Strategic Considerations in Channel Selection

Products can be supplied to different target markets through different distribution channels. Proper channels should be selected at minimum cost considering the nature and size and condition of the products. While selecting channel, different factors may affect. So, strategy should be made paying attention to
such factors. The task of selecting proper distribution channel is also very difficult.

Due to distribution channel, there may appear difficult situation and needs to be faced, cost and risk may increase and profit decrease. So, distribution channel should be selected considering mainly the following strategic factors/elements.
  • Product Considerations
    • Unit price
    • Nature of product
  • Market considerations
    • Types of market
    • Target customers
    • Concentration of market
    • Order size
    • Competition
  • Objective considerations
    • Control
    • Cost
  • Middlemen considerations
    • Availability of middleman
    • Capacity of middleman
    • Interest of middleman
  • Company considerations
    • Financial position
    • Company's ability
    • Company's goodwill
    • Company's policy
  • Environmental Considerations
    • Legal environment
    • Social environment
    • Economic environment

I. Product Considerations

The task of selection of distribution channel is very challenging. Mostly the following factors should be considered for the selection of distribution channel.
  1. Unit price: The produced goods may be of different quality and features. Their price also may be different. Generally, if the price of the goods is high, such goods are sent to target markets through direct and short channels. But, if their price is low, they may be sent through long and indirect channels.
  2. Nature of product: Channel can be taken on the basis of the nature of goods. For perishable goods, direct and short channel should be selected. But for the long lasting goods, indirect and long channel can be selected. If any goods are of technical nature, direct and short channel may be appropriate. So, proper channel should be selected according to the nature of goods.

II. Market consideration

While selecting distribution channel, market related factors should also be given special consideration. The main factors are given as follows:
  1. Types of market: Target markets may be of different types. Market of industrial goods and consumers goods are the usual markets. The structure of industrial market channel becomes limited in comparison with the structure of consumer market channel, because at least some middlemen are needed in this channel structure. Therefore short channel for industrial goods and long for the consumer goods should be selected.
  2. Target customers: Channel can be selected on the basis of the number of customers. If the number of target customers is very small, direct and short channel becomes suitable. If their number is big, indirect and long channel may be suitable. So, proper channel should be selected on the basis of the number of target customers.
  3. Concentration of market: Customers live in different geographical regions. They may be living scattered in some regions while in some other may be living concentrated or densely. In both of these two conditions, use of same channel does not become suitable. If the customers are living centered or concentrated in any geographical region, direct or short channel should be selected. But if, they are living scattered, indirect and long channel becomes suitable. So, distribution channel should be selected according to the situation/condition of the target markets.
  4. Order size: Channel can be selected on the basis of the quantity of goods ordered by the purchaser. If the order is for large quantity of goods, direct and short channel should be used. Just opposite to this, if the order is for small quantity, indirect and long channel can be used.
  5. Competition: Competitors’ channel selection and their strategy also affect channel selection. Distribution channel should never be selected weaker than those of competitors. So, distribution channel should be selected only after carefully studying and analyzing the channels and strategies being used by competitors. Only then the selection of channel becomes favorable.

III. Objective considerations

Every producer wants/wishes to distribute his products through proper channel. The channel objective also directly affects channel selection. The main factors/elements affecting channel selection have been mentioned as follows:
  1. Control: Sale department of company may determine the objectives of channel. If the channel objective is to keep under control, short and direct channel becomes suitable, because indirect and long channel becomes difficult to control.
  2. Cost: Cost is also an effective factor to channel selection. Distribution cost may be different according to channel structure. Channel cost becomes low in short channel whereas cost for physical distribution becomes high. But, in long channel, both the channel cost and physical distribution cost become high. So, channel should be selected only after carefully analyzing cost.

IV. The middlemen consideration

The middlemen who distribute goods also strongly affect channel selection. The factors/elements related to middlemen affecting channel selections are mentioned as follows:
  1. Availability of middlemen: Availability of middlemen also should be considered while selecting distribution channel. Whether the middlemen become available or not, at the time whenever needed, it also affects channel selection. If there is lack of middlemen, in such situation the producers cannot appoint the middlemen even wanted. But, they are available, the producers can appoint as middlemen or representatives.
  2. Capacity of middlemen: Capacity of middlemen also should be considered while selecting any channel. The producers should study and analyze what types of middlemen are needed and what type is available. Only then proper suitable middlemen should be selected studying and considering their financial capacity, physical capacity and technical capacity.
  3. Interest of middlemen: A lots of middlemen may be available in markets. But whether the goods intended to sell in the markets are interesting for the middlemen or not, it also should be considered. If the middlemen have no interest in any goods, they should not be given pressure to work as middlemen. Instead of this, the producers should select direct or short channel.

V. Company considerations

There are different types of companies. They have differences in quality, nature, capacity, features etc. from each other. So, the size, market and sales knowledge, financial position, etc. also should be considered and suitable ones should be selected for middlemen.
  1. Financial position: Generally company’s financial position should be better. But sometimes the position may be different. Good or bad financial position also affects distribution channel. If the company is financially strong, it can do all the distribution related functions by itself. Otherwise it should take help of middlemen due to which distribution channel becomes long.
  2. Company’s ability: A company may have various abilities. Among them the management of company should be efficient and effective in distribution, functions. If the company is efficient and skilled in distribution indirect channel is not needed. Otherwise, the company should involve middlemen.
  3. Company’s goodwill: A company can earn goodwill from long experiences, functional style, quality services etc. It needs long time and hard labor to earn such goodwill. If the company has earned goodwill, products can be distributed without any middlemen. But, if the company is new and has not earned goodwill, middlemen should be compulsorily involved.
  4. Company’s policy: A company may have its own rules and regulations. The company’s predetermined policy may or may not be to involve middle men. If its policy is to involve middlemen, long channel should be used. If the policy is not to involve middlemen, direct channel should be used.

VI. Environmental considerations

Environmental factors also affect channel selection for distribution. They are mentioned as follows:
  1. Legal environment: Company of nay country should not disobey legal provisions of the country. Every company should exactly obey legal provisions. In other word, any activity of the company should not be against the law. So, every company should pay attention to government law, rules and regulations while selecting distribution channel.
  2. Social environment: While selecting distribution channel, social environment also should be equally considered. Distribution function should not be negative. In other word, any activity of distribution should not be against the social norms and conditions.
  3. Economic environment: Economic environment can influence the channel selection. If the financial resources or economic condition is strong, the firm can use long distribution channel. But the economic position is opposite of it, the firm can select short and cheaper channel. In this way, economic environment also affects selection of distribution channel.

Retailers: Meaning and Roles

Meaning of Retailers

The buyers who buy goods or services for selling them to final consumers are called retailers. Retailers are the last step of distribution channel. In the lack of it, functions of producers and wholesalers cannot be effective. Retailers are the business intermediaries. They work as the bridge between wholesalers
and final consumers. Retailers deal in small quantity. However, their total business transaction becomes very much. In French language, retailer means ‘to cut into small pieces’. It also makes clear that the function of buying goods in huge quantity from producers and selling out them in small quantity is called ‘retailing’. Every retailer sells goods or services to ultimate consumers in small quantity.

Different marketing experts and writers have defined retail trade and retailing. The important definitions are given as follows:

Prof. Philip Kotler has defined retailing and retail trade as, “Retailing includes all the activities involved in selling goods or services directly to the final consumers for their personal or non business use.”
Prof. William J. Stanton has defined it as, “A retail or retail store in a business enterprise that sells primarily (over one half of store sales volume) to household consumers for their non-business use.”
E. Jerome McCarthy has defined it as, “Retailing is selling to final consumer products to householders.”
Condiff and Still have defined retailing and retail trading as, “A retailer is a merchant or occasionally an agent whose main business is selling directly to the ultimate consumers.”
Such retailers are the different types. On the basis of business operation, they can be divided mainly into two classes as full service retailers and out-store retailers. Similarly, on the basis of the sales volume, retailers can be divided into two classes as large quantity selling retailers and small quantity selling retailers. In the same way, on the basis of dealing in goods, retailers can be divided into three classes as simple/general business product retailers, product line retailers and special retailers. Similarly, on the basis of ownership, retailers can be divided into four classes as independent store, consumer store, chain store and contract store.

Retailers provide various services. They supply goods or services by purchasing them from wholesalers to final consumers at right place and at right time when demanded. They also provide information about quality, utility and operation methods of the goods or services to the consumers. Besides, the retailers provide important information to wholesalers about market demand, consumers’ wants and purchasing power. From this, the wholesalers can take right decisions easily about what products should be sent to retailers or distributed, what products should be postponed from supplying.

Role of Retailer

The task of sending/distributing goods or services to different parts and places of any country is done by retailers. This task also takes responsibilities to improve people’s life standard and provide necessary services and facilities to the society. In addition to this, retailers’ have an important role in the development of national economy. Retailers have important role in distribution channel for the following reasons:

1. Efficiency in distribution

Retailers become efficient in their business. Retailing performs distribution more skillfully and efficiently than producers and wholesalers. Distribution of goods through retailers takes lower cost and the number of transactions becomes small. Retailers fully know about how to provide goods or services to all their customers, by which wholesalers get great help in distribution.

2. Market information

Retailers live in direct contact with consumers. They establish long and deep relationship with the consumers. So, retailers give all information to producers and wholesalers about the need, priority, wants and interests etc. of the consumers. Besides, they also give information to the producers and wholesalers about the activities of competitors, their products, price, promotional strategy etc. On the basis of the market information, the producers produce new goods. The retailers also collect information from producers and wholesalers and send them to consumers. This task benefits both two sides.

3. Financing

Retailers keep on selling goods even in small quantity every time. Hence, some amount of money is collected from continuous sale. Such cash amount can be paid to the wholesalers according to the right time, due to which both the wholesalers and producers become successful in financial management. The retailers also get ownership of the goods by purchasing them. As they get ownership of the goods, they also bear the risk.

4. Contact with consumers

As the retailers sell goods or services to consumers, they remain in close contact with them. They establish long and deep relationship with the consumers. The customers trust retailers more than the producers and wholesalers. So, the producers and wholesalers do not need to keep direct contact with consumers. This also makes clear about the importance of the role of retailers in the distribution system.

5. Selection facility

Retailers sell various goods produced by many producers. They purchase goods from producers and wholesalers and keep them in their own shop. The consumers get chances to buy such goods from the retailers’ shop whichever they like. The retailers in super markets, departmental stores, shopping centers etc. give ample chance to the customers to select goods.

6. After sale service

Retailers should also give all information about services what they can provide to the customers after sale of the goods. Retailers should make the customers believe that they can also get after sale service, for example, free repairing, instruction about the method of use, simple repair, how to keep the goods safe etc. After such services to be provided are ensured, the customers trust the retailers, due to which the sale quantity increases.

7. Sales of new products

Producers may produce different types of new goods. Retailers make flow of description and information about quality, features, utility and weaknesses of the new goods. On the basis of the same, the customers buy new products. In the lack of retailers, it becomes very difficult to get entrance to markets for the new goods. In this way, the retailers play a great role in selling new goods in markets.

8. Consumer satisfaction

Retailers know about the interests, wants, needs and purchasing power of their customers. They also know what goods they need what they demand at what time and season etc. and satisfy them by providing wanted goods. In the lack of retailers, it becomes very difficult to get such facilities for the consumers. In this way, the retailers keep the customers always happy and satisfied.

9. Home delivery service

Retailers promptly implement their customers’ order. Nowadays, the customers demand goods or services even through telephones. The retailers provide home delivery services to the customers who have no time or remain busy. Such facilities are also provided to the physically unable customers. Such simple and special activities have made the retailers more important in distribution system.

10. Seasonal goods

Retailers can well identify the wants and needs of the local customers. So, they also know about what kinds of goods in what season their customers want and provide them seasonal goods. For example, they provide warm clothes, jackets etc. in cold season and thin in hot seasons, coffee in cold seasons and cold drinks in hot season, umbrella, raincoat etc. in rainy season. So, retailers play very important role in distribution system.

Wholesaler: Meaning, Role and Functions

Wholesaler: Meaning

The business men who sell huge amount of goods are called wholesalers. Wholesalers sell goods to retailers by purchasing huge amount from producers. In other word, the person who performs the wholesale trade is a wholesaler. Wholesalers work as a bridge between producers and retailers. Such intermediaries do not
produce goods nor sell to ultimate consumers. The work of wholesaler, sometimes, may be done by producers or retailers. The producers work as wholesalers when they sell goods to industrial users, to government offices, to users, or other organizations. 

Wholesalers invest much capital and make arrangement for necessary warehouse/storing. So, such wholesalers are known as big businessmen. Such businessmen have their own warehouse for storage, means of transport and modern communication system. So, wholesaler or businessmen purchase goods in mass quantities transport them, bear risk etc. Wholesalers may also provide credit facility to their customers.

Different experts and scholars have defined wholesalers; the important are given as follows:
Prof. William J. Stanton has defined wholesaler as, “Wholesaling or wholesale trade includes the sale and all activities directly incidental to the sale of product or service to those who are buying for purpose of resale or for business use.”
Prof. Philip Kotler has defined it as, “Wholesaling includes all activities involved in selling goods or services to those who are buying for purpose of resale or business use.”
Peter D. Bennet has defined it as, “Wholesalers are the merchants who buy products from producers or other wholesalers and release them to retailers, organizational buyers or to other wholesalers.”
Wholesalers are of two types – agent wholesaler and trading wholesaler. Agent wholesalers work as the wholesalers but do not take the ownership of products. They only facilitate wholesaling on the basis of commission. Under agent wholesaler commission house, there are limited numbers of brokers wholesalers, workers, agents, sales agent, producers’ agents, auction company etc. Trading wholesalers take ownership by purchasing goods from producers. They conduct independent wholesale trading concern. Wholesalers include simple product wholesalers, simple line product wholesalers, and special product wholesalers.

Trading wholesaling includes five types of wholesalers such as full time workers, simple wholesalers, simple product line wholesalers, limited worker wholesalers, and postage order wholesalers, drop-shipment wholesalers and rack jobbers. Similarly, there are four types of wholesalers according to the extension of trade or on the basis of geographical region, such as local, regional, national and international. In this way, it becomes clear that the businessmen who sell goods/products to retailers, government and other organizations, and business users by purchasing in huge quantity from producers are called wholesalers. Sometimes producers and retailers also work as wholesalers. Wholesalers can be divided into different types on the basis of functional area and ownership. However, the main task feature of all types of wholesalers is to conduct wholesale trading.
Situation of Wholesalers

Role of wholesaler in distribution channel

Wholesalers conduct businesses investing huge capital in it. Besides, they also provide special types of facilities and services. Producers do not have to worry about sale of their products. Wholesalers have great role in distribution channel. The functions and roles of wholesalers are mentioned in short as follows:

1. Bulk buying

Wholesalers buy products in huge quantity from producers. Then the products are sold to retailers, government offices and organizations in small quantity. As the wholesalers become physically, financially and intellectually capable and knowledgeable about markets, distribution channels have proved very important. So, the wholesalers purchase products in mass/ huge quantity. As the scattered innumerable retailers buy goods from wholesalers but not directly from producers, wholesalers make bulk buying/ purchase in huge quantity of products.

2. Warehousing

Wholesalers also make effective arrangement for storing the products. Until the purchased goods are sold to retailers, they should be properly stored in warehouse. Such storage arrangement keeps the goods safe. Besides, it also stabilizes market price keeping balance in demand and supply.

3. Quick delivery

Wholesalers quickly deliver goods after they receive order from government offices, organizations, retailers etc. But, if all the buyers demand for goods/products from producers, they cannot deliver goods to all at the same time. As wholesalers become efficient in distribution, sufficient stock of goods remains with them. On the one side, there remains sufficient stock of goods and on the other means of transport remain ready at any time when needed. So, they can fulfill the demands or order of buyers immediately.

4. Financing

Wholesalers are capable intermediaries in terms of capital. They help producers by purchasing goods in huge quantity and paying bills immediately. Similarly, they provide goods to their regular retailers on credit. Because of credit facility, financially weak retailers can increase their business. As a result, sale quantity also considerably increases.

5. Order collection

At first the wholesalers store goods buying them in huge quantity and deliver the goods to the customers when demand or orders are received. Demands or orders should be collected for delivering the goods of different qualities and features. The task of collecting and scanning different orders and demands made by different retailers of different places, areas or regions is done by wholesalers. Hence, records of demands and deliveries also become ready.

6. Risk bearing

Wholesalers purchase huge quantity of goods from producers at a time. They also take ownership of the goods so purchased. If prices, fashion, demands and wants of customers for such goods change, all the goods may not be sold out. In such situation, the wholesalers have to bear the risks. Similarly, there also remain possibilities of damage, fire caught, robbery, stealing etc. of the stored goods. The wholesalers have to bear such risks. So, the wholesalers should also try to minimize such risks.

7. Promotion

Wholesalers remain in contact with government bodies, organizations and many other retailers. So, they believe the wholesalers. They purchase different goods from them believing in the wholesalers. Besides this, the wholesalers are also involved in advertisement with the producers and retailers. They give suggestions to retailers about exhibitions and decorations. If needed, they also know wants, interests, needs and desires of the consumers.

8. Expert advisor

Wholesalers become experienced, qualified and effective in wholesale job. Such sellers sell products through direct contact with government organizations, institution and retailers. So, they provide information about the consumer’s wants and interests to the producer. Thus, the wholesalers give valuable information as expert advisor.

9. Market information

As wholesalers are the important parts of producers, they keep various information and records. Besides, the wholesalers remain in close contact with retailers and markets. So, they provide information about the need of production/ product customers, competitors’ activities, price of products, new products and environmental changes etc. They also provide retailers the important information and notices received from producers.

10. Efficiency in distribution

Wholesalers become experienced in distribution. So, such sellers can perform wholesale and distribution more efficiently than the producers. They quickly deliver goods to the customers of target markets. This also cuts down the distribution cost. The wholesalers bring effectiveness in distribution; make available the right goods, at right place, at right time at lower cost.

Channel System and Channel Structure

Channel System

Goods are produced to use/ consume. Goods should be distributed from production place to sale center. Right channel is needed to carry goods to right place at right time. The way used to distribute goods/ products is called channel. All the elements present in this channel are called channel system. Intermediaries, industrial buyers, ultimate consumers and channel member manage conflicts and play important roles. This type of channel system does production, whole selling and retailing functions. This channel system is categorized in different classes as follows:

1. Vertical channel system

Vertical channel system integrates different types of intermediaries. This type of channel system performs producing wholesale and retailing functions. Such channel system can be classified as follows:
  1. Corporate system: Company’s own excessive channel works in corporate vertical system. It does all the works from production of goods or services to selling to final consumers. All the channels involved in distribution are integrated under single/sole ownership. The business firms which want to keep control over distribution channels use this system.
  2. Administered system: In this system, one company controls channel co-ordination activities. So, the company does not have formal organizational structure. In other word, this system is conducted under the leadership of any one channel member.
  3. Contract system: Members of vertical channel are independently involved in this system on contract. The members involved in this system conduct programs of distribution channels. The works of channel members are formally divided which are also controlled through co-ordination.

2. Horizontal channel system

In this system, different channels jointly and mutually integrate the available man power and programs. In this way, if different organizations and intermediaries work together, this is called horizontal channel system. Among the members of such system, some may produce goods and others may distribute. This type of mutual work may be practiced at production level. This system can also be used at the wholesaler and retailer level.

3. Multi channel system

A company may use several channels to provide goods or service to the customers. In this way, if many channels are involved in distribution, it is called multi channel system. Producers may directly supply their products to final consumers. They can also sell their products through wholesalers and also through retailers. In this way, the producers may use multi channel to distribute their products according to suitability.

Meaning of Channel Structure

In simple meaning, the way to supply products from production place to consumers is called distribution channel. Structure of distribution channel may be different according to the nature of product and environmental elements. Whatever may be the channel structure, it works as a good bridge between producers and consumers. This type of distribution channel may be direct or indirect. In direct channel, the producers supply their products to the consumers by themselves. In indirect channel, the products are supplied to the consumers through intermediaries or distributors. Such indirect channel can be classified into three types as follows:

Single level channel: In this channel one retailer works.

Two level channel: In this channel two intermediaries, the wholesaler and retailer, work.

Three level channel: In this channel three intermediaries work. They are wholesalers, jobber and retailer.
Levels of Distribution Channel

Channel Structure for Consumer Goods

Personal or daily uses product is called consumer goods. According to product nature, size and price, the firm can be used as direct or indirect channel. In indirect channel, the products are supplied to the consumers through agents, wholesalers and retailers. Producer, agents, wholesalers and retailers directly participate in the channel structure for consumer goods. The following four levels are involved in the channel structure of consumer goods.
Channel Structure for Consumer Goods

1. Producer → Consumer channel

The channel in which no any intermediaries are involved between producer and consumer is called producer – consumers channel. As no any intermediary is needed between the two sides, it is called zero level channel. In this type of distribution channel, the producers themselves supply goods to the consumers. In other word, producer does all the works to distribute produced goods directly to the customers. In such channel, it is necessary to have direct contact and talks between producer and customers. This channel is very cost effective/economical. But the producer should be physically, financially and intellectually able to distribute produced goods.

Technological goods such as television, deck, computer, automobile, machines and machinery goods are distributed through direct channel. Similarly, this channel is used to distribute perishable goods, such as milk, fruits, fish and meat, etc. Door to door service facilities such as mail, order, TV selling, exhibition arcade, telemarketing etc. are forms of direct distribution channels.

Wants and interests of consumers can be easily identified through such direct channel. To perform this task, no any added or extra expense is needed. But, as management for all the tasks should be looked after by producers themselves, it needs capital. Besides, it becomes very difficult for the producers to have direct contact with all the customers.

2. Producer → Retailer → Consumer

In this channel, one intermediary business holder is involved. This is the shortest indirect channel for consumer goods. This is also called single/one level channel. In this channel, retailers remain in between producers and consumers. Consumer goods reach retailer from producers and consumers from retailers. There may be a large number of retailers. Perishable goods such as fruits, vegetables, eggs, milk etc. are distributed through this channel. In this channel, the producers do not need to keep direct personal contact with consumers. Goods are sold out in high quantity with low distribution cost. Channel store, departmental store, super market, discount houses, big mail order houses and cooperative organizations are involved in the single/ one level channel.

3. Manufacturer → Wholesaler → Retailer → Consumer channel

Two intermediaries, wholesaler and retailer work in this channel. So, this channel is also called two – level – channel. This distribution channel becomes longer than one/single level channel. In practice, most of goods reach market through this channel. Goods can easily reach even any market segment where there are many wholesalers and innumerable retailers. The producer/manufacturer does not have direct contact with retailers and consumers but only with wholesalers. As distribution function widens very much through this channel, there remains possibility of large amount sale. But it takes more distribution cost. This channel is used to distribute groceries, medicines, food stuff, hardware, goods, etc.

4. Producer → Agent → Wholesaler → Retailer → Consumer channel

The longest channel to distribute goods to the final consumers is this three – level channel. In this channel, there are three intermediaries such as agents, wholesalers and retailers between producer/manufacturer and consumers. The goods reach the hands of consumers through agents, wholesalers and retailers respectively. Mostly the international and global companies use this channel. Such companies produce goods in huge quantity. Sale quantity of goods increases through three – level channel. But it takes high sales cost.

Different experts and scholars of marketing have prepared different types of structures of distribution channels. Marketing scholar William J. Stanton has suggested that five/fifth type distribution channel also can be used. This structure is as follows:
Channel Structure of Final Consumer Goods

Channel Structure for Industrial Goods

The goods used in order to produce any new goods are called industrial goods. Direct or indirect distribution channel can be used according to the nature, size, design, price etc. If it is to use indirect distribution channel, goods reach the users through agents and industrial distributors. Producers, agents, industrial distributors and industrial users are directly involved in the channel structure of industrial goods. Specially, there are three levels in channel structure of industrial goods. It is presented in the figure as follows:
Channel Structure of Industrial Goods

1. Producer → Industrial user channel

This channel is also called direct channel or 0 level channel. In this channel no intermediaries are found between producer and industrial user. This channel has become very popular for industrial goods. Heavy machines and raw materials are distributed through this channel. In this channel the producers themselves identify industrial users, sign contract and supply goods. As this is also direct channel used for industrial goods, its distribution cost becomes cheap, but skilled seller is needed as he/she has also to play intermediary’s role. The seller should be experienced, efficient and have technical knowledge.

2. Producer → Distributor → Industrial user channel

As only one intermediary works in this channel, it is called one/single level channel. In this channel, industrial goods come to distributors from producers and reach the industrial users. This channel is very popular and is suitable for the goods such as photocopy machine, auxiliary equipment, operation supply, air conditioner, computer etc. This distribution channel becomes more expensive then direct channel. The distributors of industrial goods acquire specialization in dealing industrial goods. Otherwise, dealing in industrial goods becomes impossible.

3. Producer → Agent → Distributor → Industrial user channel

This is the longest and popular channel. In this channel, agents and distributors work between producers and industrial users. So, this level is also called two level channel. Here agents mean representatives of producer. Agents take the responsibilities to supply goods to distributors. This channel is used for cheap industrial goods for mass distribution. As the way of distribution is long, distribution cost also gets high in proportion. The producer distributing industrial goods can select other distribution channels. The alternative channel is represented as follows:
Alternative Channel for Industrial Goods

Distribution: Meaning, Objectives and Importance

Meaning of Distribution

Production and sale center do not remain at same place. Distributors are needed to supply production to the consumers/customers. Production of goods or services becomes meaningful only if they are supplied to the consumers/customers. So, the activities performed for supplying the products to the target markets on the whole is called
distribution. Distribution creates time utility, place utility, ownership utility of products. Management of product storing creates time utility whereas exchange creates ownership utility. Management of good transport system creates place utility. Distribution management satisfies customers’ wants by supplying necessary goods to them and heightens their lifestyle.

Products have no utility at production place. Their utility increases immediately after they have been taken to consumption places. For example, publishers have no use of books, but when they reach among readers and students their utility increases. Similarly, suppliers provide means of productions and work as bride between producers and target markets by supplying products. Distribution includes the tasks of distribution channels and physical distribution. Distribution channels of marketing provide products to customers whereas physical distribution transports products to warehouses and target markets. Both these functions are the important channels of distribution.

The task of carrying finished goods to target markets is called physical distribution. This includes the important functions such as transport management, warehouse management, stock control, product management, order scanning etc. In the lack of distribution, marketing becomes lame/ crippled. To make physical distribution clearer, different definitions given by different experts and writers can be presented as follows:
According to Prof. William J. Stanton, “Physical distribution consists of all activities concerned with moving the right amount at the right product to the right place at the right time.”
According to S.A. Sherlekar, “Physical distribution is an important marketing function describing the marketing activities relating to the flow of raw materials from the suppliers to the factory and the movement of finished goods from the end of production line to final consumers or users.”

From the above mentioned definitions, it becomes clear that physical distribution provides distribution channels and supplies products to the target consumers. Physical distribution is task or the function of supplying products from production place to the final consumers or industrial users at the right time they demand for. Mostly, transport and storage/warehouse related functions are emphasized in physical distribution.

Marketing channel is also called distribution channel. They way which is used to supply products to the consumers is called marketing channel. As the channel carries water to the farm from its origination, the distribution channels carry products to markets or consumers from place of production. So, distribution channel can be taken as the pillar of marketing.

To make the marketing channel much clearer, the following definitions have been presented:
According to Prof. William J. Stanton, “ A channel of distribution (sometime called a trade channel) for a product is the route taken by the title to the product as it moves from the producers to the ultimate consumers or industrial users.”
Accordint to Prof. Philip Kotler, “ Distribution channel as the set of firms and individuals that take title or assists transferring title to the particular goods or services at it moves from the producers to the consumers.”

From the above definitions, it becomes clear that marketing channel is a simple as well as an easy way through which products reach the target markets. Proper channel should be used for distribution according to the nature of products or service. Generally, distribution channel of industrial goods become short. But channel of consumer goods becomes long.

Objectives of Distribution

Distribution, in marketing, has narrowed the world market and makes it very easy. Any product can be easily delivered/ supplied to every geographical place or region at any time if demanded by customers. No any producer has to fret over how to distribute the products. Distribution management takes all the responsibilities to distribute any goods produced by any producer to any place at proper time. The distribution management also decides which goods of what nature should be distributed through what channel to which place and at what time. So, the main objectives of distribution management which discharges such important responsibility are as follows:

1. Minimization of total cost

Producers produce various goods. A lot of expense needs to distribute them. The producers may give responsibility to any channel to distribute. Channel management may deliver products to a certain place at minimum cost for distribution. While distributing products in such way, many channels may involve in it. The function of distribution can be completed at minimum cost calculating the average labor of persons or groups spend on it. So, distribution channel sets the objective to minimize the total cost.

2. Making the goods available

Effective distribution channel makes arrangements for easy availability of any goods. Any goods or services demanded by customers become available at any place and any time. If goods are available when demanded, sale quantity of such goods increases on the one hand and healthy competition with competitors can be easily faced on the other. In this way, distribution channels always have the objective to maintain the availability of the products regularly.

3. Regular supply of goods

Any business firm or producer can give the responsibility of distribution for channels. Then the distribution channel manages regular supply of goods. In other word, distribution channel delivers right product at the right time and right place to buyers. So, all the customers of target market do not feel the lack of goods. Thus, distribution channel sets objective to render crucial services of regular supply of goods.

4. Transfer of product ownership

The distribution function also fulfills the process of ownership transfer. For any product documents/papers should also be given together with product by signing a contract. Ownership of some other goods should be handed over, in presence of government authority, with documents by completing every legal process and requirement. Only after formally transferring ownership, the goods can belong to the buyer or customer. So, distribution channels also take responsibilities to transfer ownership of goods.

5. Promotion of goods and services

Effective distribution channel also promotes goods or services. Distributor reaches target market taking goods from production center. After reaching target market, the distributor gets chances to show the goods to customers. Customers become very happy to see and know about the goods. They also can ask about the product if anything unclear. They become acquainted with the product after the distributor gives true information and answers to them about the products. In this way, distributor has the target to promote the product or service of the producer.

Importance of Distribution

In the lack of distribution, products become meaningless. Distribution has very important role in marketing. The importance has been mentioned in short as follows:

1. Utility of the product

In marketing, distribution creates utility of goods/ products. If the products are not carried to the consumption place, no any benefit or utility can be obtained from them. Mainly transportation, storage and exchange are involved in distribution. Transportation creates place utility of the product by carrying wanted goods to the right places. Storage creates product utility of time by storing and providing goods at the time when wanted. Similarly, exchange creates ownership utility of goods by transferring ownership. By different activities, it becomes clear that distribution motivates customers by creating place utility, time utility and ownership utility.

2. Need satisfaction

In this competitive business age, at first the needs of customers should be studied and understood. Then goods should be produced accordingly. The distribution meets/satisfies the needs of the customers by supplying the right goods to right place at right time. If there is no proper arrangement of distribution, needs/ wants of the customers cannot be satisfied at right time. Distribution plays an important role to heighten the life style of customers. This function should compulsorily be conducted by carrying goods from production place to the selling centers.

3. Employment and occupation

Distribution is one of the important tasks of marketing. This provides job or employment to many persons. Distribution plays an important role in providing employment opportunities to the people. Many persons get employment by involving in wholesale business, retail business, agents, intermediary, etc. A large number of people have adopted it as their occupation. Similarly, transport, banking and insurance have provided job to large number of people. Distribution has been found successful to provide job to a large number of people in the industrial and developed countries. In the developing country like Nepal, distribution has provided job opportunities to a lot of people.

4. Means of production

The producers need means to produce different goods. Raw materials, machines and machinery parts, big machines and equipment, production function, supply etc. help in production. Besides this, it also provides necessary financial resource to conduct production function effectively. Without means of production, production function becomes meaningless, and in the absence of it, marketing itself becomes worthless.

5. Financing

Several intermediaries are involved in distribution function. They manage financial resources themselves for distribution. Besides this, they also manage financial resources for extra warehouse and stock. So, the producers need not make financial arrangement for distribution and creating distribution channel. Hence, the producers do not need to invest stock financial resources. Produced goods change in cash immediately. So, no any difficulty arises in managing financial resources for market research, production of new goods, development of goods and other functions.

6. Communication

Distribution function establishes contact between producer and customers. So, distribution works as link between the two sides. Producer makes flow of message about products, price, promotion, etc. to the customers through the persons or groups of person involved in distribution. Through the persons involved in distribution, they also get feedback about competitors, environment change etc. Hence, it becomes clear that distribution function also works as a means of communication.

Pricing Strategies: Marketing

Pricing Strategies

Producers should face several problems, challenges and difficulties at the time of pricing their products. Besides, pricing strategy should be adopted to fix reasonable and proper price. Fixed price strategy should be adopted accordingly on the basis of pricing strategy. The main strategies are as follows:
Pricing Strategies

1. Market Entry Strategy

Producers produce various products. All the old and new products should be sent to market for sale. Specially, the marketing manager may adopt two strategies for sending new products to market for selling. They are as follows:

  1. Market skimming pricing: Fixing more price of new product at the beginning is called market skimming pricing. According to such pricing strategy, price of new products becomes a little more than estimated price of target market. Even if the price of new product is more, the customers become eager to buy the new ones. Effort is made to recover research expenses in shorter time by convincing the customers that the price is reasonable with good quality. Under this strategy, company is made flexible and decreases price is needed. If the new product has good quality with good features and is safe from competition, this price may be fixed for taking benefits from the best element of the market.
  2. Market penetration pricing: Determining very low price in the course of supplying new products to markets is called market penetration pricing. According to such policy of pricing, the price of new products is fixed much lower than the expectation of the target market. The main purpose of determining such price is to take market share immediately and prevent competitors from coming to the market. If the market of the products is vast or there is intense competition, this pricing policy becomes very useful. But, if the market is limited and there is no competition, this strategy is not suitable.

2. Product Life Cycle Strategy

Products/goods also have a life cycle like living things. Different pricing strategies should be determined according to the life cycle of the products. The given strategies to be adopted in the following situations:

  1. Introduction stage of products: Introduction stage of product is the first stage of its life. At this stage, market entrance strategy may be adopted. This strategy includes market hunting pricing and market penetration pricing from which large share of market can be occupied.
  2. Growth stage of product: At this stage of product life cycle, sale of products mounts very high. Prices of the products should be cut down a little to encourage this tendency.
  3. Maturity stage of product: Competition of the products grows at this maturity stage. Sale and profit remain stable. Although sale of products continues at beginning of this stage, the rate of growth may decline. So, in such situation a strategy should be adopted to cut down price rate slightly in order to maintain market share.
  4. Decline stage of product: Sale quantity declines very fast at this stage of product. Only some loyal customers may decide to buy the product. So, the strategy to decrease advertisement cost, cut price down and maintain existence of the firm should be adopted.

3. Price Change Strategy

The environment of any market cannot remain same forever. It changes frequently. Price also should be changed according to the change of market environment. But, while changing price, study and analysis of customers’, competitors’, suppliers’ and government’s reactions should be done. There are two alternatives in price changing strategy. a) Increase, or b) Decrease.

  1. Price increase strategy: Even a country has to face different problems. Due to inflation in the country, new taxes arrangement by government and lack of supply, prices need to be increased.
  2. Price decrease strategy: The producers should face market competition at any cost. On the other hand, full capacity of the company should also be used. Besides, the company should not escape from price war. In such situation, any company or firm should cut down the price.

4. Psychological Pricing Strategy

Determining price considering the customers’ perception is called psychological pricing strategy. This type of strategy encourages sentimental customers to buy products. This pricing strategy includes the following strategies:

  1. Odd even pricing strategy: Customers can be encouraged to buy products even by determining odd and even price. Odd price should be fixed to make the customers realize the price is low. For example, according to odd pricing strategy, price of any product can be fixed $99.95 instead of $100. Only $0.5 is different between the two prices. But customers may feel very different from each other. The customers can buy the product thinking that the price is very low. Even price fixing makes the customers realize that the product is of good quality. So, customers can also be encouraged to buy products by fixing even price. This type of price may be $150, $200, $250, $300 etc.
  2. Customary pricing strategy: This pricing strategy is based on the traditional practices. Product prices are determined on the basis of customers’ expectation. For instance, as a practice everybody has known that the price of Nepalese match is Re. 1. So, if the price of a match is fixed more or less than Re. 1, then the customers may be psychologically affected. So, the producer should also fix price Re. 1 for the new match. However, such pricing strategy may not be practical in view of cost.
  3. Prestige pricing strategy: prestige pricing strategy can also be adopted to establish prestige of any product. According to this strategy, price of the product is determined very high. This makes the customers think the product is of high quality and want to heighten their prestige by buying such products. Prestige price may be determined for ornaments, drinks, vehicles, other luxury goods etc. because the customers of such products/goods may be economically strong.
  4. Discount strategy: Discount pricing strategy also may be adopted for any product. According to this strategy, price of product goes high. Then the seller can be offered heavy discount for the product. Such pricing techniques encourage the customers.
  5. Promotional pricing strategy: Reputed companies can be offered cash rebates, longer payment terms and low price of the established product. Such pricing techniques are called promotional pricing of the product. This strategy remains for short run term because the competitors may follow it. So, the firm should improve product quality and services through advertisements.

Pricing Strategies in Nepal

Effective pricing policy can increase sales volume of product. Reasonable and correct price of product encourages sales. Such price of product helps to maintain and improve market share. It also greatly helps in facing market competition. Every producer company wishes to maintain stable price. Proper pricing strategy should be adopted for stability. Nepal’s business companies and entrepreneurs are found to have practiced following strategies:

1. Location precising strategy

Price of one kind of products may be different in different places like in Himalayan region, hilly region, Terai region, in valley etc. Although the cost for the product becomes same, the price becomes different for several reasons. Transport cost is an effective element to cause differences in price according to place. Price of Nepal Oil Corporation can be taken as an example.

2. Product mix pricing strategy

Production companies produce different goods using one transport cost. Prices of such goods are determined according to quality, features, facilities and utility. The customers should pay the price of the products which they decide to buy. Discount may be given for buying some products and may not be given for others. For example, Nepal Telecom gives discount on the basis of time.

3. Response pricing strategy

Producers may determine price on the basis of one or the other factors. The customers, consumers and competitors begin to express reactions. After the logical reactions have been received, the producers are compelled to make review. Some changes can be made in price of the products in order to face healthy competition. This increases the sale quantity. If price of the product needs to be cut down, discount facility may be closed.

Pricing Policies

Pricing Policies

Different pricing problems may appear in any company. Pricing policy should be made to determine to solve pricing problems. This policy provides guidelines to marketing manager. Such policy does not change in usual situation. Main policies of pricing are mentioned in the following figure:

1. Flexible Price Policy

Any firm or company can make pricing policy in several ways. It may make policy to fix price of product or service on the basis of flexibility. Such policy includes the following two policies:

a) One price policy: One price policy is such a policy which collects same/one price from all customers. This type of price policy makes price administration easy, saves time of marketing experts, customers feel convenience etc. Apart from this, customers do not compare price and so it also becomes beneficial to the
company. Firm/ company may adopt such policy at the place where sales are done. For instance, this policy may be suitable for departmental store, super market, chain store etc.

b) Price discrimination policy: Price discrimination policy is made just opposite to the one price policy. Producers or companies charge different prices for same products in different geographical areas of the market segment that is called the price discrimination. The discrimination in pricing is made on the basis of consumers’ class or different zones. Sometimes the firm itself or the sellers sell some products to different customers at different prices. Generally, the sellers use this pricing policy for consumer products. some examples of price discrimination have been given as follows:
  1. Customer discrimination: The task of fixing different prices of the same products for different customers is called customer discrimination. Discount facilities for students in cinema hall, transport service, zoo are some of the examples of discrimination.
  2. Product version: Different prices can be changed for the same product, according to the features, utility and its services. It is called product version discrimination. This type of discrimination is made in prices of books for students and regular readers by different organizations including libraries.
  3. Different time: Different prices charged for the same service are called time discrimination. Nepal Telecom has discriminated prices for telephone calls for different times such as morning, evening, day, night etc. On Saturday price for national trunk serve has been fixed nearly 50 percent less than normal as facility.
  4. Different locations: Differentiation in pricing is made on the basis of location which is called locational discrimination. For example, ticket prices for same service such as travelling by train, tram, etc. and film halls, stadium, become different according to classes, but services are of the same nature.

2. Discount and Allowance Facilities

Some discount from listed price can be given to the customers. Cutting down price of product or services is called discount and allowance policy. Discount policies are also of different types. They are mentioned as follows:

a) Quality discount: Sales department can make policy to give discount on the basis of sale quantity. This type of discounts can motivate the customers to buy a lot of goods from the same seller. For example, $30 is charged for one unit of product, but if one dozen is bought by any customer, the same product can be charged only $29 per unit. In the same way, if one gross is bought by anybody, then $28 per unit can be charged. So, the more quantity is sold, the higher discount/allowance may be given to the customers. That means the more the sale quantity, the lower the price becomes.

b) Seasonal discount: Every product has its seasonal importance. Cutting down price of season – off products or services is called seasonal discount. Price of such product has high price in season and low in off season, for example, hotel service, plane service etc. Price at the hotel in Kathmandu decreases in off-season and increase in season. They give heavy discount due to competition. Similarly, in the months of Poush and Magh, the price of woolen sweaters, jackets etc. are sold at high rate and the price is cut down in Jesth and Asadh.

c) Cash discount: The discount in cash given for getting quick payment of price for the goods sold on credit is called cash discount. Suppose credit period is for 30 days, but if it is to collected within 10 days or the buyer wants to pay soon, cash discount is given for such sooner payment. Discounts have also their own terms and conditions. If the credit period is for 30 days and the customer wants to pay the price in 10 days, up to 2% discount may be given. The discount given in this way is cash discount. Such discount develops in customers as a trend of quick payment of credit.

d) Trade discount: The discount given to distribution channels for selling or storing is called trade discount. Trade discount helps in sale promotion. For example, per unit price of some ‘A’ product is $15, if it is sold for $14, the rest $1 is trade discount. This discount is given to wholesalers and retailers. As it is the discount to them for working as the distribution channel, this is also called operating or working discount. Cutting down listed price of goods or services for performance of nay work or giving some cash to the distribution channels is called allowance. Such allowances may be promotional allowances and trade in allowances. They are mentioned as follows:
  1. Promotional allowance: Agents, dealers and wholesalers advertise products and provide different services to customers. For providing such services, the products either cut down price of the products for them or give some amount of money as reward. Such facility provided by producers is called promotional facility.
  2. Trade in allowance: Trade in allowance is price reduction given by an organization for returning in an old product when buying a new one. Such services one most common in the car industry and other durable goods. Generally, such allowances are also provided in the situation of high competition.

3. Geographical Pricing Policy

Price of products or services can also be determined on the basis of geographical situation. Buyers or customers may live in different geographical regions. The cost for supplying the products to such regions and customers, transport costs, insurance cost, management expenses, advertising expenses etc. may be different. Price of product cannot be same in all geographical regions. So, the following policies can be adopted under geographical pricing policy.

a) F.O.B. Price: According to FOB pricing policy, producers determine factory price of their products and they transport the products up to airport or seaport for shipping at the factory price rate. After then, all the expenses for transport should be incurred by the purchasers themselves. So, as transport fare for long distance becomes high, the price of the products also becomes high. For short distance, transport fare becomes low due to which price also becomes low. In short, in Free on Board price policy, all the transport expenses should be incurred by the purchasers. Prices in different regions may be different for the same product.

b) Zone price: At first big market should be segmented on the basis of zone or area for adopting zone price policy. Then price should be determined for different zones/ areas by fixing average transport fare. As the average transport fare becomes different for each zone, the prices may also differ in different zones. But in same zone, the price becomes same. In Nepal, price of petroleum is different in different zones, but it is same in all parts of same zone.

c) Base point price: Producers may also adopt base point pricing policy. Under this policy, producers determined price rate of product by fixing a base point. Transport expenses for the transport of products from the base point to the purchaser’s place are incurred by the purchasers themselves. So, price of any product may be different at different places on the basis of the transport charge paid by the purchasers.

d) Uniform price: Policy to provide any product to the customers of all geographical regions at same price rate may also be adopted. For this, average transport fare to the markets is calculated and price is fixed same for all geographical regions. This is called uniform price. Products are supplied to the customers at any place or region at the same price rate. In our country Nepal, CocaCola and Pepsi companies have adopted uniform price policy.

e) Freight absorb price: Price of any product may be determined incurring all transport fare by the producers themselves. Price may also be determined incurring some or cent percent fare by the producers. To supply new products to target market or face intense competition, this type of transport fare attraction policy is adopted. This policy may attract the attention of the customers.

4. Product Mix Price Policy

Every firm may produce different types of goods. Prices of all goods may not be the same. Price rate of different products should be fixed differently according to the quality and features of the products. Product mix policy includes the policies as follows:

a) Captive product price: One task may be completed using some two products. In other words, one product needs for using other product. Such products are called captive products. In captive products one may be main and the other auxiliary product. For example, camera and film are captive products. Only camera can do nothing or only film can do anything. Camera may be taken as main product and film as auxiliary. So, a policy may be adopted to fix the price of main product more than the price of auxiliary product.

b) Product line price: Producer may adopt product line pricing policy. There may be different products of different quality, features, colors, design etc. under one product line. Different price should be fixed for different products. This makes customers feel easy to discriminate products. They can get opportunity to select products comparing price and quality of the products.

c) Optional feature price: Policy may be adopted to determine price of any product by adding or taking off some features to or from any product. The price of computer may be determined on the basis of features. It may be sold by adding all the different features and facilities or only with some features. Addition of different facilities and features to computer increases price. However, customers become ready to pay more amount of price for the added facilities and features. If they do not like to have various facilities and features, the computers may be sold at low rate. It depends on the desire of the customers.

d) Two parts price: Under this policy, prices of products or services can be fixed at two stages: they are as fixed and variable costs. In other word, one price rate for products or services is paid up to a certain limit, and other price rate is paid if the products or services go beyond the limit. For example, the price for the services of Nepal Telecom can be cited as an example. Nepal Telecom has fixed certain amount of price for certain calls (one rate for up to 175 calls) and if the fixed calls cross the limit, different rate is charged for the extra calls. Similarly, Nepal Electricity Authority has fixed one rate for certain units and if the fixed limit is crossed, other price rate is charged for the extra units.

e) Product bundle price: Fixing price for a mixed bundle of different products is called product bundle price. Combined price may also be fixed for a bundle of different products mixed together. With such policy different products can be sold together. Make up set, cosmetics set, suit set, ornament set, cup and plate set, tea set etc. are the examples of product bundle price.

Initiating and Responding to Price Change

Initiating to Price Change

After goods have been produce, price is determined on the basis of its cost and taking reasonable profit. The price so determined may also need changes. Due to external and internal environmental effects, prices may need changes. Two main strategies can be adopted in leadership pricing as follows:

1. Initiating price cut

Every business firm wishes to increase its sale quantity. Changes in price may be needed to achieve such objective. So, the producer should cut down necessary amount of leadership price of the products. Sometimes companies’ products can enter in more markets segments only after cutting down prices. This strategy should be adopted in order to face strong competition. Otherwise, there may appear a situation either to quit the market segment or abandon the production. On the other side, there may be a compulsion to cut down prices of products to control the target market segments.

2. Initiating price increase

Sometimes a strategy to increase in price may be adopted not affecting sale quantity. Price may need some changes due to cost inflation. Price may need changes due to government’s policy to control price or to increase revenue. On the other hand, demand for products may grow suddenly. In such situation, one needs price change. In the situation, one needs price change. In the situation when all continuations are suitable, price may be increased according to the time. However, such increase should be very low percent. Price should not be increased at the rate which may spoil the image and competition of the company.

Responding to Price Change

While changing price of any products, many reactions may come from concerned sides. At first reaction may come from consumers. Such reactions may be positive when price is cut down and negative when it is increased. The company should carefully as well as logically answer both reactions. In the same way, competitors’ reactions may also come. The company should give satisfactory answer to them with all reasons such as cost, market study, transport expenses, administrative expenses, etc. The following strategies should be adopted to face reactions of competitors and distributors.

1. Maintaining Price

The producers should try their best to maintain price at the same rate. Producers may cut down some percent of profit. The existing market segments can be maintained with such strategy. Along with this, opportunity can be found to enter new market segments. In this way, sale quantity may increase.

2. Increasing price and quality

Producer may increase in existing quality and price. Production companies may bring in markets the new products or adding new features to the products challenging their competitors. Little more prices of such products do affect competitors so much. However, such analysis cannot last long. Other competitors also may adopt such strategy. This may be only a periodical means to stop competitors’ reactions. After sometime, the company should seek other alternatives.

3. Reducing price

Most of the customers become conscious about price. So, the producer should cut down the price of the products after certain time. Competitors of similar products also may adopt this strategy. The producers who cannot adopt such policy may get compelled to quit main market segments among many segments. Such markets once quitted need very hard labor to supply products to there again. Policy of taking low percent of profit should be adopted. Even decreasing price, quality, features and services should be maintained same. Only then, products can control markets.

Methods of Price Determination

Methods of Price Determination

Price determination is very difficult and challenging task. So, reasonable price should be determined only after identifying the factors affecting it and objectives. According to traditional practice, price can be determined through interaction between seller and buyer. But in the modern marketing, many methods of price determination have developed. The main methods are follows:

1. Cost-oriented pricing

This cost oriented method gives special care to cost of products. The cost oriented pricing method is also divided in three classes:
a) Cost – plus pricing: This cost – plus pricing method is also called mark-up pricing. This pricing method is very simple and popular. According to this method, price of any product is determined adding certain percent of profit. Mostly small producers and retailers use this method. Besides, construction company, legal advisors, accounting experts and other professionals determine price of products or services using this method. According to this method, no special qualification or experience is not needed to fix price. So, this method can be used by any person. One imaginary example can be presented for making it clearer.
If a pair of football shoes costs the seller Rs. 100, and the seller wants a mark-up of 25 percent, the price will be set as following:
Cost-plus price = Cost + (Cost x desired mark up)
Selling price = Cost + (Cost x desired mark up)
= 100 + (100 x 25% = 100 + 25 Cost-plus price = Rs. 125
For making clear the cost - plus price of any goods or services, easier method can also be applied. Suppose, an umbrella has cost Rs. 200/-, if the producer wants to sell it taking 25% profit, the price of the umbrella can be determined in the following method,
Cost-plus price = Unit cost + Profit margin = 200 + (25 x 2) = 200 + 50
Cost-plus price = Rs. 250

b) Target return pricing: Every investor invests his capital to get return. The income expected form such investment is called target result. According to target result pricing method, expected result is added to total cost and is divided by sales units. Break-even analysis can also be used for this. Such pricing policy is applied by market monopoly companies or the people’s utility organizations with mass production. Target result pricing method can be understood from the following example:
Suppose, a pocket calculator manufacturer has the following information. Determine the price of calculator on the basis of target return.
Pricing Method: Total investment = $900,000
Target return on investment = 20%
Total cost = $500,000
Unit Sales = $10,000
ROI = 20/100 x 900,000 = $180,000
Per unit price = Total Cost + Target ROI/Unit Sales
= 500,000 + 180,000/10,000
= 680,000/10,000
= $68 Price
= $68
The unit price would be set $68.

c. Break-even pricing: The situation when income and total costs become equal is called breakeven pricing. This is another important method used to determine price of products or services. In this analysis, relation between cost, quantity and profit is studied. In this breakeven situation, the firm neither earns profits nor suffers loss. If goods are produced in large quantity from breakeven point, the firm can earn more profit, but gets loss from breakeven point, the firm can earn more profit, but gets loss from the production if less quantity is produced from this point. For analyzing breakeven point, cost can be divided into two classes as (a) fixed and (b) variable. Variable cost changes with production.

If production quantity is increased, variable cost increases, and if decreased, it also decreases. Direct materials, wages and other expenses are variable costs. Fixed cost remains same even if production increases or decreases to certain limit. This means it does not increase or decrease with production quantity. Rent, interest, salary etc. are fixed costs. It is believed that while calculating breakeven point, total fixed cost and variable cost remain same per unit. To make the method of determining breakeven price clear, the following example is presented:
Suppose a manuafacturer had the following information about a pair of shoes:
Fixed costs = $32,000
Selling prie per unit = $22
Variable cost per unit = $12
Breakeven point = ?
Breakeven point can be calculated using the following formula:
Breakeven point (Units) = Fixed cost/Price - Variable cost = 32,000/22 - 12 = 3200 units
Breakeven point (Dollar) = Fixed cost/1 - Variable cost per unit/Selling Price per unit
= 32000/1 - 12/22 = 70,400
BEP ($) = 70,400
Break Even Chart
BEP = Break Even Point
In the above given figure, total revenue and total cost are crossed by each other. Breakeven point is located at the cross-point. At this point, the total income can recover total cost. So, at this point of production, firm can neither earn profit nor incur loss. If the firm produces more than breakeven point, it can earn profit, otherwise it incurs losses. If the sale price is increased, BEP (Breakeven point) and market demand also decrease. This method helps to recover production cost through selling at certain price. However, fixed cost does not remain always fixed and cost cannot be classified in fixed and variable. So, it does not become useful in practice.

2. Demand oriented pricing

Demand oriented pricing method is also called profitable pricing. This method gives emphasis only on customers’ value perception rather than to the cost of production or services and market fees. Under demand oriented pricing, the following methods can be included:

a) Perceived value pricing: This method has become very popular in determining consumer goods. According to this method, business firm collects information about consumers’ views, perception, experiences, feelings etc. Then price is determined by calculating average on the basis of such information. In this method of pricing, the cost of production is not taken as an important element/factor. The price determiner of the cost oriented products, at first determines production cost or services. But in this method, at first, customers’ perceptions are collected and average is made out from them.

b) Customer value pricing: According to the customer value pricing method, business company fixes very low price for high quality products. The company does so in order to occupy/control market share. Sometimes the market price becomes lower than cost price. This method of pricing is used by the companies having several product lines or products. Even such companies may apply this method only to some products but not to all products. They sell other products or services at premium prices. Their main purpose of doing so is to attract customers’ attention towards some products through customers’ pricing or value pricing. Such companies make a strategy to sell their other products in maximum quantity at premium price.

3. Competition Oriented Pricing

The method of determining prices of products or services giving priority to market competition is called competition oriented pricing. This method does not care demand and production cost. In this method, price may be fixed at going on rate, more or less than market price. Under market oriented or competition oriented pricing the following methods can be used:

a) Going rate pricing: If price of products or services is determined on the basis of market price, it is called going rate. In this method, price is determined on the basis of competitors’ price (equal to the price of the products of the competing companies). This method is mostly used in fully competitive market or in same products. Generally, this method is used in steel, paper, and fertilizer, agricultural and mineral products. Small companies fix price only after the big companies fix prices of their products. The companies which fix prices with this method may have their objective to face market competition.

b) Pricing below competition: The method of fixing prices lower than the competitors’ price is called pricing below competition. This method aims to attract price sensitive customers by sweeping market competitors aside. In this method, price of every product is fixed lower than the competitors’ price. This method of pricing may be very dangerous/risky, because the customers may think substitute products or service of lower quality for its lower price/rate. At such time, the related company may suffer losses.

c) Pricing above competition: According to this method, price of products or services are fixed higher than the prices fixed by competitors. Generally, such pricing method may be applied for quality products or reputed brands. This method of pricing may also be used to show to the customers that the product is of higher quality and more useful than those of competitors. This method also tries to popularize the products among customers by impressing them that the products have added quality, specialty and utility.

d) Sealed bid pricing: Sealed bid pricing is also based on competition. In this method, price is determined on the basis of estimates of the price the competitors may offer. So, in this method production cost is not considered. Price should be fixed lower than the price offered by the bidders to get success in sealed bid. If the price becomes higher than the competitors’ price, such sealed bid may be rejected. So, the price should be fixed lower in competition than the price of the competing bidders who have registered sealed bid. Only such type of sealed bid becomes acceptable.

Some offices call sealed bids as they need to perform their works following rules and regulations. If any government office has called for sealed bid, sealed bid should be submitted giving every detail of the goods and prices. For submitting sealed bid to any office price of products or services should be fixed. Therefore, according to this method, price should be estimated less than the price offered by competitors, but such estimate should be rational/ reasonable. In government and semi-government offices in our country, if any goods or services of more than prescribed amount are to be purchased, this method is compulsorily used.