Chapter 12 – Distribution and Pricing

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Chapter 12 – Distribution and Pricing
Objectives:  Distribution can be a competitive strategy for small business  Intermediaries‘ role in the distribution channel  Exporting & importing products issues  Roles of pricing objectives, strategy, & structure in determining best price for product/service Distribution offers opportunities for growth, innovation, and competitive advantage. Companies have learned new ways of growth by tapping in on their ―hidden assets‖ like expertise, unique customer access, and by focusing on an unserved need in a niche market. Distributors try to find opportunities to be more than just an intermediary to their retailers and manufacturers. The distributor finds ways to help the other channels to save money, offer new or better services or products to their customers, become more efficient.

TERM: Indirect channel of distribution: A type of distribution channel in which there are intermediaries between the producer (the manufacturer) and the consumer.  Where the company lies in the distribution channel determines what kind of business it is in and who its primary customer is.  For example, the manufacturer is the producer of the product and also the customer of the supplier that supplies the raw materials or parts to produce the product.  The manufacturer‘s primary customer is the distributor, which buys product and sells it to its primary customer, the retailer.  The retailer, in turn, has the consumer as the primary customer.  Independent representatives and agents also enter the channel in addition to other members or to replace the distributor. For example, a manufacturer can choose to sell direct to the industrial user, using no intermediaries, or it can use distributors or manufacturer‘s reps, who market to end users. Another alternative is to work with agents who act as a sales force for the manufacturer and go either through a distributor or directly to the industrial user.  In the industrial channel of distribution, businesses sell to other businesses.



TERM: Direct channel of distribution: A distribution channel in which the manufacturer cuts out the intermediaries and sells direct to the consumer. The distribution channel graph:  Shows the various options available to get the product or service to the customer.  Assists with judging the time from manufacture to purchase by the end-user customer.  Assists with determining the ultimate retail price (or wholesale price in the case of industrial channels) based on the markups required by the intermediaries.  Assists with figuring the marketing responsibilities and costs. Manufacturers help distributors and retailers with promotion, but the heaviest responsibility and cost fall on the channel member that deals with the ultimate customer: (the end customer).

TERM: The value chain is the distribution channel from supplier to customer or end user. It includes every business that contributes to the production and distribution of a product or service to a customer. The value chain indicates the markups along the channel and each channel adds value in getting the product/service to the end user (the customer). For example, the distributor performed a valuable service, in that it made it possible for the manufacturer to focus on producing the product and not incur the cost of warehouses, a larger marketing department, a sales force, and a more complex shipping department. All these activities become a cost to the manufacturer of doing business with retailers and must be factored into the decision to choose a direct distribution channel.  At each stage, the channel member adds value to the product by performing a service that increases the chances the product will reach its intended customer.  For example, the manufacturer charges the distributor a price that covers the costs of producing the product plus an amount for overhead and profit.  The distributor, in turn, adds an amount to cover the cost of the goods purchased and his or her overhead and profit.  The retailer does the same and charges the final price to the customer/end user.  The amount of the markup at each point is a function of the industry and the demand for the product.  A wholesaler, for example, will generally have an established markup or gross profit margin for a particular product line.  Price is critical to the wholesalers because most retailers purchase based on price.  Wholesalers offer discounts and terms based on quantity ordered. 2

GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12 DISTRIBUTION STRATEGY Channel members are those companies that perform the actual functions of the channel. Two critical decision areas must be addressed in any business‘s distribution strategy: To hire others (optimal channel assignment) or own the distribution channel (forward integration decision): TERM: Forward integration decision: A critical decision area in a business’s distribution strategy that generally has to do with whether the business owner should hire others to do its distribution or own the distribution. Whereas most small businesses choose to focus on its core competencies because of limited resources, as a business gains more resources, it may choose to own its distribution so that it can exert more control and be more profitable. By owning its own distribution channels, the business can create a competitive advantage and set up barriers to entry for others. TERM: Optimal channel assignment: A critical decision in a business’s distribution strategy that is about choosing the various channel members that may handle distribution for small business. (These channel members will be discussed in the Intermediaries section.) Traditionally, distribution system infrastructures were designed with the expressed purpose of expediting marketing strategies that served mass markets of customers that all looked alike. Today, however, distribution has become a significant competitive strategy in two arenas:  The new paradigm of mass customization calls for a different distribution strategy, one that allows a company to successfully compete in a dynamic marketplace by offering customers exactly what they want when they want it.  Low-cost distribution is a powerful tool for value creation in markets with sophisticated customers & products and services that are less differentiated. Price is the defining factor. A good example is Wal-Mart‘s low-cost distribution strategy of a highly successful distribution strategy that forces manufacturers to lower prices or modify their operations to deliver on price and with a minimum level of quality. Looking at Distribution Channel Partners like Customers  Small businesses should analyze distribution channels like we analyze customers: segmentation, value proposition, and relationship management. Segmentation:  Channel members can be segmented into types—dealers, salespeople, resellers, and so forth.  Each channel member type performs a different function and has different requirements.  Each has a different relationship with the small business in terms of contribution to profit.  Small business resources are limited, so it‘s important to maximize return on investment by choosing wisely the choice of channel partners.


GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12 Value Proposition:  Small business owners must demonstrate a value proposition, or benefit, to their channel partners so that the partners have a reason to do business with them and are motivated to push their products.  Small businesses are competing for the attention of the channel partner against large companies with greater volumes of product to sell.  To capture channel partner‘s attention may require discounting the price and providing advertising and other types of support.  Bottom-line is that an effective distribution channel partner must be aligned with endcustomer needs and enhance the profitability of the small business.

Multiple Channels of Distribution  In 2003, sixty-three percent of retailers employed 3 or more distribution channels in their marketing strategies.  Use of multiple channels is due to the need to meet more complex customer needs in a more competitive environment. For example, a complex, technical product needs a highly skilled salesperson, whereas a shoe purchase transaction does not need human intervention and can be conducted effectively online.  Multiple channels enable many customer touch-points, or points where products and services can be purchased or serviced, and they enable the customer to take more control of the transaction. Internet-Enabled Strategies  Internet has changed the way many businesses do business.  For small business distribution strategy, the Internet has been a significant asset in terms of reducing the costs of distribution.  The Internet can easily reach any customer day or night and in any time zone automatically without involving expensive personnel.  Customers can purchase 24/7 without needing salespeople.  Online retailers don‘t concern about shelf space because they have unlimited free space to offer their products.  Four types of Internet distribution strategies are functional decomposition, cloning, forward integration, and strategic industry alliance (advantages & disadvantages identified): Functional Decomposition: TERM: Functional Decomposition: An Internet distribution strategy in which the small business uses the Internet to provide the service component, but the customer still makes the final purchase transaction through a distributor.  Customers go to the website to view products, secure information, and compare products; however, they contact the distributor to make the final purchase.  Good for complex products that customer must experience or test prior to final purchase. 4

GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12  Example is a real estate brokerage firm. It may provide a real estate information website with data on up-to-date real estate listings that the customer can preview at their leisure; however, but it does not replace the real estate agent (but allows the client to be better informed, saving time). Complementary to other approaches. Channel does not replace the physical channel (distributors, sales agents); it causes channel conflict but can actually help increase sales to the channel members. Disadvantages: Internet site becomes cost center (does not generate revenues directly), & it is not easy to measure the effectiveness of the channel because linking customer visits to the site to actual sales transactions is difficult unless the distributor is willing to cooperate in that regard by querying customers as to where they learned about products.

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Cloning Cloning: TERM: Cloning An Internet distribution strategy in which a small business duplicates its strategy on the Internet.  Example: a bed-and breakfast inn duplicates its reservation system online to capture and better serve its customers who prefer doing business online.  Creates economies of scale for the small business.  Gets company brand out in front of customers in more locations and with a wider scope that would be possible with simply a bricks-and-mortar location, meaning the potential to reach new markets.  Disadvantages: Challenges in coordinating online and offline efforts, leads to questions about charging different prices on-line or off-line and differences in customer behavior online versus purchasing in retail store.  Types of products that don‘t sell well on the Internet channel are those with low differentiation and require frequent purchases (hair products and cosmetics). Forward Integration TERM: Forward Integration. An Internet distribution strategy in which the small business disintermediates its channel; that is, it bypasses the intermediaries in the channel to sell direct to the customer.  Enables business to have a stronger relationship with its customers and more quickly meet their needs.  Cost savings from not having to pay fees to distributors.  Ability to control distribution better and therefore sense and respond quickly to market changes.  Disadvantages: Initial development cost for e-commerce site (includes logistics, inventory & fulfillment) is relatively high.  Learning curve of the small business owner with no experience in this type of distribution.  Marketing costs rise to create brand awareness that wasn‘t needed when a known distributor was used. 5

GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12 Strategic Industry Alliance TERM: Strategic alliance: An Internet distribution strategy in which several complementary businesses join forces to provide a common distribution channel to customers who demand a variety of choices and volume prices.  Example: MovieLink is a strategic alliance of 5 major film studios (MGM, Sony, Universal, Warner Bros., and Paramont). Their purpose is to bypass the online video rental giants like Blockbuster. MovieLink allows customers to download movies to their computers for the same price as the typical rental.  This strategy used when it doesn‘t make sense for small business to use one of the previously discussed strategies.  Advantages: Saves distribution costs and offers a variety & volume to customers.  Strategy works best in a market that consists of few major players, an oligopoly, so that the alliance achieves enough power in the market.  Alliances always require a lot of coordination.

INTERMEDIARIES: Intermediaries are the channel members who provide services that help take a product from a producer to the end customer. Suppliers: Suppliers are also called vendors. They provide raw materials for production, products to resell, or supplies to run a business. Suppliers also have information that helps business owners make important decisions about new products, competitor strategy, and cutting costs. When business owners are looking for suppliers they shouldn‘t just look for the best priced, but also the most reliable. The best priced supplier might not be reliable and the business might not receive a product/shipment on time or receive damaged goods. Even with the best supplier, it‘s not always wise to rely on just one supplier. Some business owners find it better to use fewer suppliers and have a closer relationship with them. Before the first order with a supplier, businesses need to develop requests for proposal, detailed specifications for the products they want, and qualify the supplier. Then a business will need to place an order, negotiate the terms of the deal, inspect the products when they arrive, and deal with any problems in the order. All these tasks are a cost by the business, and should be recorded. If the cost start becoming higher then average then a business might want to switch suppliers.


GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12 Wholesalers/Distributors: Wholesales buy products in bulk from manufacturers and then find retail outlets or other businesses to sell to. Wholesalers take the responsibility of finding suitable retail outlets for products. Good distributors will contribute to increased sales and help with product planning for the future. Some tasks performed by distributors are: - Warehousing of products - Advertising and promotion - Packaging and displays - Training of retail sales personnel - Service backup - Restocking of retailer‘s shelves What you want to look for in a distributor: - Provides good service - Prices competitively to retail outlets - Is trustworthy After a distributor is chosen, the company should create a written contract and monitor the performance of the distributor. Logistics Firms: TERM: Logistics firms: Firms that handle packaging, warehousing, inventory control, and trucking requirements for other companies. In distributing, logistics is the timely movement of goods from the producer to the customer. Logistics firms also can negotiate the best deals and the most efficient carriers, potentially saving the growing venture thousands of dollars Agents/Manufacturer’s Representatives: Often manufacturers/producers use agents, brokers, or manufacturer‘s reps to find suitable outlets for their products. Agents: Arrange agreements with wholesalers and retailers for the manufacturers. They usually don‘t buy or take position of inventory. They bring manufacturers and distributors or retailers together. And they paid by commission on what they sell. Manufacturers Representatives: Are independent salespeople that handle specific territories. They work with a specific manufacturer on a continuing basis. They get paid by commission on per product sold. They can also provide warehousing in a territory and handle the shipping of the product to the retailer.



IMPORT / EXPORT Issues: Global market, determining finance how to finance international transactions, finding strategic partners, choosing intermediaries and logistics companies. Finding the best global market: Sources- the International Trade Statistics yearbook of the US (available at libraries) to find the international demand by each product‘s Standard Industrial Trade Classification (SITC) codes. And the Harmonized System (HS) of classification for tracking commodity for international shipments exceeding 2,500. Demands for U.S. products are reflected in 4 areas:  Dollar value of worldwide imports of a specific type of product to a country  Level of growth by import demand records (higher exceeding avg. the better)  Share of total import demand to a country US products have. (Should exceed 5%, low numbers reflect high growth)  Other sources: District office or Washington DC office of International Trade Administration and Department of Commerce (DOC), Commerce Department‗s databases Successful launch for global growth includes marketing plan and budget, team member who is an international management or ex-import experience, consultants. Export Financing: Most important: Business plan and resources to fill orders. Look for capital at:  Banks (loan to small exporter if they have a secured guarantee of payment from a government agency like Import-Export bank)  internal cash flows  venture capital or private investors  prepayment, down payment, progress payment from foreign company making the order (help pay for raw materials if limited in cash flow) Letters of Credits: Bank doc that guarantees a customer‘s bank drafts up to certain amount and time, agreement much be met for letter to be valid. Constructing letters of credits: make sure to; use the suppliers bank, use exact address, use ‗atsight‘ clause(can be called on when presented and exporter will be paid in 5 days), make sure shipping date is in production schedule limits, they can work with US banks, have the internal bank reference number on all documents, include an expiration date that is one month after the


GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12 ship date, have a ‗clean airway bill‘ or ocean bill of lading, details of items on packing lists, invoices and purchasing orders, have no transshipment, and allow for partial shipments. Foreign Agents, Distributors and Trading Companies: (Three choices to get products overseas):  Sales representatives work on commission and do not hold products but controls sales for economic centers, country or region but do not handle collections  Agents sell and handle collections by buying products at a discount, but the company loses control of product  Export Trading Company‘s (ETC) locates manufacturers, buys the products and then sells it in foreign country Choosing an Intermediary: Check List look for intermediaries:  1, current listing of products and expertise  2, competitors  3, numbers of representatives  4, sales volume for growth level  5, marketing plans  6, servicing plan Once selected, write agreement with terms and conditions of relationships. Other issues addressed using other distributors, specific products representation, geographic territories responsibility, duties and responsibilities of agents, statement of sales quotas, dispute rules. Choosing a Freight Forwarder: Handles all aspects of delivering products to customers, shipping methods changes the cost/prices to customers. Duties include preparing shipping documents, bill of lading, and exporter‘s declaration of contents of shipment and collection.



Pricing and pricing structures are very dynamic, but they tend to fall under three main categories: 1. Cost-based versus market-based pricing. 2. Reactive versus proactive pricing. 3. Standardization versus flexibility pricing. Summary- the marketplace today demands a more entrepreneurial approach to pricing that is market based, flexible, proactive, and risk assumptive. Pricing Objectives- Before pricing the product or service it‘s important that the company have a long term pricing objective. Here are some examples of long term pricing objectives: 1. Becoming the lowest-priced supplier in the industry. 2. Creating the widest price range. 3. Maximizing penetration of a market. 4. Creating price leadership in the market. 5. Positioning the company in a specific market. 6. Obtaining a specific share of the market. 7. Maximizing profit. TERM: Pricing strategy: The method by which the goals or objectives of the company are achieved. It is determined by conditions existing within the company and in the industry in which the company operates. There are four main conditions that affect pricing strategy they include: 1. New product pricing a. Price Skimming b. Penetration pricing-vonage c. Experience curve pricing 2. Competitive pricing a. Leader pricing b. Parity pricing-super markets c. Low-price supplier 3. Product line pricing a. Complementary product pricing-Gillette b. Price bundling-Bedroom set furniture c. Customer value pricing 4. Cost-Based pricing-most widely used a. Cost-plus pricing-contractors The following are some possible goals and pricing strategies to achieve them:  Increase sales. This may entail lowering prices to increase the volume.  Increase market share. Lowering prices may increase volume, thus increasing market share.  Maximize cash flow. Raising prices and reducing direct cost and overhead.


GROUP: HOME DESIGN -- JULIA COSS, JAMES SMITH, JOHN CLARK, & TONY LAM CHAPTER 12     Maximize profit. Raising prices, lowering prices and increasing volume, or decreasing overhead. Set up entry barriers to competition. Lowering prices based on using efficient production methods, achieving economies of scale, and keeping overhead low. Define an image. Setting a higher price based on higher perceived quality will enhance image. Control demand. A company that does not have the resources to meet demand can set prices higher to control demand.

TERM: Pricing structure: All the aspects of a product/service that have a price attached to them. Companies will employ different strategies at various stages of the product life cycle. See table 12.4 Price Tactics: Have to do with the actual price that is assigned to the product or service. $3.99 suggests a bargain price versus $5,000 to create a high-end image. Rebates, coupons, discounts, and promotions are all tactics to drive the customer to the product based on price. Warning signs of Pricing Problems include:  Prices are always based on cost.  Different people in the organization set prices with no agreement among them.  New prices are generally a percentage increase over the previous year‘s prices.  Prices always follow the competition.  Prices to all customers are the same.  Discounts are standardized.