Deck 11: Pricing Issues in Channel Management

Question 1

Apple CEO Steve Jobs has been quoted as saying: "We don't know how to build a sub-$500 computer that is not a piece of junk." Job's disdain for the under $500 price point for personal computers reflects his belief that price should not be the driver of product developments. Through much of its history, Apple has pursued a premium pricing strategy to complement its reputation for offering more innovative and superior products. So, even if Apple resellers were to clamor for Apple to offer lower-priced computers (as well as other products) to compete at price points that Apple is missing, Apple is likely to say no.
Discuss Apple's pricing strategy in terms of its future implications for the company's channel strategy.

Answer 1

Company A's pricing strategy in terms of its future implications for the company's channel strategies are mentioned below:
• Premium pricing strategy can play a key role in the sale of sub-$500 computers. The company A has a reputation which is often being complemented by innovative and superior products.
• Price points : This pricing strategy has proved successful for the company in the past. Hence, price point would enable the consumers to buy product at the price they expect in the market.
• Special pricing deals : The Company can also make use of special discounts, rebates or free goods to persuade consumers to buy sub-$500 computer.

Question 2

The basic factors to consider in developing pricing strategies are market variables, internal cost and competitive forces. Do you agree or disagree? Explain.

Answer 2

The said statement is not true. In addition to the basic factors in developing price strategies, channel consideration is also important.
The effects of pricing decision on the behaviour of channel member play an important role in pricing strategy. It can be justified in the following way:
• If the channel members perceive the manufacturer's pricing strategy compatible with their own interests, they are more likely to provide a higher level of cooperation.
• On the other hand, if the manufacturer's approach to pricing reflects a lack of awareness of channel member's needs or appears to work against them, there are chances of conflict.
Hence, the major challenge is to foster pricing strategy that encourages channel member cooperation and minimize conflict.

Question 3

A sales representative from a wholesaler of sporting goods called on a sporting goods retailer in the middle of the summer. The salesman was particularly fond of the new line of exercise equipment from a major manufacturer his company was now carrying. He went through his presentation of showing pictures, leaflets and catalogs for about 20 minutes. Finally, the store owner held up his hand as if to say "wait a minute" and said, "What's the bottom line? How much can I make on this stuff? Normally we get 50 percent off list price on these products and I see from your catalog that most of your merchandise offers that. But the market around here is very competitive. Stores discount this stuff like crazy. I need 35 percent gross margin to pay my expenses and make a profit. How can I be sure this merchandise will measure up?"
What would be your response to the store owner? Present an argument that would address his concerns on gross margins.

Answer 3

T he response to the store owner as per the stated case is mentioned below:
The merchandise would be measured when the gross margin is more and that would affect the price of the product.
The reasoning given by the store owner was apt in justifying the gross margin percentage. The cases, where there are enough discounts tend to affect the business's revenues in long run. The questions raised by the manufacturer are valid as they are related to the company's revenue.

Question 4

What should be the role of the channel manager in formulating the manufacturer's pricing policies and strategies?

Question 5

Amazon.com became the world's largest e-book seller by offering new best selling books for a fixed price of $9.99 regardless of the fame and popularity of the author or the prestige of the publisher. But some publishers have balked at Amazon's e-book pricing strategy. They believe that over time, the $9.99 price will create a ceiling for consumer price perception about the value of new books. If consumers believe new books from famed authors and top publishers are worth no more than $9.99, the publishers' ability to price their products at what they believe them to be worth will be undermined or destroyed completely. In early 2010, five publishers, including Macmillan, one of the largest and most prestigious book publishers, refused to offer their books through Amazon's Kindle e-books and instead decided to distribute their e-book list through Apple's iPad, which allows the publisher to set the price. Some of the e-books distributed through Apple will be priced at $14.99.
Who do you think should control the pricing of e-book best sellers in the marketing channel? Why?

Question 6

Explain the concept of "buying distribution services" as it applies to channel pricing strategy.

Question 7

Tina Anderson talked to knowledgeable salespeople about the pros and cons of a variety of cameras, discussed the various features and handled the cameras to see how they felt while at the Camera Store, a full-service camera shop at a regional shopping mall. She decided to buy a Konica Minolta DiMAGE X50. But she did not buy it from the Camera Store. Instead she said thank you very much to the salesperson and left the store. She went over to the Starbucks across the street, ordered a tall frappuccino and, while sipping the drink, ordered the Konica Minolta DiMAGE X50 using her Apple iPhone to find the lowest price online seller. Three days later, the camera was delivered by UPS to Tina's home. Tina was delighted-she had saved $60 and the camera was exactly the same one she had tried out in the Camera Store. Tina could not have cared less whether the online dealer was authorized to sell Konica Minolta cameras.
Discuss this situation from the point of view of Tina Anderson, the Camera Store, the online dealer and the manufacturer.

Question 8

How might different classes of channel members, rival brands and special arrangements between the manufacturer and channel members affect pricing strategies?

Question 9

Anheuser-Busch InBev and MillerCoors LLC control about 80 percent of the U.S. beer market. Most of the beer distributed by both companies is sold through independent beer distributors who, in turn, sell the beer to retailers, restaurants and bars. Anheuser-Busch InBev, which had been acquired by Belgium-based brewer InBev in mid- 2008, soon after embarked on a cost-cutting program. One key cost focus was distributor margins: Anheuser-Busch distributors received about $1.00 for each case of Budweiser distributed to retail channel members compared to $.85 paid by MillerCoors to distributors. By eliminating that 15 cent difference in margin, Anheuser- Busch InBev estimated it could save about $200 million per year! But Anheuser-Busch distributors, many of whom had decades-old relationships with the brewer, would not be happy with the lower margins.
Should Anheuser-Busch InBev proceed with the margin cut? Why or why not?

Question 10

What is meant by conventional norms in margins? How does this concept affect channel pricing policy?

Question 11

Discuss the issues involved in channel pricing to account for margin variations on different models in a product line, price points and product variations.

Question 12

Discuss the problems associated with the manufacturer's attempt to exercise price control in the channel. How should the manufacturer deal with these problems?

Question 13

Why might major changes in the manufacturer's pricing policies or terms of sale create havoc for the channel members? How might the manufacturer mitigate the negative effects of such changes?

Question 14

Discuss some alternative strategies available to the manufacturer contemplating the passing of price increases through the channel.

Question 15

What is the underlying factor responsible for possible differing reactions of consumers versus channel members to a manufacturer-initiated price incentive? Explain.

Question 16

Why is participation in the gray market attractive to many distributors and dealers? Discuss.

Question 17

Free riding, though profitable for some types of dealers, can be detrimental for manufacturers, full-service dealers and even consumers. Do you agree or disagree? Explain. Channel Issues for Discussion 1.