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Week 6, "Using Marketing Channels and Price to Create Value
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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.
6.1 Marketing Channels and Channel Partners
LEARNING OBJECTIVES
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 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.
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.
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-
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 KEY TAKEAWAY
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

LEARNING OBJECTIVES
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.
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 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).
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 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).
6.2 KEY TAKEAWAY
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
LEARNING OBJECTIVES
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.
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.
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).
6.3 KEY TAKEAWAY
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
LEARNING OBJECTIVES
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 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 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.
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.
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).
6.4 KEY TAKEAWAY
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.
6.5 Channel Dynamics
LEARNING OBJECTIVES

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.
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.
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."
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.
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
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.
6.5 KEY TAKEAWAY
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
LEARNING OBJECTIVES
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
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
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
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.)
6.6 KEY TAKEAWAY
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
LEARNING OBJECTIVES
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).
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
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.
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).
6.7 KEY TAKEAWAY
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
LEARNING 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 the needs of their customers, 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.
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.
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,

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.
6.8 KEY TAKEAWAY
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
LEARNING OBJECTIVES
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,
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

Figure 6.9 The Relationship Between Price and Demand Elastic
demand
Price goes down as demand goes up
Price goes up when demand goes up
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.
Inelastic demand
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.
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:
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.
6.9 KEY TAKEAWAY
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.
6.10 Pricing Strategies
LEARNING OBJECTIVES
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 customer or 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.
Customer-Focused Pricing Strategies
In many instances, it is the customer who is the ultimate
determiner of the correct price. The customer may want a price
that is based on his or her perception of the value of the
benefits received from the offering, and therefore the company
needs to find the price that represents that value. This is called
value-based pricing. So long as that price exceeds the
company’s costs and allows the company to make the
appropriate return or profit, value-based pricing represents a
good match between the customer’s needs and the company’s
pricing objectives. It is important to note that a value-based
price is not necessarily a low price. It may be that the value
price greatly exceeds the company’s costs and allows it to make
a high rate of return.
A company might consider good-value pricing, especially in
times of economic uncertainty. Good-value pricing strategy

offers a right combination of benefits at a fair price. When the
economy is not strong, customers might be more willing to
accept a lesser degree of quality in goods and services so long
as the price is right. The fast food industry was quick to pick up
on the needs of consumers after 2008 by offering dollar menus.
Retailer outlet malls are also an outgrowth of the concept of
good-value pricing. Good-value pricing is so popular with many
consumers that some retailers have adopted everyday low price
policies where their consumers can always expect their stores to
have the lowest prices available on brand merchandise. Walmart
is a prominent example of a retailer known for its everyday low
price policy.
Another consumer-focused pricing strategy is value-added
pricing, where a consumer pays a regular price for a product but
receives something "extra" with the purchase. This is a
commonly used strategy when dropping a price may have long-
term consequences for the brand and its image, so the company
delivers more value that the customer is not expecting. For
example, it is common for high-end cosmetics companies to
include samples of the company's other products with purchase,
or high-end automobile dealerships to include free service with
each car purchase. Value-added pricing can also create a
competitive advantage.
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.
Other 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.

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 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.
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

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.
6.10 KEY TAKEAWAY
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.
WEEK 7 PREVIEW
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
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
Section 6.4
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 (
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.
Retrieved December 12, 2009, from
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. Retrieved December 12,
2009, from
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
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. Retrieved December 2,
2009, from
http://business.timesonline.co.uk/tol/business/article481363.ece
(accessed December 2, 2009).
Using Marketing Channels and Price to Create Value for
Customers
Where the offering is and how it is priced communicates value
to the customer
6.1 Marketing channels and channel partners
6.2 Typical marketing channels
6.3 Functions performed by channel partners
6.4 Marketing channel strategies
6.5 Channel dynamics
6.6 Demand planning and inventory control
6.7 Warehousing and transportation
6.8 The pricing framework and a firm’s pricing objectives

6.9 Factors that affect pricing decisions
Notice that most of our sections cover the subjects important to
distribution, getting the offering from the manufacturer to the
end user, with the last two topics devoted to pricing decisions.
6.1 Marketing channels and channel partners
Goal is to get a product to the customer when, where and how
they want it.
Requires cooperating channel partners (or intermediaries) that
actively promote and sell the product as it travels through the
channels to the end customer.
Because of technology enhancements, distribution has become a
much more important factor as companies now realize channel
systems are integral to filling customer needs. Some

universities have entire majors on distribution and logistics and
it is a fertile career field.
Our goal here is to ensure you are keenly aware of the
importance of selecting the channel members that deliver the
offering at the right time, in the right quantity, and at the right
place.
6.2 Typical marketing channels
Two major types of channel systems
Direct channel— from producer to consumer with no
intermediaries (farmer’s market, internet if direct from the
manufacturer)
Indirect channel — Any number of intermediaries between
producer and consumer
Many products have multiple channels
Direct channels were almost disappearing until the internet
allowed customers to directly buy from manufacturers. You
may notice that most tangible goods now have a direct channel

as well as indirect channels of distribution. Think of Barnes &
Noble with its network of retail stores as well as a vibrant
online presence. Of course, the direct channels tend to
cannibalized or steal business from the indirect channels even
though the goal would be to increase sales by offering both
channels. This creates channel conflict, which we will discuss
shortly.
This diagram outlines the most common and basic of channel
systems. In practice, however, channel systems can be quite
complex and may be different based on different customer
groups.
Question: Wouldn’t fewer intermediaries be more efficient and
effective to get products to consumer when, where and how they
want them?
Answer: Some large retailers have been able to own more of
the channels themselves (disintermediation).
But, the channel member functions have to be performed by
some firm, but one firm can perform more than one channel
functions.
Only include channel members that add value for the customer.

Walmart is a good example of a company that decided fewer
players would be more cost effective, and it is able to offer
customers lower prices as a result. Walmart tends to tell a
manufacturer what they are willing to pay for their products.
This gives Walmart the channel power — the ability to dictate
favorable terms with their suppliers because they have high
volume buying power. It also means that Walmart takes on
more of the channel functions themselves. Customers benefit
from this arrangement and that is the goal, to create channel
systems that add value for customers.
6.3 Functions performed by channel partners
Disseminating marketing communications and promote brands
Push versus pull strategy
Sorting and regrouping products
Storing and managing inventory
Distributing products
Assume ownership risk and extend credit
Share marketing and other information

These are the major functions that need to be performed by
some firm in the channel.
We will cover push versus pull strategy later in Week 7,
Integrated Marketing Communications. Basically, it is a
strategy choice depending on whether you want the end user to
demand channel members supply the product (pull), or if the
marketing communications to stimulate sales is passed along
from manufacturer down the chain (push).
6.4 Marketing channel strategies
Factors affecting the marketing channel strategy decisions
Type of customer
Type of product
Channel partner capabilities
Business environment and technology
Channels are designed primarily based on what customers want.
This is tempered with other factors such as type of product,
whether it is large and bulky and needs ground transportation,

or if it is light and compact and can use air transportation. How
far does the product have to travel to reach the end user, does it
require refrigeration, and other questions need to be considered
when developing channel strategy.
Channel integration
Vertical marketing system — formal agreements to cooperate
Conventional marketing system — no formal relationships, all
independent operators
Horizontal marketing system — Two companies at same channel
level agree to cooperate (usually for compatible but non
competing products)
Channels versus supply chains — supply chains are channels
that includes the firms involved in distributing the raw
materials for manufacturing.
Value chain — another term for supply chain BUT
acknowledges the value adding role of the intermediary.
Refer to your week’s readings for explanations of these
important channel concepts and be sure you leave with a firm
grasp of a value chain — a system created for the purpose of

creating value for the customer. This means it fills a customers
time, place, and possession needs.
Factors that affect a product’s intensity of distribution
intensive distribution = want to sell product in as many outlets
as possible
selective distribution = selling products at select outlets in
specific locations.
exclusive distribution = selling products through one or very
few outlets
There are three general categories of distribution intensity listed
above. The choice of which of these a company selects says a
lot about the offering. Rolls Royce doesn’t want to have a
dealership next to every Ford, GM, and Dodge dealership in
town. A person who wants to purchase a Rolls Royce is willing
to travel to a very limited number of exclusive dealerships. It’s
part of the personal value equation for that customer.
The choice also depends on the price of the product and whether
the company needs to penetrate a market, then intensive

distributions the right choice. Most grocery items fall into this
category.
Selective is somewhere in between these two extremes. Check
the readings for more details.
6.6 Demand planning and inventory control
Demand planning — process of estimating how much product
customers will buy from you so can plan production capacity to
not run out
Inventory control — process of ensuring have adequate supply
of products on hand and in sufficient assortment to meet
customer needs
Product tracking — process to knowing where inventory is at all
times
Part of distribution is to ensure the offerings are available when
customers need them and in the right quantity. Companies do
not want to store too much excess inventory even if would mean
ability to meet any and all customer demand. Technology has
made these three functions much more cost efficient and has

added value for customers who get what they want when they
want it.
6.7 Warehousing and transportation
Warehousing — handles fluctuations in demand
Distribution centers — a warehouse that focuses on moving
product to various wholesalers, retailers or consumers
Transportation — the logistics of moving goods via air, boat,
rail, pipeline, plane or truck
The readings will give you a brief overview of these three
concepts that completes our discussion on distribution.
6.8 Pricing framework and a firm’s pricing objectives
A framework for how to set prices

This illustration, which you can also find in the readings, shows
the main elements of pricing and the types of concerns a
company has when determining a price for its offerings. Notice
the arrow depicting the order in which these concerns are
addressed.
The price basement, or the lowest price, is usually some profit
over break even. So those tasks of determining total costs and
break even points is important. After that, pricing strategies
have a lot ot do with the customer and their perception of price
and the offering. These considerations result in a price ceiling,
or the highest price customers would pay for an offering based
on their personal value equation.
6.9 Factors that affect pricing decisions
How will customers perceive the price?
How does it compare to competitors?
Are there any external factors such as the economy, government
laws or regulations that impact the price?
How much does it cost to create the offering?

Here are some of the questions the company asks when
determining price based on consumer, competitive and external
factors in addition to the break even point.
6.10 Pricing strategies
Introductory pricing
strategies
skimming
penetration
everyday low price
Sample pricing approaches
cost plus
markup
markdown
odd/even pricing
prestige pricing
leader pricing

sealed bid pricing
online auction
going rate price
price bundling
captive pricing
product mix pricing
two-part pricing
payment pricing
promotional pricing
price discrimination
Introductory pricing is difficult since actual demand has not
been proven and the pricing decision is a little more complex
based on projected as opposed to actual demand. Otherwise, the
readings will discuss all of the various pricing strategies
available to companies.
In practice, most companies use multiple pricing strategies.
Consider an airline seat. Two people sitting on the same plane
in the same aisle could have paid dramatically different prices
for virtually the same seat and service: or a product could be

bundled with another product with the combined price lower
than buying both products separately.
You will recognize many of these pricing strategies from your
own buying experiences. Some of these are more relevant to
Business-to-Business marketing such as sealed bid pricing or
captive pricing.
Week 6
Assessments
Week 6 Discussion Forum participation
Week 6 Writing Assignment
Week 6 Quiz
All due Sunday
by midnight!
Clearly where a product is distributed is crucial to a successful

offering as the cartoon above illustrates. The offering, the
price, and the marketing communications become irrelevant if
the distribution is not customer focused.
Questions or concerns?
Be sure to take advantage of the General Discussion topic in the
Week 6 Discussion Forum to ask any questions, get
clarifications, or otherwise seek the advice and assistance of
your faculty member.
As usual, use the General Discussion in the Week 6 Discussion
Forum to post your questions and concerns.
6.2 Typical Marketing Channels
The Coca-Cola company has a very large and complex channel
distribution system. Take a look at how the company describes
its distribution system by clicking on this link:
http://www.coca-colacompany.com/our-company/the-coca-cola-
system
Can you outline the indirect channel system based on the
information on the website? You might want to refer to Figure

6.2 or Figure 6.3 in the main text to organize your thoughts.
What value does each of the channel members provide to the
end customer? What might you suggest they do differently?
Required: Post your thoughts in the Week 6 Discussion Forum,
Topic 1: Channel Systems. Many of you might have different
ideas as to how Coke products are distributed, so feel free to
comment on classmates' posts as appropriate.
************************************************
6.4 Marketing Channel Strategies
This section of the readings explains the three generic
distribution strategies:
· intensive
· selective
· exclusive
The choice of which of these distribution strategies would be
best for any given product depends on those factors outlined in
the readings as follows:
· type of customer
· type of product
· channel partner capabilities
· business environment and technology
· competing products' marketing channels
Pick a product for one of the three distribution strategies. Note

your product and the distribution strategy, and then discuss why
you feel the distribution strategy is most appropriate for that
product based on the factors listed above.
For example, Lexus automobiles are distributed selectively.
Customers tend to be upper middle class who want an affordable
(as they define it) luxury car that is highly dependable. Because
of the service component, dealerships need to be all-inclusive
for services needed for a Lexus and be as close to their target
market as possible, e.g., upscale neighborhoods. But because
Lexus is a car dealership, it can't be directly located in an
upscale neighborhood. The car dealer needs to be able to serve a
geographic area that is easy to reach and where customers are
willing to drive, and the best choice may be locations visible
from highways driven by upscale members of the target market
as they drive between home, work, and errands. A Lexus
dealership wants to be located near competitive offerings to
ensure the target market considers Lexus. It also makes it easy
to shop the competition and to increase the value of the brand
by being associated with like products.
Do the same type of description for each of the three
distribution strategies with a product of your choice.
Topic 2: Channel Strategies. You can then comment on your
classmates' postings as appropriate.
************************************************

6.7 Warehousing and Transportation
One way that manufacturers can reduce the price of a product is
by decreasing the warehousing and transportation costs using
the demand and inventory planning techniques discussed in
Section 6.6 of the main text. This adds value to the customer.
Warehousing and transportation tends to be outsourced by most
manufacturers so they don't have to develop those core
competencies. Sometimes the warehousing or transportation
channel member becomes the channel leader.
Can you think of an example of a product for which the
warehouse or the method of transportation is the channel
leader? You might need to do a little web searching to find
examples. Think creatively for both online delivery and
physical delivery.
Required: Post your example to the Week 6 Discussion Forum,
Topic 3: Warehousing and Transportation. Comment on
classmates' posts as appropriate.
************************************************
6.10 Pricing Strategies
The readings suggest there are certain strategies for pricing new
products, which is decidedly more difficult than adjusting prices
to existing products. The new product pricing approaches are:

· skimming
· penetration
· everyday low prices
The pricing approaches discussed for existing products are:
· cost plus
· markup
· markdown
· odd-even pricing
· prestige pricing
· price lining
· demand backward pricing
· leader pricing
· sealed bid pricing
· going-rate pricing
· price bundling
· captive pricing
· product mix pricing
· two-part pricing
· promotional pricing
There is no shortage of pricing approaches, and as customers,
we are exposed to all of them at some time or another in our
purchasing processes. Choose one of the pricing approaches and
discuss the product, the pricing approach, and why you think it
is the most appropriate approach for that particular product
given your consumer characteristics. Be sure you understand the

definition of your approach before tackling this topic.
Many of you will be tempted to use promotional pricing since it
is the easiest to demonstrate. So promotional pricing is not "for
sale" (pun intended). Pick one of the other approaches for this
topic.
Topic 4: Pricing Strategies. Then, comment on your classmates'
posts as appropriate, especially where you note that you as a
consumer may have picked a different approach. Remember,
there are no rights or wrongs in this topic. Each of us as
consumers can view pricing differently.

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