and Technology
The general business environment, such as the economy, can

also affect the marketing channels
chosen for products. For example, think about what happens
when the value of the dollar declines
relative to the currencies of other countries. When the dollar
falls, products imported from other
countries cost more to buy relative to products produced and
sold in the United States. Products
"made in China" become less attractive because they have
gotten more expensive. As a result,
some companies then look closer to home for their products and
channel partners.
Technological changes affect marketing channels, too. We
explained how the Internet has
changed how products are bought and sold. Many companies
like selling products on the Internet
as much as consumers like buying them. An Internet sales
channel gives companies more control
over how their products are sold and at what prices than if they
leave the job to another channel
partner such as a retailer. Plus, a company selling on the
Internet has a digital footprint, or
record, of what shoppers look at, or click on. As a result, it can
recommend products they appear

to be interested in and target them with special offers and prices
(Food Channel, 2008).
Some sites let customers tailor products to their liking. On the
Domino's website, you can pick
your pizza ingredients and then watch them as they fall onto
your virtual pizza. The site then lets
you know who is baking your pizza, how long it's taking to
cook, and who's delivering it. Even
though interaction is digital, it somehow feels a lot more
personal than a basic phone order.
Developing customer relationships is what today's marketing is
about. The Internet is helping
companies do this.
Competing Products' Marketing Channels
How your competitors sell their products can also affect your
marketing channels. As we
explained, Dell now sells computers to firms such as Best Buy
so the computers can compete with
other brands on store shelves.
15

You don't always have to choose the channels your competitors
rely on, though. Netflix is an
example. Netflix turned the video rental business on its head by
coming up with a new marketing
channel that better meets the needs of many consumers.
Maybelline and L'Oréal products are
sold primarily in retail stores. However, Mary Kay and Avon
use salespeople to personally sell
their products to consumers.
Factors That Affect a Product's Intensity of Distribution
Firms that choose an intensive distribution strategy try to sell
their products in as many
outlets as possible. Intensive distribution strategies are often
used for convenience offerings—
products customers purchase on the spot without much shopping
around. Soft drinks and
newspapers are an example. You see them sold in many
different places. Redbox, which rents
DVDs out of vending machines, has made headway using an
intensive distribution strategy: the
machines are located in fast-food restaurants, grocery stores,
and other places people frequent.
Figure 6.4

Because installing a vending machine is less expensive than
opening a retail outlet, Redbox has
been able to locate its DVD vending machines in places where
people go frequently.
Source: Photo by Greg Goebel. (2012). Wikimedia Commons.
Used under
the terms of the Creative Commons Attribution-ShareAlike 2.0
Generic license.
16
By contrast, selective distribution involves selling products at
select outlets in specific
locations. For instance, Sony TVs can be purchased at a number
of outlets such as Circuit City,
Best Buy, or Walmart, but the same models are generally not
sold at all the outlets. By selling
different models with different features and price points at
different outlets, a manufacturer can
appeal to different target markets.

Exclusive distribution involves selling products through one or
very few outlets. For instance,
supermodel Cindy Crawford's line of furniture is sold
exclusively at the furniture company Rooms
To Go. Designer Michael Graves has a line of products sold
exclusively at Target. To purchase
those items you need to go to one of those retailers. TV series
are distributed exclusively. A
company that produces a TV series will sign an exclusive deal
with a network like ABC, CBS, or
Showtime, and the series will initially appear only on that
network. Later, reruns of the shows are
often distributed selectively to other networks.
To control the image of their products and the prices at which
they are sold, the makers of upscale
products often prefer to distribute their products more
exclusively. Expensive perfumes and
designer purses are an example. During the economic downturn,
the makers of some of these
products were disappointed to see retailers had slashed the
products' prices, "cheapening" their
prestigious brands.

Distributing a product exclusively to a limited number of
organizations under strict terms can
help prevent a company's brand from deteriorating, or losing
value. It can also prevent products
from being sold cheaply in gray markets. A gray market is a
market in which a producer hasn't
authorized its products to be sold (Burrows, 2008).
Selecting the best marketing channel is critical because it can
mean the success or failure of your product.
The type of customer you're selling to will have an impact on
the channel you select. In fact, this should
be your prime consideration. The type of product, your
organization's capabilities vs. those of other
channel members, the way competing products are marketed,
and changes in the business environment
and technology can also affect your marketing channel
decisions. Various factors affect a company's
decisions about the intensity of a product's distribution. An
intensive distribution strategy involves selling
a product in as many outlets as possible. Selective distribution
involves selling a product at select outlets
in specific locations. Exclusive distribution involves selling a
product through one or very few outlets.
17

6.5 Channel Dynamics
1. Explain what channel power is and the types of firms that
wield it.
2. Describe the types of conflicts that can occur in marketing
channels.
3. Describe the ways in which channel members achieve
cooperation with one another.
4. Understand how supply chains differ from marketing
channels.
Channel Power
Strong channel partners often wield what's called channel power
and are referred to
as channel leaders, or channel captains. In the past, big
manufacturers like Procter & Gamble
and Dell were often channel captains. But that is changing.
More often today, big retailers like
Walmart and Target are commanding more channel power. They
have millions of customers and
are bombarded with products wholesalers and manufacturers
want them to sell. As a result, these

retailers get what they want.
Category killers are in a similar position. Consumers like you
are gaining marketing channel
power, too. Regardless of what one manufacturer produces or
what a local retailer has available,
you can use the Internet to find whatever product you want at
the best price available and have it
delivered when, where, and how you want.
Channel Conflict
A dispute among channel members is called a channel conflict.
Channel conflicts are common.
Part of the reason for this is that each channel member has its
own goals, which are unlike those
of any other channel member. The relationship among them is
not unlike the relationship
between you and your boss. Both of you want to serve your
organization's customers well.
However, your goals are different. Your boss might want you to
work on the weekend, but you
might not want to because you need to study for a Monday test.
All channel members want to have low inventory levels but
immediate access to more products.

Who should bear the cost of holding the inventory? What if
consumers don't purchase the
products? Can they be returned to other channel members, or is
the organization in possession of
the products responsible for disposing of them? Channel
members try to spell out such details in
their contracts.
18
No matter how "airtight" their contracts are, there will still be
points of contention among
channel members. Channel members are constantly asking their
partners, "What have you done
(or not done) for me lately?" Wholesalers and retailers
frequently lament that the manufacturers
they work with aren't doing more to promote their products—for
example, distributing coupons
for them or running TV ads—so they will move off store
shelves more quickly.
Meanwhile, manufacturers want to know why wholesalers aren't
selling their products faster and

why retailers are placing them at the bottom of shelves where
they are hard to see. Apple opened
its own retail stores around the country, in part because it didn't
like how its products were being
displayed and sold in other companies' stores.
Vertical vs. Horizontal Conflict
The conflicts we've described so far are examples of vertical
conflict. A vertical conflict is
conflict that occurs between two different types of members in a
channel—say, a manufacturer, an
agent, a wholesaler, or a retailer. By contrast, a horizontal
conflict is conflict that occurs
between organizations of the same type—say, two
manufacturers that each want a powerful
wholesaler to carry only its products.
Horizontal conflict can be healthy because it's competition-
driven. But it can create problems,
too. In 2005, Walmart experienced a horizontal conflict among
its landline telephone suppliers.
The suppliers were in the middle of a price war and cutting the
prices to all the retail stores to
which they sold. Walmart wasn't selling any additional phones

due to the price cuts. It was just
selling them for less and making less of a profit (Hitt, Black, &
Porter, 2005).
Channel leaders such as Walmart usually have a great deal of
say when it comes to how channel
conflicts are handled, which is to say that they usually get what
they want. But even the most
powerful channel leaders strive for cooperation. A manufacturer
with channel power still needs
good retailers to sell its products; a retailer with channel power
still needs good suppliers from
which to buy products. One member of a channel can't squeeze
all the profits out of the other
channel members and still hope to function well.
Moreover, because each of the channel partners is responsible
for promoting a product through
its channel, to some extent they are all in it together. Each one
of them has a vested interest in
promoting the product, and the success or failure of any one of
them can affect that of the others.

19
Figure 6.5
Boar's Head's in-store displays help its channel partners sell its
products.
Source: Photo by Scorpions and Centaurs. (2010). Flickr. Used
under the terms
of the Creative Commons Attribution-NonCommercial-
ShareAlike 2.0 Generic license.
Producing marketing and promotional materials their channel
partners can use for sales purposes
can also facilitate cooperation among companies. In-store
displays, brochures, banners, photos
for websites, and advertisements the partners can customize
with their own logos and company
information are examples.
Educating your channel members' sales representatives is an
important part of facilitating
cooperation, especially when you're launching a new product.
The reps need to be provided with
training and marketing materials in advance of the launch so

their activities are coordinated with
yours. Microsoft does a good job of training its partners. Before
launching operating systems such
as Windows XP and Vista, Microsoft provides thousands of its
partners with sales and technical
training (IrieAuctions.com, 2009).
In addition, companies run sales contests to encourage their
channel partners' sales forces to sell
what they have to offer. Offering your channel partners certain
monetary incentives, such as
discounts for selling your product, can help, too. We'll talk
more about incentive programs
in Week 7, "Public Relations and Sales Promotions."
20
Finally, you don't want to risk breaking the law or engage in
unfair business practices when
dealing with your channel partners (IrieAuctions.com, 2009).
Another issue channel partners
sometimes encounter relates to resale price maintenance

agreements. A resale price
maintenance agreement is an agreement whereby a producer of a
product restricts the price a
retailer can charge for it.
The producers of upscale products often want retailers to sign
resale price maintenance
agreements because they don't want the retailers to deeply
discount their products. Doing so
would "cheapen" their brands, producers believe. Producers also
contend that resale price
maintenance agreements prevent price wars from breaking out
among their retailers, which can
lead to the deterioration of prices for all of a channel's
members.
Channel Integration: Vertical and Horizontal Marketing Systems
Another way to foster cooperation in a channel is to establish a
vertical marketing system. In
a vertical marketing system, channel members formally agree to
closely cooperate with one
another. (You have probably heard the saying, "If you can't beat
'em, join 'em.") A vertical
marketing system can also be created by one channel member
taking over the functions of

another member.
Procter & Gamble (P&G) has traditionally been a manufacturer
of household products, not a
retailer of them. But the company's long-term strategy is to
compete in every personal-care
channel, including salons, where the men's business is
underdeveloped. In 2009, P&G purchased
The Art of Shaving, a seller of pricey men's shaving products in
upscale shopping malls. P&G also
runs retail boutiques around the globe that sell its prestigious
SK-II skin-care line (Neff, 2009).
Franchises are another type of vertical marketing system. They
are used not only to lessen
channel conflicts but also to penetrate markets. Recall that a
franchise gives a person or group the
right to market a company's goods or services within a certain
territory or location (Daszkowski,
n.d.). McDonald's sells meat, bread, ice cream, and other
products to its franchises, along with the
right to own and operate the stores. And each of the owners of
the stores signs a contract with
McDonald's agreeing to do business in a certain way.

By contrast, in a conventional marketing system, the channel
members have no affiliation
with one another. All the members operate independently. If the
sale or the purchase of a product
seems like a good deal at the time, an organization pursues it.
But there is no expectation among
the channel members that they have to work with one another in
the future.
21
A horizontal marketing system is one in which two companies at
the same channel level—
say, two manufacturers, two wholesalers, or two retailers—
agree to cooperate with another to sell
their products or to make the most of their marketing
opportunities. The Internet phone service
Skype and the mobile-phone maker Nokia created a horizontal
marketing system by teaming to
put Skype's service on Nokia's phones. Skype hoped it will
reach a new market (mobile phone

users) this way. And Nokia hoped to sell its phones to people
who like to use Skype on their
personal computers (PCs) (Gelles, 2009).
Channels vs. Supply Chains
In the past few decades, organizations have begun taking a more
holistic look at their marketing
channels. Instead of looking at only the firms that sell and
promote their products, they have
begun looking at all the organizations that figure into any part
of the process of producing,
promoting, and delivering an offering to its user. All these
organizations are considered part of
the offering's supply chain.
For instance, the supply chain includes producers of the raw
materials that go into a product. If
it's a food product, the supply chain extends back through the
distributors all the way to the
farmers who grew the ingredients and the companies from which
the farmers purchased the
seeds, fertilizer, or animals. A product's supply chain also
includes transportation companies such
as railroads that help physically move the product and
companies that build websites for other

companies. If a software maker hires a company in India to help
it write a computer program, the
Indian company is part of the partner's supply chain. These
types of firms aren't considered
channel partners because it's not their job to actively sell the
products being produced.
Nonetheless, they all contribute to a product's success or
failure.
Firms are constantly monitoring their supply chains and
tinkering with them so they are as
efficient as possible. This process is called supply chain
management. Supply chain
management is challenging. Done well, it's practically an art.
We'll talk more about supply chains
and what companies can do to improve them to satisfy
customers and gain a competitive edge.
As we explained earlier, your product's supply chain includes
not only the downstream companies
that actively sell the product but also all the other organizations
that have an impact on it before,
during, and after it's produced. Those companies include the
providers of the raw materials your

firm uses to produce it, the transportation company that
physically moves it, and the firm that
helped build the web pages to promote it. If you hired a
programmer in India to help write code
for a computer game, the programmer is also part of the
product's supply chain. If you hired a
company to process copies of the game returned by customers,
that company is part of the supply
22
chain as well. Large organizations with many products can have
thousands of supply chain
partners. Service organizations also need supplies to operate, so
they have supply chains, too.
Today, the term value chain is sometimes used interchangeably
with the term supply chain. The
idea behind the value chain is that your supply chain partners
should do more for you than
perform just basic functions; each partner should help you
create more value for customers as the
product travels along the chain—preferably more value than
your competitors' supply chain

partners can add to their products.
Zara, a trendy but inexpensive clothing chain in Europe, is a
good example of a company that has
managed to create value for its customers with smart supply
chain design and execution.
Originally, it took six months for Zara to design a garment and
get it delivered to stores. To get the
hottest fashions in the hands of customers sooner, Zara began
working more closely with its
supply chain partners and internal design teams. It also
automated its inventory systems so it
could quickly figure out what was selling and what was not. As
a result, it's now able to deliver its
customers the most cutting-edge fashion in just two weeks
(Smith, 2008).
Sourcing is the process of evaluating and hiring individual
businesses to supply goods and
services to your business. Procurement is the process of actually
purchasing those goods and
services. Sourcing and procurement have become a bigger part
of a supply manager's job, in part
because businesses keep becoming more specialized. Just like
Ford's workers became more

efficient by performing specialized tasks, so, too have
companies.
Firms look at their supply chains and outside them to see which
companies can add the most
value to their products at the least cost. If a firm can find a
company that can add more value than
it can to a function, it will often outsource the task to that
company. After all, why do something
yourself if someone else can do it better or more cost
effectively?
Other companies go a step further and outsource their entire
order processing and shipping
departments to third-party logistics (3PLs) firms. FedEx Supply
Chain Services and UPS
Supply Chain
Solution
s (which are divisions of FedEx and UPS, respectively) are
examples of
3PLs. A 3PL is a one-stop shipping solution for a company that

wants to focus on other aspects of
its business. Firms that receive and ship products
internationally often hire 3PLs so they don't
have to deal with the headaches of transporting products abroad
and completing import and
export paperwork for them.
23
Channel partners that wield channel power are referred to as
channel leaders. A dispute among channel
members is called a channel conflict. A vertical conflict is one
that occurs between two different types of
members in a channel. By contrast, a horizontal conflict is one

that occurs between organizations of the
same type. Channel leaders are often in the best position to
resolve channel conflicts. Vertical and
horizontal marketing systems can help foster channel
cooperation, as can creating marketing programs to
help a channel's members all generate greater revenues and
profits. All of the organizations that figure
into any part of the process of producing, promoting, and
delivering an offering to its user are part of the
offering's supply chain. Firms have begun looking at these
organizations in addition to the organizations
that sell and promote their products. The process of managing
and improving supply chains is called
supply chain management.
6.6 Demand Planning and Inventory Control
1. Explain why demand planning adds value to products.
2. Describe the role inventory control plays when it comes to
marketing products.

3. List the reasons why firms collaborate with another for the
purposes of inventory control and
demand planning.
Demand Planning
Imagine you are a marketing manager who has done everything
in your power to help develop
and promote a product—and it's selling well. But now your
company is running short of the
product because the demand forecasts for it were too low.
Recall that this is the scenario
Nintendo faced when the Wii came out. The same thing
happened to IBM when it launched the
popular ThinkPad laptop in 1992.
Not only is the product shortage going to adversely affect the
profitability of your company, but

it's going to adversely affect you, too. Why? Because you, as a
marketing manager, probably earn
either a bonus or commission from the products you work to
promote, depending on how well
they sell. And, of course, you can't sell what you don't have.
As you can probably tell, the best marketing decisions and
supplier selections aren't enough if
your company's demand forecasts are wrong. Demand planning
is the process of estimating
how much of a good or service customers will buy. If you're a
producer of a product, this will
affect not only the amount of goods and services you have to
produce but also the materials you
must purchase to make them. It will also affect production
scheduling, or the management of

24
the resources, events, and processes need to create an offering.
For example, if demand is heavy,
you might need staff members to work overtime. Closely related
to demand forecasting are lead
times. A product's lead time is the amount of time it takes for a
customer to receive a good or
service once it's been ordered. Lead times also have to be
considered when a company is
forecasting demand.
The promotions you run will also affect demand for your
products. Consider what happened to
KFC when it came out with its grilled chicken. As part of the
promotion, KFC gave away coupons

for free grilled chicken via Oprah.com. Just 24 hours after the
coupons were uploaded to the
website, KFC risked running out of chicken. Customers were
turned away. Others were given
"rain checks" (certificates) they could use to get free grilled
chicken later (Weisenthal, 2009).
In addition to looking at the sales histories of their firms,
supply chain managers also consult with
marketing managers and sales executives when they are
generating demand forecasts. Sales and
marketing personnel know what promotions are being planned
because they work more closely
with customers and know what customers' needs are and if those
needs are changing. Firms also
look to their supply chain partners to help with their demand
planning.

Demand-planning software can also be used to create more
accurate demand
forecasts. Demand-planning software can synthesize a variety of
factors to better predict a
firm's demand—for example, the firm's sales history, point-of-
sale data, warehouse, suppliers,
and promotion information, and economic and competitive
trends. So a company's demand
forecasts are as up-to-date as possible, some of the systems
allow sales and marketing personnel
to input purchasing information into their mobile devices after
consulting with customers.
Inventory Control
Demand forecasting is part of a company's overall inventory
control activities.

Inventory control is the process of ensuring your firm has an
adequate supply of products and
a wide enough assortment to meet your customers' needs. One
of the goals of inventory
management is to avoid stockouts. A stockout occurs when you
run out of a product a customer
wants. Customers will simply look elsewhere—a process the
Internet has made easier than ever.
When the attack on the World Trade Center occurred, many
Americans rushed to buy batteries,
flashlights, American flags, canned goods, and other products in
the event that the emergency
signaled a much bigger attack. Target sold out of many items
and could not replenish them for
several days, partly because its inventory tracking system only
counted what was needed at the

25
end of the day. Walmart, on the other hand, took count of what
was needed every five minutes.
Before the end of the day, Walmart had purchased enough
American flags, for example, to meet
demand and in so doing, completely locked up all their vendors'
flags.
Just-in-Time Inventory Systems
To lower the amount of inventory and still maintain they stock
they need to satisfy their
customers, some organizations use just-in-time inventory
systems in both good times and
bad. Firms with just-in-time inventory systems keep very little
inventory on hand. Instead, they

contract with their suppliers to ship them inventory as they need
it—and even sometimes manage
their inventory for them—a practice called vendor-managed
inventory (VMI). Dell is an
example of a company that uses a just-in-time inventory system
that is vendor-managed. Dell
carries very few component parts. Instead, its suppliers carry
them. They are located in small
warehouses near Dell's assembly plants worldwide and provide
Dell with parts "just-in-time" for
them to be assembled (Kumar & Craig, 2007).
Dell's inventory and production system allows customers to get
their computers built exactly to
their specifications, a production process that's called mass
customization. This helps keep
Dell's inventory levels low. Instead of a huge inventory of

expensive, already-assembled
computers consumers may or may not buy, Dell simply has the
parts on hand, which can be
configured or reconfigured should consumers' preferences
change. Dell can more easily return the
parts to its suppliers if at some point it redesigns its computers
to better match what its customers
want. And by keeping track of its customers and what they are
ordering, Dell has a better idea of
what they might order in the future and the types of inventory it
should hold. Because mass
customization lets buyers "have it their way," it also adds value
to products, for which many
customers are willing to pay.
Product Tracking
Some companies, including Walmart, are beginning to

experiment with new technologies such as
electronic product codes in an effort to better manage their
inventories.
An electronic product code (EPC) is similar to a barcode, only
better, because the number on
it is truly unique. You have probably watched a checkout person
scan a barcode off a product
identical to the one you wanted—perhaps a pack of gum—
because the barcode on your product
was missing or wouldn't scan. Electronic product codes make it
possible to distinguish between
two identical packs of gum. The codes contain information
about when the packs of gum were
manufactured, from where they were shipped, and where they
were going. Being able to tell the

26
difference between "seemingly" identical products can help
companies monitor their expiration
dates if the products are recalled for quality or safety reasons.
EPC technology can also be used to
combat "fake" products, or knockoffs, in the marketplace.
Electronic product codes are stored on radio-frequency
identification (RFID) tags. A radio-
frequency identification (RFID) tag emits radio signals that can
record and track a shipment
as it comes in and out of a facility. If you have unlocked your
car door remotely, microchipped
your dog, or waved a tollway tag at a checkpoint, you have used
RFID technology (EPCglobal,

n.d.). Because each RFID tag can cost anywhere from 50 cents
to $50 each, they are generally
used to track larger shipments, such as cases and pallets of
goods rather than individual items.
See Figure 6.6, "How RFID Tagging Works," to get an idea.
Figure 6.6 How RFID Tagging Works
Some consumer groups worry that RFID tags and electronic
product codes could be used to track
their consumption patterns or for the wrong purposes. But keep
in mind that like your car-door
remote, the codes and tags are designed to work only within
short ranges. (You know that if you
try to unlock your car from a mile away using such a device, it
won't work.)

27
The best marketing decisions and supplier selections aren't
enough if your company's demand forecasts
are wrong. Demand forecasting is the process of estimating how
much of a good or service a customer
will buy. If you're a producer of a product, this will affect not
only the amount of goods and services you
have to produce but also the materials you must purchase to
make them. Demand forecasting is part of a
company's overall inventory control activities. Inventory
control is the process of ensuring your firm has
an adequate amount of products and a wide enough assortment
of them to meet your customers' needs.
One of the goals of inventory control is to avoid stockouts
without keeping too much of a product on
hand. Some companies are beginning to experiment with new
technologies such as electronic product
codes and RFID tags to better manage their inventories and
meet their customers' needs.

6.7 Warehousing and Transportation
1. Understand the role warehouses and distribution centers play
in the supply chain.
2. Outline the transportation modes firms have to choose from
and the advantages and disadvantages
of each.
Warehousing
At times, the demand and supply for products can be unusually
high. At other times, it can be
unusually low. That's why companies generally maintain a
certain amount of safety stock, often in
warehouses. As a business owner, it would be great if you didn't
have excess inventory to store in

a warehouse. In an ideal world, materials or products would
arrive at your facility just in time for
you to assemble or sell them. Unfortunately, we don't live in an
ideal world.
Toys are a good example. Most toymakers work year-round to
be sure they have enough toys for
sale during the holidays. However, retailers don't want to buy a
huge number of toys in July. They
want to wait until November and December to buy large
amounts of them. Consequently,
toymakers warehouse them until that time. Likewise, during the
holiday season, retailers don't
want to run out of toys, so they maintain a certain amount of
safety stock in their warehouses.
Some firms store products until their prices increase. Oil is an

example. Speculators, including
investment banks and hedge funds, have been known to buy, and
hold, oil if they think its price is
going to rapidly rise. Sometimes they go so far as to buy oil
tankers and even entire oil fields
(Winnett, 2004).
28
A distribution center is a warehouse or storage facility where
the emphasis is on processing
and moving goods on to wholesalers, retailers, or consumers
(Wikipedia, n.d.). A few years ago,
companies were moving toward large, centralized warehouses to
keep costs down. In 2005,

Walmart opened a 4-million-square-foot distribution center in
Texas. (Four million square feet is
about the size of 18 football fields.)
Today, however, the trend has shifted to smaller warehouses.
The use of smaller warehouses is
being driven by customer considerations rather than costs. The
long lead times that result when
companies transport products from Asia, the Middle East, and
South America are forcing
international manufacturers and retailers to shorten delivery
times to consumers (Specter,
2009). Warehousing products regionally, closer to consumers,
can also help a company tailor its
product selection to better match the needs of customers in
different regions.

How Warehouses and Distribution Centers Function
So how do you begin to find a product or pallet of products in a
warehouse or distribution center
the size of 18 football fields? To begin with, each type of
product that is unique because of some
characteristic—say, because of its manufacturer, size, color, or
model—must be stored and
accounted for separate from other items. To help distinguish it,
its manufacturer gives it its own
identification number, called a SKU (stock-keeping unit)
(BusinessDictionary.com).
Warehouses and distribution centers are also becoming
increasingly automated and wired. Some
warehouses use robots to picks products from shelves. At other
warehouses, employees use voice-

enabled headsets to pick products. Via the headsets, the workers
communicate with a computer
that tells them where to go and what to grab off shelves. As a
result, the employees are able to pick
products more accurately than they could by looking at a sheet
of paper.
It's pretty amazing when you think about how the thousands of
products that come in and out of
Amazon's distribution centers every day ultimately end up in the
right customer's hands. After all,
how many times have you had to look really hard to find
something you put in your own closet or
garage? Processing orders—order fulfillment—is a key part of
the job in supply chains. Why?
Because delivering what was promised, when it was promised,
and the way it was promised drives

customer satisfaction (Thirumalai & Sinha, 2005).
One of the ways companies are improving their order
fulfillment and other supply chain processes
is by getting rid of paper systems and snail mail. Instead of
companies receiving paper orders and
sending paper invoices to one another, they send and receive the
documents via electronic data
interchange (EDI). Electronic data interchange (EDI) is a
special electronic format that
29
companies use to exchange business documents from computer
to computer. It also makes for
greater visibility among supply chain partners because they can
all check the status of orders

electronically rather than having to fax or e-mail documents.
Another new trend is cross-docking. Products that are cross-
docked spend little or no time in
warehouses. As Figure 6.7, "How Cross-Docking Works" shows,
a product being cross-docked will
be delivered via truck to a dock at a warehouse where it is
unloaded and put on other trucks
bound for retail outlets.
Figure 6.7 How Cross-Docking Works
Transportation
Not all goods and services need to be physically transported.
When you get a massage, oil change,
or a manicure, the services pass straight from the provider to
you. Other products can be

transported electronically via electronic networks, computers,
phones, or fax machines.
Downloads of songs, software, and books are an example. So
are cable and satellite television and
psychic hotline readings delivered over the phone.
Other products, of course, have to be physically shipped.
Logistics refers to the physical flow of
materials in the supply chain. You might be surprised by some
of the physical distribution
methods that companies use. To get through crowded, narrow
streets in Tokyo, Seven-Eleven
Japan delivers products to its retail stores via motorcycles. In
some countries, Coca-Cola delivers
syrup to its bottlers via camelback. More commonly, though,
products that need to be transported
physically to get to customers are moved via air, rail, truck,

water, or pipeline.
Companies face different tradeoffs when choosing
transportation methods. Which is most
important? Speed? Cost? Frequency of delivery? The flexibility
to respond to different market
conditions? Again, it depends on your customers.
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Goya Foods has many challenges due to the variety of
customers it serves. The company sells
more than 1,600 canned food products. Because the types of
beans people prefer often depends
on their cultures, Goya sells about 40 varieties of beans alone.
Almost daily, Goya's truck drivers

deliver products to tens of thousands of US food stores, from
supermarket chains in Texas to
independent mom-and-pop bodegas in New York City.
Delivering daily is more costly than
dropping off jumbo shipments once a week and letting stores
warehouse goods, says the
company's CEO, Peter Unanue. However, it's more of a just-in-
time method that lets Goya offer
stores a greater variety and ensure that products match each
store's demographics. "Pink beans
might sell in New York City but not sell as well in Texas or
California," says Unanue (De Lollis,
2008).
Some firms store products until their prices increase. A
distribution center is a warehouse or storage

facility where the emphasis is on processing and moving goods
on to other parts of the supply chain.
Warehousing products regionally can help a company tailor its
product selection to better match the
needs of customers in different regions. Logistics refers to the
physical flow of materials in the supply
chain. Not all goods and services need to be physically
transported. Some are directly given to customers
or sent to them electronically. Products that need to be
transported physically to get to customers are
moved via air, rail, truck, water, and pipelines. The
transportation modes a firm uses should be based on
what its customers want and are willing to pay for.
6.8 The Pricing Framework and a Firm's Pricing Objectives
1. Understand the factors in the pricing framework.
2. Explain the different pricing objectives organizations have to
choose from.

Prices can be changed and matched by your competitors.
Consequently, your product's price
alone might not provide your company with a sustainable
competitive advantage. Nonetheless,
prices can attract consumers to different retailers and businesses
to different suppliers.
Organizations must remember that the prices they charge should
be consistent with their
offerings, promotions, and distribution strategies. In other
words, it wouldn't make sense to
promote a high-end, prestige product, make it available in only
a limited number of stores, and
then sell it for an extremely low price. The price, product,
promotion (communication), and
placement (distribution) of a good or service should convey a

consistent image.
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The Pricing Framework
Before pricing a product, an organization must determine its
pricing objectives. In other
words, what does the company want to accomplish with its
pricing? Companies must also
estimate demand for the product or service, determine the costs,
and analyze all factors (e.g.,
competition, regulations, and economy) affecting price
decisions. Then, to convey a consistent
image, the organization should choose the most appropriate
pricing strategy and determine

policies and conditions regarding price adjustments. The basic
steps in the pricing framework are
shown in Figure 6.8, "The Pricing Framework."
Figure 6.8 The Pricing Framework
The Firm's Pricing Objectives
Different firms want to accomplish different things with their
pricing strategies. For example, one
firm may want to capture market share, another may be solely
focused on maximizing its profits,
and another may want to be perceived as having products with
prestige. Some examples of
different pricing objectives companies may set include profit-
oriented objectives, sales-oriented
objectives, and status quo objectives.

Earning a Targeted Return on Investment (ROI)
ROI, or return on investment, is the amount of profit an
organization hopes to make given the
amount of assets, or money, it has tied up in a product. ROI is a
common pricing objective for
many firms. Companies typically set a certain percentage, such
as 10 percent, for ROI in a
product's first year following its launch. So, for example, if a
company has $100,000 invested in a
product and is expecting a 10 percent ROI, it would want the
product's profit to be $10,000.
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Maximizing Profits
Many companies set their prices to increase their revenues as

much as possible relative to their
costs. However, large revenues do not necessarily translate into
higher profits. To maximize its
profits, a company must also focus on cutting costs or
implementing programs to encourage
customer loyalty.
In weak economic markets, many companies manage to cut
costs and increase their profits, even
though their sales are lower. How do they do this? The Gap cut
costs by doing a better job of
controlling inventory. The retailer also reduced its real estate
holdings to increase its profits when
its sales were down during an economic recession. Other firms
such as Dell cut jobs to increase
profits. Meanwhile, Walmart tried to lower its prices so as to
undercut its competitors' prices to

attract more customers. After it discovered that wealthier
consumers who didn't usually shop at
Walmart before the 2009 recession were frequenting its stores,
Walmart decided to upgrade some
of its offerings, improve the checkout process, and improve the
appearance of some of its stores to
keep these high-end customers happy and enlarge its customer
base. Other firms increased their
prices or cut back on their marketing and advertising expenses.
A firm has to remember, however, that prices signal value. If
consumers do not perceive that a
product has a high degree of value, they probably will not pay a
high price. Furthermore, cutting
costs cannot be a long-term strategy if a company wants to
maintain its image and position in the

marketplace.
Maximizing Sales
Maximizing sales involves pricing products to generate as much
revenue as possible, regardless of
what it does to a firm's profits. When companies are struggling
financially, they sometimes try to
generate cash quickly to pay their debts. They do so by selling
off inventory or cutting prices
temporarily. Such cash may be necessary to pay short-term
bills, such as payroll. Maximizing
sales is typically a short-term objective since profitability is not
considered.
Maximizing Market Share
Some organizations try to set their prices in a way that allows
them to capture a larger share of the

sales in their industries. Capturing more market share doesn't
necessarily mean a firm will earn
higher profits, though. Nonetheless, many companies believe
capturing a maximum amount of
market share is downright necessary for their survival. In other
words, they believe if they remain
a small competitor, they will fail. Firms in the cellular phone
industry are an example. The race to
be the biggest cell phone provider has hurt companies such as
Motorola. In the last decade,
33
Motorola held only 10 percent of the cell phone market, and its
profits on product lines were
negative.

Maintaining the Status Quo
Sometimes a firm's objective may be to maintain the status quo
or simply meet, or equal, its
competitors' prices or keep its current prices. Airline companies
are a good example. Have you
ever noticed that when one airline raises or lowers its prices,
the others all do the same? If
consumers don't accept an airline's increased prices and fees
such as the charge for checking in
with a representative at the airport rather than checking in
online, other airlines may decide not
to implement the extra charge, and the airline charging the fee
may drop it. Companies, of course,
monitor their competitors' prices closely when they adopt a
status quo pricing objective.

Price is the only marketing variable that generates money for a
company. All the other variables (product,
communication, distribution) cost organizations money. A
product's price is the easiest marketing variable
to change and also the easiest to copy. Before pricing a product,
an organization must determine its
pricing objective(s). A company can choose from pricing
objectives such as maximizing profits, maximizing
sales, capturing market share, achieving a target return on
investment (ROI) from a product, and
maintaining the status quo in terms of the price of a product
relative to competing products.
6.9 Factors That Affect Pricing Decisions
1. Understand the factors that affect a firm's pricing decisions.
2. Understand why companies must conduct research before

setting prices in international markets.
3. Learn how to calculate the breakeven point.
Having a pricing objective isn't enough. A firm also has to look
at a myriad of other factors before
setting its prices. Those factors include the offering's costs, the
demand, the customers whose
needs it is designed to meet, the external environment—such as
the competition, the economy,
and government regulations—and other aspects of the marketing
mix, such as the nature of the
offering, the current stage of its product life cycle, and its
promotion and distribution.
If a company plans to sell its products or services in
international markets, research on the factors
for each market must be analyzed before setting prices.

Organizations must understand buyers,
34
competitors, the economic conditions, and political regulations
in other markets before they can
compete successfully.
Next, we look at each of the factors and what they entail.
Customers
How will buyers respond? Three important factors are whether
the buyers perceive the product
offers value, how many buyers there are, and how sensitive they
are to changes in price. In
addition to gathering data on the size of markets, companies
must try to determine how price-

sensitive customers are. Will customers buy the product, given
its price? Or will they believe the
value is not equal to the cost and choose an alternative, or
decide they can do without the product
or service? Equally important is how much buyers are willing to
pay for the offering. Figuring out
how consumers will respond to prices involves judgment as well
as research.
Price elasticity, or people's sensitivity to price changes, affects
the demand for products. Think
about a pair of sweatpants with an elastic waist. You can stretch
an elastic waistband, but it's
much more difficult to stretch the waistband of a pair of dress
slacks. Elasticity refers to the
amount of stretch or change. The waistband of sweatpants may
stretch if you pull on it.

Similarly, the demand for a product may change if the price
changes. Imagine the price of a 12-
pack of sodas changing to $1.50 a pack. People are likely to buy
a lot more soda at $1.50 per 12-
pack than they are at $4.50 per 12-pack.
Conversely, the waistband on a pair of dress slacks remains the
same (doesn't change) whether
you pull on it or not. Likewise, demand for some products won't
change even if the price changes.
The formula for calculating the price elasticity of demand is as
follows.
Price elasticity = percentage change in quantity demanded ÷
percentage change in price

35
Figure 6.9 The Relationship Between Price and Demand
When consumers are very sensitive to the price change of a
product—that is, they buy more of it at
low prices and less of it at high prices—the demand for it is
price elastic. Durable goods such as
TVs, stereos, and freezers are more price elastic than
necessities. People are more likely to buy
them when their prices drop and less likely to buy them when
their prices rise. By contrast, when
the demand for a product stays relatively the same and buyers
are not sensitive to changes in its

price, the demand is price inelastic. Demand for essential
products such as many basic food
and first-aid products is not as affected by price changes as
demand for many nonessential goods.
The number of competing products and substitutes available
affects the elasticity of demand.
Price elasticity is also affected by whether a person considers a
product a necessity or a luxury as
well as the percentage of a person's budget allocated to different
products and services. Some
products, such as cigarettes, tend to be relatively price inelastic
since most smokers keep
purchasing them regardless of price increases and the fact that
other people see cigarettes as
unnecessary. Service providers, such as utility companies in
markets in which they have a

monopoly (only one provider), face more inelastic demand since
no substitutes are available.
Competitors
How competitors price and sell their products will affect a
firm's pricing decisions. If you wanted
to buy a certain pair of shoes, but the price was 30 percent less
at one store than another, what
would you do? Because companies want to establish and
maintain loyal customers, they will often
match their competitors' prices. Some retailers, such as Home
Depot, will give you an extra
discount if you find the same product for less somewhere else.
Similarly, if one company offers
you free shipping, you might discover other companies will,
too. With so many products sold
online, consumers can compare the prices of many merchants
before making a purchase decision.

Elastic demand
Price goes down as
demand goes up
Inelastic demand
Price goes up
when demand
goes up
36
The availability of substitute products affects a company's
pricing decisions as well. If you can
find a similar pair of shoes selling for 50 percent less at a third
store, would you buy them?
There's a good chance you might.

The Economy and Government Laws and Regulations
The economy also has a tremendous effect on pricing decisions.
In Week 1, we noted that factors
in the economic environment include interest rates and
unemployment levels. When the economy
is weak and many people are unemployed, companies often
lower their prices. In international
markets, currency exchange rates also affect pricing decisions.
Pricing decisions are affected by federal and state regulations.
Regulations are designed to protect
consumers, promote competition, and encourage ethical and fair
behavior by businesses. For
example, the Robinson-Patman Act limits a seller's ability to
charge different customers
different prices for the same products. The intent is to protect

small businesses from larger
businesses that try to extract special discounts and deals for
themselves to eliminate their
competitors. However, cost differences, market conditions, and
competitive pricing by other
suppliers can justify price differences in some situations. In
other words, the practice isn't illegal
under all circumstances. You have probably noticed that
restaurants offer senior citizens and
children discounted menus. Movie theaters also charge different
people different prices based on
their ages and charge different amounts based on the time of
day, with matinees usually less
expensive than evening shows. These price differences are
legal.
Price fixing, which occurs when firms get together and agree to

charge the same prices, is
illegal. Usually, price fixing involves setting high prices so
consumers must pay a high price
regardless of where they purchase a good or service. Video
systems, LCD (liquid crystal display)
manufacturers, auction houses, and airlines are examples of
offerings in which price fixing
existed. When a company is charged with price fixing, it is
usually ordered to take some type of
action to reach a settlement with buyers.
Price fixing has occurred over the years. Nintendo and its
distributors in the European Union
were charged with price fixing and increasing the prices of
hardware and software. Sharp, LG, and
Chungwa collaborated and fixed the prices of the LCDs used in
computers, cell phones, and other

electronics. Virgin Atlantic Airways and British Airways were
also involved in price fixing for their
flights. Sotheby's and Christie's, two large auction houses, used
price fixing to set their
commissions.
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By requiring sellers to keep a minimum price level for similar
products,
unfair trade laws protect smaller businesses. Unfair trade laws
are state laws preventing large
businesses from selling products below cost (as loss leaders) to
attract customers to the store.

When companies act in a predatory manner by setting low prices
to drive competitors out of
business, it is a predatory pricing strategy.
Similarly, bait-and-switch pricing is illegal in many states. Bait
and switch, or bait advertising,
occurs when a business tries to "bait," or lure customers with an
incredibly low-priced product.
Once customers take the bait, sales personnel attempt to sell
them more expensive products.
Sometimes the customers are told the cheaper product is no
longer available.
Product Costs
The costs of the product—its inputs—including the amount
spent on product development,
testing, and packaging required have to be considered when a
pricing decision is made. So do the

costs related to promotion and distribution. For example, when
a new offering is launched, its
promotion costs can be very high because people need to be
made aware that it exists. Thus, the
offering's stage in the product life cycle can affect its price.
The point at which total costs equal total revenue is known as
the breakeven point (BEP). For
a company to be profitable, a company's revenue must be
greater than its total costs. If total costs
exceed total revenue, the company suffers a loss.
Total costs include both fixed costs and variable costs. Fixed
costs, or overhead expenses, are
costs that a company must pay regardless of its level of
production or level of sales. A company's

fixed costs include items such as rent, leasing fees for
equipment, contracted advertising costs,
and insurance. As a student, you may also incur fixed costs such
as the rent you pay for an
apartment. You must pay your rent whether you stay there for
the weekend or
not. Variable costs are costs that change with a company's level
of production and sales. Raw
materials, labor, and commissions on units sold are examples of
variable costs. You, too, have
variable costs, such as the cost of gasoline for your car or your
utility bills, which vary depending
on how much you use.
Consider a small company that manufactures specialty DVDs
and sells them through different
retail stores. The manufacturer's selling price (MSP) is $15,

which is what the retailers pay for the
DVDs. The retailers then sell the DVDs to consumers for an
additional charge. The manufacturer
has the following charges:
38
Copyright and distribution charges for the titles $150,000
Package and label designs for the DVDs $10,000
Advertising and promotion costs $40,000
Reproduction of DVDs $5 per unit
Labels and packaging $1 per unit
Royalties $1 per unit

In order to determine the breakeven point, you must first
calculate the fixed and variable costs.
To make sure all costs are included, you may want to highlight
the fixed costs in one color and the
variable costs in another color. Then, using the formulas below,
calculate how many units the
manufacturer must sell to break even.
The formula for BEP is as follows:
BEP = total fixed costs (FC) ÷ contribution per unit (CU)
contribution per unit = MSP – variable costs (VC)
BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to
break even

To determine the breakeven point in dollars, you simply
multiply the number of units to break
even by the MSP. In this case, the BEP in dollars would be
25,000 units times $15, or $375,000.
In addition to setting a pricing objective, a firm has to look at a
number of factors before setting its prices.
These factors include the offering's costs, the customers whose
needs it is designed to meet, the external
environment—such as the competition, the economy, and
government regulations—and other aspects of
the marketing mix, such as the nature of the offering, the stage
of its product life cycle, and its promotion
and distribution. In international markets, firms must look at
environmental factors and customers'
buying behavior in each market. For a company to be profitable,
revenues must exceed total costs.

39
6.10 Pricing Strategies
1. Understand introductory pricing strategies.
2. Understand the different pricing approaches that businesses
use.
Once a firm has established its pricing objectives and analyzed
the factors that affect how it
should price a product, the company must determine the pricing
strategy (or strategies) that will
help it achieve those objectives. As we have indicated, firms
use different pricing strategies for

their offerings. And often, the strategy depends on the stage of
life cycle the offerings are in. Next,
we'll examine three strategies businesses often consider when a
product is introduced and then
look at several different pricing approaches that companies use
during the product life cycle.
Introductory Pricing Strategies
Think of products that have been introduced in the last decade
and how products were priced
when they entered the market. Remember when the iPhone was
introduced, its price was almost
$700. Since then, the price has dropped considerably even for
new models. The same is true for
DVD players, LCD televisions, digital cameras, and many high-
tech products. As we mentioned in
Week 5 as part of our discussion on offerings, a skimming price
strategy is when a company

sets a high initial price for a product. The idea is to go after
consumers who are willing to pay a
high price (top of the market) and buy products early. This way,
a company recoups its
investment in the product faster.
The easy way to remember a skimming approach is to think of
the turkey gravy at Thanksgiving.
When the gravy is chilled, the fat rises to the top and is often
"skimmed" off before serving. Price
skimming is a pricing approach designed to skim that top part of
the gravy, or the top of the
market. Over time, the price of the product goes down as
competitors enter the market and more
consumers are willing to purchase the offering.

In contrast to a skimming approach, a penetration pricing
strategy is one in which a low
initial price is set. Often, many competitive products are already
in the market. The goal is to get
as much of the market as possible to try the product. Penetration
pricing is used on many new
food products, health and beauty supplies, and paper products
sold in grocery stores and mass
merchandise stores such as Walmart, Target, and Kmart.
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Another approach companies use when they introduce a new
product is everyday low prices.
That is, the price initially set is the price the seller expects to
charge throughout the product's life

cycle. Companies like Walmart and Lowe's use everyday low
pricing.
Pricing Approaches
Companies can choose many ways to set their prices. Many
stores use cost-plus pricing, in
which they take the cost of the product and then add a profit to
determine a price. The
strategy helps ensure that a company's products' costs are
covered and the firm earns a
certain amount of profit. When companies add a markup, or an
amount added to the cost of
a product, they are using a form of cost-plus pricing. When
products go on sale, companies
mark down the prices, but they usually still make a profit.
Potential markdowns or price
reductions should be considered when deciding on a starting
price.

Many pricing approaches have a psychological appeal. Odd-
even pricing occurs when a
company prices a product a few cents or a few dollars below the
next dollar amount. For
example, instead of being priced $10.00, a product will be
priced at $9.99. Likewise, a
$20,000 automobile might be priced at $19,998, although the
product will cost more once
taxes and other fees are added. See Figure 6.10 for an example
of odd-even pricing.
Figure 6.10
Walmart uses a combination of odd-even pricing and
everyday low pricing in this store in Gladstone, Missouri.

Source: Photo by Walmart. (2011). Flickr. Used under the
terms of the Creative Commons Attribution 2.0 Generic license.
41
Prestige pricing occurs when a higher price is used to give an
offering a high-quality image.
Some stores have a quality image, and people perceive that
perhaps the products from those
stores are of higher quality. Many times, two different stores
carry the same product, but one
store prices it higher because of the store's perceived higher
image. Neckties are often priced
using a strategy known as price lining, or price levels. In other
words, there may be only a
few price levels ($25, $50, and $75) for the ties, but a large

assortment of them at each level.
Movies and music often use price lining. You may see a lot of
movies and CDs for $15.99,
$9.99, and perhaps $4.99, but you won't see a lot of different
price levels.
Remember when you were in elementary school and many
students bought teachers little
gifts before the holidays or on the last day of school. Typically,
parents set an amount such as
$5 or $10 for a teacher's gift. Knowing that people have certain
maximum levels that they are
willing to pay for gifts, some companies use demand backward
pricing. They start with the
price demanded by consumers (what they want to pay) and
create offerings at that price. If
you shop before the holidays, you might see a table of different

products being sold for $5
(mugs, picture frames, ornaments) and another table of products
being sold for $10 (mugs
with chocolate, decorative trays). Similarly, people have certain
prices they are willing to pay
for wedding gifts—say, $25, $50, $75, or $100—so stores set up
displays of gifts sold at these
different price levels. IKEA also sets a price for a product—
which is what the company
believes consumers want to pay for it—and then, working
backward from the price, designs
the product.
Leader pricing involves pricing one or more items low to get
people into a store. The
products with low prices are often on the front page of store ads
and "lead" the promotion.

For example, prior to Thanksgiving, grocery stores advertise
turkeys and cranberry sauce at
very low prices. The goal is to get shoppers to buy many more
items in addition to the low-
priced items. Leader or low prices are legal; however, as you
learned earlier, loss leaders, or
items priced below cost in an effort to get people into stores,
are illegal in many states.
Sealed bid pricing is the process of offering to buy or sell
products at prices designated in
sealed bids. Companies must submit their bids by a certain time.
The bids are reviewed all at
once, and the most desirable one is chosen. Sealed bids can
occur on either the supplier or
the buyer side. Via sealed bids, oil companies bid on land for
potential drilling purposes, and

the highest bidder is awarded the right to drill. Similarly,
consumers sometimes bid on lots to
build houses. The highest bidder gets the lot. On the supplier
side, contractors often bid on
different jobs and the lowest bidder is awarded the job. The
government often makes
42
purchases based on sealed bids. Projects funded by stimulus
money were awarded based on
sealed bids.
Bids are also being used online. Online auction sites such as
eBay give customers the
chance to bid and negotiate prices with sellers until an

acceptable price is agreed upon. When
a buyer lists what he or she wants to buy, sellers may submit
bids. This process is known as
a forward auction. If the buyer not only lists what he or she
wants to buy but also states
how much he or she is willing to pay, a reverse auction occurs.
The reverse auction is
finished when at least one firm is willing to accept the buyer's
price.
Going-rate pricing occurs when buyers pay the same price
regardless of where they buy the
product or from whom. Going-rate pricing is often used on
commodity products such as wheat,
gold, or silver. People perceive the individual products in
markets such as these to be largely the
same. Consequently, there's a "going" price for the product that

all sellers receive.
Price bundling occurs when different offerings are sold together
at a price that's typically lower
than the total price a customer would pay by buying each
offering separately. Combo meals and
value meals sold at restaurants are an example. Companies such
as McDonald's have promoted
value meals for a long time in many different markets. Other
products such as shampoo and
conditioner are sometimes bundled together. Automobile
companies bundle product options. For
example, power locks and windows are often sold together,
regardless of whether customers want
only one or the other. The idea behind bundling is to increase an
organization's revenues.

Captive pricing is a strategy firms use when consumers must
buy a given product because they
are at a certain event or location or they need a particular
product because no substitutes will
work. Concessions at a sporting event or a movie provide
examples of how captive pricing is used.
Maybe you didn't pay much to attend the game, but the snacks
and drinks were extremely
expensive. Similarly, if you buy a razor and must purchase
specific blades for it, you have
experienced captive pricing. The blades are often more
expensive than the razor because
customers do not have the option of choosing blades from
another manufacturer.
Pricing products consumers use together (such as blades and
razors) with different profit margins

is also part of product mix pricing. Recall from Week 5 that a
product mix includes all the
products a company offers. If you want to buy an automobile,
the base price might seem
reasonable, but the options such as floor mats might earn the
seller a much higher profit. While
consumers can buy floor mats at stores like Walmart for $30,
many people pay almost $200 to
get the floor mats that go with the car from the dealer.
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Nearly everyone has a cell phone. Are you aware of how many
minutes you spend talking or
texting and what it costs if you go over the limits of your phone
plan? Maybe not if your plan

involves two-part pricing. Two-part pricing means there are two
different charges customers
pay. In the case of a cell phone, a customer might pay a charge
for one service such as 1,000
minutes, and then pay a separate charge for each minute over
1,000. Get out your cell phone and
look at how many minutes you have used. Many people are
shocked at how many minutes they
have used or the number of messages they have sent in the last
month.
Have you ever seen an ad for a special item only to find out it is
much more expensive than what
you recalled seeing in the ad? A company might advertise a
price such as $25*, but when you read
the fine print, the price is really five payments of $25 for a total
cost of $125. Payment pricing,

or allowing customers to pay in installments, is a strategy that
helps customers break their
payments into smaller amounts, which can persuade customers
to buy higher-priced products.
Promotional pricing is a short-term tactic designed to get people
into a store or to purchase
more of a product. Examples of promotional pricing include
back-to-school sales, rebates,
extended warranties, and going-out-of-business sales. Rebates
are a great strategy for companies
because consumers think they're getting a great deal. Many
consumers forget to request the
rebate. Extended warranties have become popular for all types
of products, including
automobiles, appliances, electronics, and even athletic shoes. If
you buy a vacuum for $35, and it

has a one-year warranty from the manufacturer, does it really
make sense to spend an additional
$15 to get another year's warranty? However, when it comes to
automobiles, repairs can be
expensive, so an extended warranty often pays for itself
following one repair. Buyers must look at
the costs and benefits and determine if the extended warranty
provides value.
We have discussed price discrimination, or charging different
customers different prices for
the same product. In some situations, price discrimination is
legal. As we explained, you have
noticed that certain customer groups (students, children, and
senior citizens) are sometimes
offered discounts at restaurants and events. However, the
discounts must be offered to all senior

citizens or all children within a certain age range, not just a
few. Price discrimination is used to
get more people to use a product or service. Similarly, a
company might lower its prices in order
to get more customers to buy an offering when business is slow.
Matinees are often cheaper than
movies at night; bowling might be less expensive during
nonleague times.
Price Adjustments
Organizations must also decide what their policies are when it
comes to making
price adjustments, or changing the listed prices of their
products. Some common price
44

adjustments include quantity discounts, which involves giving
customers discounts for larger
purchases. Discounts for paying cash for large purchases and
seasonal discounts to get rid of
inventory and holiday items are other examples of price
adjustments. Other price adjustments
might be related to FOB (free on board) origin, meaning the
title changes at the origin and buyer
pays the shipping; or FOB (free on board) destination, meaning
that the seller pays the shipping.
Uniform-delivered pricing, also called postage-stamp pricing,
means buyers pay the same
shipping charges regardless of where they are located. If you
mail a letter across town, the postage
is the same as when you mail a letter to a different state. A
manufacturer might give a retail store

a trade allowance such as funds to advertise the product in local
media, or a discount to restock
the manufacturer's products. Reciprocal agreements are
agreements in which merchants
agree to promote each other to customers. Customers who
patronize a particular retailer might
get a discount card to use at a certain restaurant, and customers
who go to a restaurant might get
a discount card to use at a specific retailer.
Figure 6.11

In this promotion at a California shopping mall,
participants received transit tokens.
Source: Southern California Rapid Transit District Metro
Library and Archive. (1985). Used under
the terms of the Creative Commons Attribution-
NonCommercial-ShareAlike 2.0 Generic license.
A bounce back is a promotion in which a seller gives customers
discount cards or coupons after
purchasing. Consumers can then use the cards and coupons on
their next shopping visits. The
idea is to get the customers to return to the store or online
outlets later and purchase additional
items. Some stores set minimum amounts that consumers have
to spend to use the card.

45
6 . 1 0 K E Y T A K E A W A Y
Both external and internal factors affect pricing decisions.
Companies use many different pricing
strategies and price adjustments. However, the price must
generate enough revenues to cover costs in
order for the product to be profitable. Cost-plus pricing, odd-
even pricing, prestige pricing, price bundling,
sealed bid pricing, going-rate pricing, and captive pricing are
just a few of the strategies used.
Organizations must also decide what their policies are when it
comes to making price adjustments, or
changing the listed prices of their products. Some companies
use price adjustments as a short-term tactic
to increase sales.
W E E K 7 P R E V I E W

Thus far, we have explored offerings, distribution, and price,
the first three elements of the marketing
mix. Finally, we get to marketing communications in Week 7,
the most visible element of marketing and
the element most frequently referred to as "marketing."
However, by now we hope you clearly
understand that marketing is much more involved than the
communication function of the marketing
discipline. The overarching concept is integrated marketing
communications (IMC), a strategic approach
to ensuring that the right message is delivered to the right
audience in the right media and at the right
time. The tools marketers use to develop IMC programs are
called the promotion mix, which includes
advertising, personal selling, public relations, sales promotion,
and direct marketing. Throughout the
week, we will emphasize the role new media such as social
networks play in the design of an IMC
program.
Week 6 References
Section 6.1
Austin, J. (2009, November 27). Pop-up stores offer long-term

strategy. Fort Worth Star-Telegram, 1C–2C.
CBSNews.com. (2007, November 16). Developing a channel
strategy. Retrieved April 13, 2012,
from http://www.cbsnews.com/8301-505125_162-
51168339/developing-a-channel-
strategy/?tag=mncol;lst;1
Lancaster, G., & Withey, F. (2007). Marketing fundamentals (p.
173). Burlington, MA: Butterworth-
Heinemann.
Littleson, R. (2007, February 6). Supply chain trends: What's in,
what's out. Manufacturing.net. Retrieved
April 13, 2012, from
http://www.manufacturing.net/articles/2007/02/supply-chain-
trends-whats-in-
whats-out
Lyons, D. (2009, November 9). The lost decade. Newsweek, 27.
Section 6.2
Birchall, J. (2010, January 4). Walmart aims to cut supply chain
cost. Financial Times, 4.

Fitzpatrick, M. (2005, October 1). The seven myths of channel
integration. Chief Marketer. Retrieved
December 12, 2009, from
http://chiefmarketer.com/multi_channel/myths_integration_1001
46
Kraemer, K. L., & Dedrick, J. (2002). Dell computer:
Organization of a global production network. Center
for Research on Information Technology and Organizations,
University of California, Irvine. Retrieved April
13, 2012, from http://escholarship.org/uc/item/89x7p4ws#page-
2
Wilson, J., & Blas, J. (2009, June 17). Machines with Midas
touch swap chocolate for gold bars. Financial
Times. Retrieved December 12, 2009, from
http://www.ft.com/cms/s/0/5232dc6c-5ad4-11de-8c14-
00144feabdc0.html?nclick_check=1
Section 6.3

Frazier, G. L., Maltz, E., Antia, K. D., & Rindfleisch, A. (2009,
July 1). Distributor sharing of strategic
information with suppliers. Journal of Marketing, 73(4).
Retrieved December 12, 2009, from
http://www.atypon-
link.com/AMA/doi/abs/10.1509/jmkg.73.4.31?cookieSet=1&jou
rnalCode=jmkg (
Section 6.4
Burrows, P. (2008, February 12). Inside the iPhone gray market.
BusinessWeek. Retrieved December 12,
2009, from
http://www.businessweek.com/technology/content/feb2008/tc20
080211_152894.htm
The Food Channel. (2008, May 21). Pizza Hut's online ordering
called 'virtual waiter.' Retrieved December
12, 2009, from http://www.foodchannel.com/stories/421-pizza-
hut-s-online-ordering-called-virtual-
waiter
Section 6.5
Daszkowski, D. (n.d.). What is a franchise? About.com.
http://franchises.about.com/od/franchisebasics/a/what-

franchises.htm
Gelles, D. (2009, March 31). Skype expands mobile push.
Financial Times, 20.
Hitt, M., Black, S., & Porter, L. (2009), Management, 2nd ed.
(Chapter 5). Upper Saddle River, NJ: Prentice
Hall.
IrieAuctions.com. (2009). Ten mistakes to avoid with channel
partners. Excerpted from J. Addison,
Revenue rocket: New strategies for selling with partners.
http://www.irieauctions.com/Alternate_Distribution_Channel.ht
m
Neff, J. (2009, June 8). P&G acquires the upscale Art of
Shaving retail chain. Advertising Age, 80 (2118), 2.
Smith, J. N. (2008). Fast fashion. World Trade, 21(12), 54.
Section 6.6
EPCglobal. (n.d.). FAQs. Retrieved from
http://www.epcglobalinc.org/consumer_info/faq
Kumar, S., & Craig, S. (2007). Dell, Inc.'s closed loop supply

chain for computer assembly
plants. Information Knowledge Systems Management, 6(3),
197–214.
Weisenthal, J. (2009, May 6). Slammed KFC scrambling to
source more chicken. The Business Insider.
http://www.businessinsider.com/kfc-2009-5
Section 6.7
BusinessDictionary.com. (n.d.). Stock-keeping unit (SKU).
http://www.businessdictionary.com/definition/stock-keeping-
unit-SKU.html
47
De Lollis, B. (2008, March 23). CEO profile: At Goya, it's all
in la familia. USA Today. Retrieved February
18, 2015, from
http://usatoday30.usatoday.com/money/companies/management/

2008-03-23-bob-
unanue-goya-foods_n.htm
Specter, S. P. (2009). Industry outlook: Mostly cloudy, with a
few bright spots. Modern Materials
Handling, 64(3), 22–26.
Thirumalai, S., & Sinha, K. K. (2005). Customer satisfaction
with order fulfillment in retail supply chains:
Implications of product type in electronic B2C Transactions.
Journal of Operations Management, 23(3–4),
291–303.
Wikipedia. (n.d.). Distribution center. Retrieved April 13, 2012,
from http://en.wikipedia.org/wiki/Distribution_center
Winnett, R. (2004, September 12). Soaring prices: Speculators
hijack the oil market. TimesOnline.
http://business.timesonline.co.uk/tol/business/article481363.ece
(accessed December 2, 2009).
Week 6Using Marketing Channels and Price to Create Value for
Customers6.1 Marketing Channels and Channel PartnersTypes
of Channel PartnersWholesalersRetailers6.1 KEY

TAKEAWAY6.2 Typical Marketing
ChannelsDisintermediationMultiple Channels and Alternate
Channels6.2 KEY TAKEAWAYDisseminate Marketing
Communications and Promote BrandsSorting and Regrouping
ProductsStoring and Managing InventoryDistributing
ProductsAssume Ownership Risk and Extend CreditShare
Marketing and Other Information6.3 KEY TAKEAWAYChannel
Selection FactorsType of CustomerType of ProductChannel
Partner CapabilitiesThe Business Environment and
TechnologyCompeting Products' Marketing ChannelsFactors
That Affect a Product's Intensity of Distribution6.4 KEY
TAKEAWAY6.5 Channel DynamicsChannel PowerChannel
ConflictVertical vs. Horizontal ConflictChannel Integration:
Vertical and Horizontal Marketing Systems6.5 KEY
TAKEAWAY6.6 Demand Planning and Inventory
ControlDemand PlanningInventory ControlJust-in-Time
Inventory SystemsProduct Tracking6.6 KEY
TAKEAWAYWarehousingHow Warehouses and Distribution
Centers FunctionTransportation6.7 KEY TAKEAWAY6.8 The
Pricing Framework and a Firm's Pricing ObjectivesThe Pricing
FrameworkThe Firm's Pricing ObjectivesEarning a Targeted
Return on Investment (ROI)Maximizing ProfitsMaximizing
SalesMaximizing Market ShareMaintaining the Status Quo6.8
KEY TAKEAWAY6.9 Factors That Affect Pricing
DecisionsCustomersCompetitorsThe Economy and Government

Laws and RegulationsProduct Costs6.9 KEY TAKEAWAY6.10
Pricing StrategiesIntroductory Pricing StrategiesPricing
ApproachesPrice Adjustments6.10 KEY TAKEAWAYWeek 7
preview
PSYC 421
SPSS Assignment Part 2 Instructions
The Center for Epidemiologic Studies Depression Scale (CES-D
Scale)
In the Assignment Instructions folder, there is an SPSS data file
that will be the basis for your analysis. The data included are
fictional and were created solely for this assignment.
The Center for Epidemiologic Studies Depression Scale (CES-D
scale) is often utilized to measure depressive symptomology
(Radloff, 1977). It is a self-assessment that is completed by the
individual. The CES-D contains 20-items rated on a 4-point
scale (0 = Rarely or None of the Time to 3 = Most or All of the
Time). The phrase “Within the past week did you…” prefaces
the questions in order to emphasize recent depressive mood.
Scores are summed and can range from 0 to 60. Traditionally,
individuals with scores over 16 are identified as “depressed”
(Weissman, et al., 1977), though due to high false positive
rates, a score of 27 is considered a more useful cut-off (Zich, et

al., 1990). The full scale can be accessed at:
http://www.chcr.brown.edu/pcoc/cesdscale.pdf. Items 4, 8, 12,
and 16 are reversed to avoid “yay-saying” or “nay saying”
(Radloff, 1977). Several studies have validated four subscales
across a variety of subgroups (i.e., depressive affect, well-
being, somatic, and interpersonal) (Gliem & Gliem, 2003).
Reliability and Subtest Scoring
You will continue the analysis of the CES-D data by learning to
score the survey and create subtest scores. Note: we are creating
our own norms on this survey for Friberg University students so
there are no scores for comparison.
According to Knight, Williams, McGee, and Olaman (1997) and
many others (e.g., Gliem & Gliem, 2003), the following
subscales can be calculated:
CES-D Subscales
DA = Depressive Affect
W = Well-being
S = Somatic
I = Interpersonal
1. S
2. S
3. DA

4. W
5. S
6. DA
7. S
8. W
9. DA
10. DA
11. S
12. W
13. S
14. DA
15. I
16. W
17. DA
18. DA
19. I
20. S
1. Reverse code the appropriate items (4, 8, 12, and 16) for
calculating the total score (0 becomes 3, 1 becomes 2, 2
becomes 1, and 3 becomes 0).
2. Compute the total CES-D score.
3. Compute the four subscale scores. (Note: Be careful when
interpreting “well-being.”)
4. Calculate Cronbach’s alpha for the overall scale and each

subscale.
5. Create a single table to show the appropriate measures of
central tendency and dispersion for all of the variables (total,
depressive affect, well-being, somatic, and interpersonal).
6. Create the appropriate graphs to show the distribution of
scores for each subscale.
7. Write a summary paragraph explaining the outcome: Overall,
scores ranged from X to XX (M = X, SD = X.X), indicating….
Subscale scores revealed…. Be sure to include means, standard
deviations, Cronbach’s alphas, and interpretations of the data.
This assignment is due by 11:59 p.m. (ET) on Monday of
Module/Week 3.
Page 2 of 2
PSYC 421
Criteria
Points Possible
Points Earned
Instructor’s Comments
Current APA format for table and figure captions
5

Correct table and statistics for the variables
The student correctly calculated the total scale and subscale
values, including measures of central tendency. Moreover, these
results are clearly communicated in a table.
25
Correct graph for the total and subscale variables: 5 points each
The student selected and presented a graph that illustrated the
distribution of scores for the total scale and each subscale.
25
Correct Cronbach’s alpha values
Correct values of internal consistency are reported.
20
Summary Statement:
The student clearly summarizes the descriptive and internal
consistency results for the total scale and individual subscales.
In addition, correct interpretations of the findings are discussed.
25

Total
100
SPSS Assignment Part 2 Grading Rubric

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