DQ6422mkt - Caspiano

Week 6, "Using Marketing Channels and Price to Create Value for Customers" was derived from Principles of Marketing, which was adapted by the Saylor Foundation under a Creative Commons Attribution- NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensee. © 2015, The Saylor Foundation.

Week 6

Using Marketing Channels and Price to Create Value for Customers

Sometimes when you buy a good or service, it passes straight from the producer to you. But suppose every time you purchased something, you had to contact its maker? For some products or services, such as a haircut, this would work. But what about the items you purchase at the grocery store? You couldn't begin to contact and buy from all the makers of those products. It would be an incredibly inefficient way to do business.

Fortunately, companies partner with one another, alleviating you of this burden. So, for example, instead of Procter & Gamble selling individual toothbrushes to consumers, it sells many of them to stores, which then sell them to everyone.

The specific avenue a seller uses to make a finished good or service available for purchase—for example, whether you are able to buy it directly from the seller, at a store, online, or from a salesperson—is referred to as the product's marketing channel (or distribution channel). All of the people and organizations that buy, resell, and promote the product "downstream" as it makes its way to you are part of the marketing channel.

Likewise, price creates value for customers and is the way the company makes its revenue and profit by exchanging value with the customer. When Chick-fil-A opens new locations, the company offers the first 100 customers a free meal every week for a year. Customers camp out overnight to get in line for the free meals. When KFC introduced its grilled chicken, the company put coupons good for a free piece of chicken in many Sunday newspapers.

So how do sellers make any money if they always offer goods and services on sale or for a special deal? Many sellers give customers something for free, hoping they'll buy other products, but a careful balance is needed to ensure profit.

Price is the only marketing mix variable or part of the offering that generates revenue. Buyers relate the price to value. They must feel they are getting value for the price paid. Pricing decisions

are extremely important. So how do organizations decide how to price their goods and services? This week, we explore both distribution and price as a means to add value for customers.

Intermediaries also create efficiencies by streamlining the number of transactions an organization must make, each of which takes time and costs money to conduct. As Figure 6.1, "Using Intermediaries to Streamline the Number of Transactions" shows, by selling the tractors it makes through local farm machinery dealers, manufacturer John Deere can streamline the number of transactions it makes from eight to just two.

Figure 6.1 Using Intermediaries to Streamline the Number of Transactions

The marketing environment is always changing, so what was a great channel or channel partner yesterday might not be a great channel partner today. Changes in technology, production techniques, and your customer's needs mean you have to continually reevaluate your marketing channels and channel partners. Moreover, when you create a new product, you can't assume the channels that were used in the past are the best ones (Lancaster & Withey, 2007). A different channel or channel partner might be better.

Consider Microsoft's digital encyclopedia, Encarta, which was first sold on CD and via online subscription in the early 1990s. Encarta nearly destroyed Encyclopedia Britannica, a firm that had dominated the print encyclopedia business for literally centuries. Ironically, Microsoft had actually tried to partner with Encyclopedia Britannica to use its encyclopedia information to make Encarta but was turned down.

But today, Encarta no longer exists. It's been put out of business by the free online encyclopedia Wikipedia. The point is that products and their marketing channels are constantly evolving. Consequently, you and your company have to be ready to evolve, too.

Types of Channel Partners

Let's now look at the basic types of channel partners. To help you understand the types of channel partners, we will go over the most common types of intermediaries. The two types you hear about most frequently are wholesalers and retailers. Keep in mind, however, that the categories we discuss in this section are just that—categories. The lines between wholesalers, retailers, and producers have begun to blur. Microsoft is a producer of goods, but it has opened its own retail stores to sell products to consumers, much as Apple has done (Lyons, 2009). Walmart and other large retailers now produce their own brands and sell them to other retailers. Similarly, many producers have outsourced their manufacturing, and although they still call themselves manufacturers, they act more like wholesalers. Wherever organizations see an opportunity, they are beginning to take it, regardless of their positions in marketing channels.

Wholesalers

Wholesalers obtain large quantities of products from producers, store them, and break them down into cases and other smaller units more convenient for retailers to buy, a process called "breaking bulk." Wholesalers get their name from the fact that they resell goods "whole" to other companies without transforming the goods. If you are trying to stock a small electronics store, you probably don't want to purchase a truckload of iPads. Instead, you probably want to buy a smaller assortment of iPads as well as other merchandise. Via wholesalers, you can get the assortment of products you want in the quantities you want. Some wholesalers carry a wide range of different products; others carry narrow ranges of products.

Most wholesalers "take title" to goods—or own them until purchased by other sellers. Wholesalers such as these assume a great deal of risk on the part of companies farther down the marketing channel. For example, if the iPad you plan to purchase is stolen during shipment, damaged, or becomes outdated because a new model has been released, the wholesaler suffers the loss—not you. Electronic products, in particular, become obsolete very quickly. Think about the cell phone you owned just a couple of years ago. Would you want it today?

Retailers

Retailers buy products from wholesalers, agents, or distributors and then sell them to consumers. Retailers vary by the types of products they sell, their sizes, the prices they charge, the

level of service they provide consumers, and the convenience or speed they offer. You are familiar with many of these types of retailers because you have purchased products from them.

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

Convenience stores are miniature supermarkets. Many of them sell gasoline and are open 24 hours. Often they are located on corners, making it easy and fast for consumers to get in and out. Some of these stores contain fast-food franchises such as Subway. Consumers pay for the convenience in the form of higher markups on products.

Specialty stores sell a certain type of product, but they usually carry a deep line of it. Zales, which sells jewelry, and Williams-Sonoma, which sells an array of kitchen and cooking-related products, are examples of specialty stores. The personnel who work in specialty stores are usually knowledgeable and often provide customers with a high level of service. Specialty stores vary by size. Many are small. However, giant specialty stores called category killers have emerged.

A category killer sells a high volume of a particular type of product and, in doing so, dominates the competition, or "category." Petco and PetSmart are category killers in the retail pet-products market. Best Buy is a category killer in the electronics-product market.

Department stores, by contrast, carry a variety of household and personal types of merchandise such as clothing and jewelry. Many are chain stores. The prices department stores charge range widely, as does the level of service shoppers receive. Neiman Marcus, Saks Fifth Avenue, and Nordstrom sell expensive products and offer extensive personal service. Department stores such as JCPenney, Sears, and Macy's charge midrange prices, and offer a midrange level of service. Walmart, Kmart, and Target are discount department stores with cheaper goods and a limited amount of service.

Superstores are oversized department stores that carry a broad array of general merchandise as well as groceries. Banks, hair and nail salons, and restaurants such as Starbucks are often located within these stores for the convenience of shoppers. You have probably shopped at a SuperTarget or a huge Walmart with offerings such as these.

You might be tempted to think middlemen, or intermediaries, are bad. If you can cut them out of the deal—a process marketing professionals call disintermediation—products can be sold more cheaply, can't they? Large retailers, including Target and Walmart, sometimes bypass middlemen. Instead, they buy their products directly from manufacturers and then store and distribute them to their own retail outlets. Walmart is increasingly doing so and even purchasing produce directly from farmers around the world (Birchall, 2010).

However, cutting out the middleman is not always desirable. A wholesaler with buying power and excellent warehousing capabilities might be able to purchase, store, and deliver a product to a seller more cheaply than its producer could alone. Likewise, hiring a distributor will cost a producer money. But if the distributor can help the producer sell greater quantities of a product, it can increase the producer's profits.

Moreover, when you cut out the middlemen, you have to perform the functions they once did. Those functions could include storing the product or dealing with hundreds of retailers. More than one producer has ditched its intermediaries only to rehire them later.

The trend today is toward disintermediation. The Internet has facilitated a certain amount of disintermediation by making it easier for consumers to contact one another without going through any middlemen. The Internet has also made it easier for buyers to shop for the lowest prices. Today, most people book trips online without going through travel agents. People also shop for homes online rather than using real estate agents. To remain in business, resellers need to find new ways to add value to products.

However, for some products, disintermediation via the Internet doesn't work so well. Insurance is an example. You can buy it online directly from companies, but many people want to buy through an agent they can talk to for advice. Most large insurance companies offer consumers both options, and each method of selling insurance products has a different pricing structure based on the level of service.

Sometimes it's simply impossible to cut out middlemen. Would the Coca-Cola Company want to take the time and trouble to personally sell you an individual can of Coke? No. Coke is no more capable of selling individual Cokes to people than Santa is capable of delivering toys to children around the globe.

Even Dell, which initially made its mark by selling computers straight to users, now sells its products through retailers such as Best Buy as well. Dell found that to compete effectively, its

products needed to be placed in stores alongside Hewlett-Packard, Acer, and other computer brands (Kraemer & Dedrick, 2002).

Multiple Channels and Alternate Channels

Marketing channels can get a lot more complex than the channels shown in Figure 6.2, "Typical Channels in Business-to-Consumer (B2C) Markets," though. Look at the channels in Figure 6.3, "Alternate Channel Arrangements." Notice how in some situations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers also sell straight to consumers, and, as we explained, sell straight to large retailers like Target.

Figure 6.3 Alternate Channel Arrangements

The point is that firms can and do use multiple channels. Take Levi's, for example. You can buy a pair of Levi's jeans from a retailer such as Kohl's, or you can buy a pair directly from Levi's at one of the outlet stores it owns around the country. You can also buy a pair from the Levi's website.

The key is understanding the different target markets for the product and designing the best channel to meet the needs of customers in each. Is there a group of buyers who would purchase your product if they could shop online from their homes? Perhaps there is a group of customers interested in your product, but they do not want to pay full price. The ideal way to reach these people might be with an outlet store and low prices. Each group then needs to be marketed to accordingly. Many people regularly interact with companies via numerous channels before making buying decisions.

6.3 Functions Performed by Channel Partners

convinces wholesalers, distributors, or retailers to sell its products. Consumers are informed via advertising and other promotions that the product is available for sale, but the main focus is to sell to intermediaries.

By contrast, a pull strategy focuses on creating demand for a product among consumers so that businesses agree to sell the product. A good example of an industry that uses both pull and push strategies is the pharmaceutical industry. Pharmaceutical companies promote their drugs to pharmacies and doctors, but they now also run ads designed to persuade individual consumers to ask their physicians about drugs that might benefit them.

In many cases, two or more organizations in a channel jointly promote a product to retailers, purchasing agents, and consumers and work out which organization is responsible for what type of communication to whom. The actual forms and styles of communication will be discussed more in the promotions and sales section of the book.

Sorting and Regrouping Products

As we explained, many businesses don't want to receive huge quantities of a product. One of the functions of wholesalers and distributors is to break down large quantities of products into smaller units and provide an assortment of different products.

Storing and Managing Inventory

If a channel member has run out of a product when a customer wants to buy it, the result is often a lost sale. That's why most channel members stock, or "carry," reserve inventory. However, storing products is not free. Warehouses cost money to build or rent and heat and cool; employees have to be paid to stock shelves, pick products, and ship them. Some companies, including Walmart, put their suppliers in charge of their inventory. The suppliers have access to Walmart's inventory levels and ship products when and where the retailer's stores need them.

Distributing Products

Physical goods that travel within a channel need to be moved from one member to another and sometimes back again. Some large wholesalers, distributors, and retailers own their own fleets of trucks for this purpose. In other cases, they hire third-party transportation providers—trucking companies, railroads—to move their products.

6.4 Marketing Channel Strategies

Channel Selection Factors

Selecting the best marketing channel is critical because it can mean the success or failure of your product. One of the reasons the Internet has been so successful as a marketing channel is because customers get to make some of the channel decisions themselves. They can shop virtually for any product in the world when and where they want to, as long as they can connect to the web. They can also choose how the product is shipped.

Type of Customer

The Internet isn't necessarily the best channel for every product, though. For example, do you want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or not overripe? Then online grocery shopping might not be for you. Clearly, how your customers want to buy products will have an impact on the channel you select. In fact, it should be your prime consideration.

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

Type of Product

The type of product you're selling will also affect your marketing channel choices. Perishable products often have to be sold through shorter marketing channels than products with longer shelf lives. For example, a yellowfin tuna bound for the sushi market will likely be flown overnight to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by "slow boat" and handled by more intermediaries. Valuable and fragile products also tend to have shorter marketing channels. Automakers generally sell their cars straight to car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell them straight to corporations, which demand they be customized to certain specifications.

Channel Partner Capabilities

Your ability vs. the ability of other types of organizations that operate in marketing channels can affect your channel choices. If you are a massage therapist, you are quite capable of delivering your product straight to your client. If you produce downloadable products like digital books or recordings, you can sell your products straight to customers on the Internet. Hypnotic World, a United Kingdom producer of self-hypnosis recordings, is a company such as this.

But suppose you've created a great personal gadget—something that's tangible, or physical. You've managed to sell it via two channels—say, on TV (via the Home Shopping Network, perhaps) and on the web. Now you want to get the product into retail stores like Target, Walgreens, and Bed Bath & Beyond. If you can get the product into these stores, you can increase your sales exponentially. In this case, you might want to contract with an intermediary—perhaps an agent or a distributor who will convince the corporate buyers of those stores to carry your product.

The Business Environment and Technology

The general business environment, such as the economy, can also affect the marketing channels chosen for products. For example, think about what happens when the value of the dollar declines relative to the currencies of other countries. When the dollar falls, products imported from other countries cost more to buy relative to products produced and sold in the United States. Products "made in China" become less attractive because they have gotten more expensive. As a result, some companies then look closer to home for their products and channel partners.

Technological changes affect marketing channels, too. We explained how the Internet has changed how products are bought and sold. Many companies like selling products on the Internet as much as consumers like buying them. An Internet sales channel gives companies more control over how their products are sold and at what prices than if they leave the job to another channel partner such as a retailer. Plus, a company selling on the Internet has a digital footprint, or record, of what shoppers look at, or click on. As a result, it can recommend products they appear to be interested in and target them with special offers and prices (Food Channel, 2008).

Some sites let customers tailor products to their liking. On the Domino's website, you can pick your pizza ingredients and then watch them as they fall onto your virtual pizza. The site then lets you know who is baking your pizza, how long it's taking to cook, and who's delivering it. Even though interaction is digital, it somehow feels a lot more personal than a basic phone order. Developing customer relationships is what today's marketing is about. The Internet is helping companies do this.

Competing Products' Marketing Channels

How your competitors sell their products can also affect your marketing channels. As we explained, Dell now sells computers to firms such as Best Buy so the computers can compete with other brands on store shelves.
You don't always have to choose the channels your competitors rely on, though. Netflix is an example. Netflix turned the video rental business on its head by coming up with a new marketing channel that better meets the needs of many consumers. Maybelline and L'Oréal products are sold primarily in retail stores. However, Mary Kay and Avon use salespeople to personally sell their products to consumers.

Factors That Affect a Product's Intensity of Distribution

Firms that choose an intensive distribution strategy try to sell their products in as many outlets as possible. Intensive distribution strategies are often used for convenience offerings— products customers purchase on the spot without much shopping around. Soft drinks and newspapers are an example. You see them sold in many different places. Redbox, which rents DVDs out of vending machines, has made headway using an intensive distribution strategy: the machines are located in fast-food restaurants, grocery stores, and other places people frequent.

Figure 6.4

Because installing a vending machine is less expensive than opening a retail outlet, Redbox has been able to locate its DVD vending machines in places where people go frequently.

No matter how "airtight" their contracts are, there will still be points of contention among channel members. Channel members are constantly asking their partners, "What have you done (or not done) for me lately?" Wholesalers and retailers frequently lament that the manufacturers they work with aren't doing more to promote their products—for example, distributing coupons for them or running TV ads—so they will move off store shelves more quickly.

Meanwhile, manufacturers want to know why wholesalers aren't selling their products faster and why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened its own retail stores around the country, in part because it didn't like how its products were being displayed and sold in other companies' stores.

Vertical vs. Horizontal Conflict

The conflicts we've described so far are examples of vertical conflict. A vertical conflict is conflict that occurs between two different types of members in a channel—say, a manufacturer, an agent, a wholesaler, or a retailer. By contrast, a horizontal conflict is conflict that occurs between organizations of the same type—say, two manufacturers that each want a powerful wholesaler to carry only its products.

Horizontal conflict can be healthy because it's competition-driven. But it can create problems, too. In 2005, Walmart experienced a horizontal conflict among its landline telephone suppliers. The suppliers were in the middle of a price war and cutting the prices to all the retail stores to which they sold. Walmart wasn't selling any additional phones due to the price cuts. It was just selling them for less and making less of a profit (Hitt, Black, & Porter, 2005).

Channel leaders such as Walmart usually have a great deal of say when it comes to how channel conflicts are handled, which is to say that they usually get what they want. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products; a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can't squeeze all the profits out of the other channel members and still hope to function well.

Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in it together. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect that of the others.

Figure 6.5

Boar's Head's in-store displays help its channel partners sell its products. Source: Photo by Scorpions and Centaurs. (2010). Flickr. Used under the terms

of the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic license.

Producing marketing and promotional materials their channel partners can use for sales purposes can also facilitate cooperation among companies. In-store displays, brochures, banners, photos for websites, and advertisements the partners can customize with their own logos and company information are examples.

Educating your channel members' sales representatives is an important part of facilitating cooperation, especially when you're launching a new product. The reps need to be provided with training and marketing materials in advance of the launch so their activities are coordinated with yours. Microsoft does a good job of training its partners. Before launching operating systems such as Windows XP and Vista, Microsoft provides thousands of its partners with sales and technical training (IrieAuctions.com, 2009).

In addition, companies run sales contests to encourage their channel partners' sales forces to sell what they have to offer. Offering your channel partners certain monetary incentives, such as discounts for selling your product, can help, too. We'll talk more about incentive programs
in Week 7, "Public Relations and Sales Promotions."

Finally, you don't want to risk breaking the law or engage in unfair business practices when dealing with your channel partners (IrieAuctions.com, 2009). Another issue channel partners sometimes encounter relates to resale price maintenance agreements. A resale price maintenance agreement is an agreement whereby a producer of a product restricts the price a retailer can charge for it.

The producers of upscale products often want retailers to sign resale price maintenance agreements because they don't want the retailers to deeply discount their products. Doing so would "cheapen" their brands, producers believe. Producers also contend that resale price maintenance agreements prevent price wars from breaking out among their retailers, which can lead to the deterioration of prices for all of a channel's members.

Channel Integration: Vertical and Horizontal Marketing Systems

Another way to foster cooperation in a channel is to establish a vertical marketing system. In
a vertical marketing system, channel members formally agree to closely cooperate with one another. (You have probably heard the saying, "If you can't beat 'em, join 'em.") A vertical marketing system can also be created by one channel member taking over the functions of another member.

Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a retailer of them. But the company's long-term strategy is to compete in every personal-care channel, including salons, where the men's business is underdeveloped. In 2009, P&G purchased The Art of Shaving, a seller of pricey men's shaving products in upscale shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK-II skin-care line (Neff, 2009).

Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to market a company's goods or services within a certain territory or location (Daszkowski, n.d.). McDonald's sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. And each of the owners of the stores signs a contract with McDonald's agreeing to do business in a certain way.

By contrast, in a conventional marketing system, the channel members have no affiliation with one another. All the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, an organization pursues it. But there is no expectation among the channel members that they have to work with one another in the future.

A horizontal marketing system is one in which two companies at the same channel level— say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell their products or to make the most of their marketing opportunities. The Internet phone service Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming to put Skype's service on Nokia's phones. Skype hoped it will reach a new market (mobile phone users) this way. And Nokia hoped to sell its phones to people who like to use Skype on their personal computers (PCs) (Gelles, 2009).

Channels vs. Supply Chains

In the past few decades, organizations have begun taking a more holistic look at their marketing channels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user. All these organizations are considered part of the offering's supply chain.

For instance, the supply chain includes producers of the raw materials that go into a product. If it's a food product, the supply chain extends back through the distributors all the way to the farmers who grew the ingredients and the companies from which the farmers purchased the seeds, fertilizer, or animals. A product's supply chain also includes transportation companies such as railroads that help physically move the product and companies that build websites for other companies. If a software maker hires a company in India to help it write a computer program, the Indian company is part of the partner's supply chain. These types of firms aren't considered channel partners because it's not their job to actively sell the products being produced. Nonetheless, they all contribute to a product's success or failure.

Firms are constantly monitoring their supply chains and tinkering with them so they are as efficient as possible. This process is called supply chain management. Supply chain management is challenging. Done well, it's practically an art. We'll talk more about supply chains and what companies can do to improve them to satisfy customers and gain a competitive edge.

As we explained earlier, your product's supply chain includes not only the downstream companies that actively sell the product but also all the other organizations that have an impact on it before, during, and after it's produced. Those companies include the providers of the raw materials your firm uses to produce it, the transportation company that physically moves it, and the firm that helped build the web pages to promote it. If you hired a programmer in India to help write code for a computer game, the programmer is also part of the product's supply chain. If you hired a company to process copies of the game returned by customers, that company is part of the supply

chain as well. Large organizations with many products can have thousands of supply chain partners. Service organizations also need supplies to operate, so they have supply chains, too.

Today, the term value chain is sometimes used interchangeably with the term supply chain. The idea behind the value chain is that your supply chain partners should do more for you than perform just basic functions; each partner should help you create more value for customers as the product travels along the chain—preferably more value than your competitors' supply chain partners can add to their products.

Zara, a trendy but inexpensive clothing chain in Europe, is a good example of a company that has managed to create value for its customers with smart supply chain design and execution. Originally, it took six months for Zara to design a garment and get it delivered to stores. To get the hottest fashions in the hands of customers sooner, Zara began working more closely with its supply chain partners and internal design teams. It also automated its inventory systems so it could quickly figure out what was selling and what was not. As a result, it's now able to deliver its customers the most cutting-edge fashion in just two weeks (Smith, 2008).

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager's job, in part because businesses keep becoming more specialized. Just like Ford's workers became more efficient by performing specialized tasks, so, too have companies.

Firms look at their supply chains and outside them to see which companies can add the most value to their products at the least cost. If a firm can find a company that can add more value than it can to a function, it will often outsource the task to that company. After all, why do something yourself if someone else can do it better or more cost effectively?

Other companies go a step further and outsource their entire order processing and shipping departments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of 3PLs. A 3PL is a one-stop shipping solution for a company that wants to focus on other aspects of its business. Firms that receive and ship products internationally often hire 3PLs so they don't have to deal with the headaches of transporting products abroad and completing import and export paperwork for them.

the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need staff members to work overtime. Closely related to demand forecasting are lead times. A product's lead time is the amount of time it takes for a customer to receive a good or service once it's been ordered. Lead times also have to be considered when a company is forecasting demand.

The promotions you run will also affect demand for your products. Consider what happened to KFC when it came out with its grilled chicken. As part of the promotion, KFC gave away coupons for free grilled chicken via Oprah.com. Just 24 hours after the coupons were uploaded to the website, KFC risked running out of chicken. Customers were turned away. Others were given "rain checks" (certificates) they could use to get free grilled chicken later (Weisenthal, 2009).

In addition to looking at the sales histories of their firms, supply chain managers also consult with marketing managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers' needs are and if those needs are changing. Firms also look to their supply chain partners to help with their demand planning.

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

Inventory Control

Demand forecasting is part of a company's overall inventory control activities.
Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment to meet your customers' needs. One of the goals of inventory management is to avoid stockouts. A stockout occurs when you run out of a product a customer wants. Customers will simply look elsewhere—a process the Internet has made easier than ever.

When the attack on the World Trade Center occurred, many Americans rushed to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not replenish them for several days, partly because its inventory tracking system only counted what was needed at the

end of the day. Walmart, on the other hand, took count of what was needed every five minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in so doing, completely locked up all their vendors' flags.

Just-in-Time Inventory Systems

To lower the amount of inventory and still maintain they stock they need to satisfy their customers, some organizations use just-in-time inventory systems in both good times and bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they contract with their suppliers to ship them inventory as they need it—and even sometimes manage their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an example of a company that uses a just-in-time inventory system that is vendor-managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in small warehouses near Dell's assembly plants worldwide and provide Dell with parts "just-in-time" for them to be assembled (Kumar & Craig, 2007).

Dell's inventory and production system allows customers to get their computers built exactly to their specifications, a production process that's called mass customization. This helps keep Dell's inventory levels low. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on hand, which can be configured or reconfigured should consumers' preferences change. Dell can more easily return the parts to its suppliers if at some point it redesigns its computers to better match what its customers want. And by keeping track of its customers and what they are ordering, Dell has a better idea of what they might order in the future and the types of inventory it should hold. Because mass customization lets buyers "have it their way," it also adds value to products, for which many customers are willing to pay.

Product Tracking

Some companies, including Walmart, are beginning to experiment with new technologies such as electronic product codes in an effort to better manage their inventories.

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

difference between "seemingly" identical products can help companies monitor their expiration dates if the products are recalled for quality or safety reasons. EPC technology can also be used to combat "fake" products, or knockoffs, in the marketplace.

Electronic product codes are stored on radio-frequency identification (RFID) tags. A radio- frequency identification (RFID) tag emits radio signals that can record and track a shipment as it comes in and out of a facility. If you have unlocked your car door remotely, microchipped your dog, or waved a tollway tag at a checkpoint, you have used RFID technology (EPCglobal, n.d.). Because each RFID tag can cost anywhere from 50 cents to $50 each, they are generally used to track larger shipments, such as cases and pallets of goods rather than individual items. See Figure 6.6, "How RFID Tagging Works," to get an idea.

Figure 6.6 How RFID Tagging Works

Some consumer groups worry that RFID tags and electronic product codes could be used to track their consumption patterns or for the wrong purposes. But keep in mind that like your car-door remote, the codes and tags are designed to work only within short ranges. (You know that if you try to unlock your car from a mile away using such a device, it won't work.)

A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers (Wikipedia, n.d.). A few years ago, companies were moving toward large, centralized warehouses to keep costs down. In 2005, Walmart opened a 4-million-square-foot distribution center in Texas. (Four million square feet is about the size of 18 football fields.)

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

How Warehouses and Distribution Centers Function

So how do you begin to find a product or pallet of products in a warehouse or distribution center the size of 18 football fields? To begin with, each type of product that is unique because of some characteristic—say, because of its manufacturer, size, color, or model—must be stored and accounted for separate from other items. To help distinguish it, its manufacturer gives it its own identification number, called a SKU (stock-keeping unit) (BusinessDictionary.com).

Warehouses and distribution centers are also becoming increasingly automated and wired. Some warehouses use robots to picks products from shelves. At other warehouses, employees use voice- enabled headsets to pick products. Via the headsets, the workers communicate with a computer that tells them where to go and what to grab off shelves. As a result, the employees are able to pick products more accurately than they could by looking at a sheet of paper.

It's pretty amazing when you think about how the thousands of products that come in and out of Amazon's distribution centers every day ultimately end up in the right customer's hands. After all, how many times have you had to look really hard to find something you put in your own closet or garage? Processing orders—order fulfillment—is a key part of the job in supply chains. Why? Because delivering what was promised, when it was promised, and the way it was promised drives customer satisfaction (Thirumalai & Sinha, 2005).

One of the ways companies are improving their order fulfillment and other supply chain processes is by getting rid of paper systems and snail mail. Instead of companies receiving paper orders and sending paper invoices to one another, they send and receive the documents via electronic data interchange (EDI). Electronic data interchange (EDI) is a special electronic format that

companies use to exchange business documents from computer to computer. It also makes for greater visibility among supply chain partners because they can all check the status of orders electronically rather than having to fax or e-mail documents.

Another new trend is cross-docking. Products that are cross-docked spend little or no time in warehouses. As Figure 6.7, "How Cross-Docking Works" shows, a product being cross-docked will be delivered via truck to a dock at a warehouse where it is unloaded and put on other trucks bound for retail outlets.

Figure 6.7 How Cross-Docking Works

Transportation

Not all goods and services need to be physically transported. When you get a massage, oil change, or a manicure, the services pass straight from the provider to you. Other products can be transported electronically via electronic networks, computers, phones, or fax machines. Downloads of songs, software, and books are an example. So are cable and satellite television and psychic hotline readings delivered over the phone.

Other products, of course, have to be physically shipped. Logistics refers to the physical flow of materials in the supply chain. You might be surprised by some of the physical distribution methods that companies use. To get through crowded, narrow streets in Tokyo, Seven-Eleven Japan delivers products to its retail stores via motorcycles. In some countries, Coca-Cola delivers syrup to its bottlers via camelback. More commonly, though, products that need to be transported physically to get to customers are moved via air, rail, truck, water, or pipeline.

Companies face different tradeoffs when choosing transportation methods. Which is most important? Speed? Cost? Frequency of delivery? The flexibility to respond to different market conditions? Again, it depends on your customers.

The Pricing Framework

Before pricing a product, an organization must determine its pricing objectives. In other words, what does the company want to accomplish with its pricing? Companies must also estimate demand for the product or service, determine the costs, and analyze all factors (e.g., competition, regulations, and economy) affecting price decisions. Then, to convey a consistent image, the organization should choose the most appropriate pricing strategy and determine policies and conditions regarding price adjustments. The basic steps in the pricing framework are shown in Figure 6.8, "The Pricing Framework."

Figure 6.8 The Pricing Framework

The Firm's Pricing Objectives

Different firms want to accomplish different things with their pricing strategies. For example, one firm may want to capture market share, another may be solely focused on maximizing its profits, and another may want to be perceived as having products with prestige. Some examples of different pricing objectives companies may set include profit-oriented objectives, sales-oriented objectives, and status quo objectives.

Earning a Targeted Return on Investment (ROI)

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

Maximizing Profits

Many companies set their prices to increase their revenues as much as possible relative to their costs. However, large revenues do not necessarily translate into higher profits. To maximize its profits, a company must also focus on cutting costs or implementing programs to encourage customer loyalty.

In weak economic markets, many companies manage to cut costs and increase their profits, even though their sales are lower. How do they do this? The Gap cut costs by doing a better job of controlling inventory. The retailer also reduced its real estate holdings to increase its profits when its sales were down during an economic recession. Other firms such as Dell cut jobs to increase profits. Meanwhile, Walmart tried to lower its prices so as to undercut its competitors' prices to attract more customers. After it discovered that wealthier consumers who didn't usually shop at Walmart before the 2009 recession were frequenting its stores, Walmart decided to upgrade some of its offerings, improve the checkout process, and improve the appearance of some of its stores to keep these high-end customers happy and enlarge its customer base. Other firms increased their prices or cut back on their marketing and advertising expenses.

A firm has to remember, however, that prices signal value. If consumers do not perceive that a product has a high degree of value, they probably will not pay a high price. Furthermore, cutting costs cannot be a long-term strategy if a company wants to maintain its image and position in the marketplace.

Maximizing Sales

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

Maximizing Market Share

Some organizations try to set their prices in a way that allows them to capture a larger share of the sales in their industries. Capturing more market share doesn't necessarily mean a firm will earn higher profits, though. Nonetheless, many companies believe capturing a maximum amount of market share is downright necessary for their survival. In other words, they believe if they remain a small competitor, they will fail. Firms in the cellular phone industry are an example. The race to be the biggest cell phone provider has hurt companies such as Motorola. In the last decade,

competitors, the economic conditions, and political regulations in other markets before they can compete successfully.

Next, we look at each of the factors and what they entail.

Customers

How will buyers respond? Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. In addition to gathering data on the size of markets, companies must try to determine how price- sensitive customers are. Will customers buy the product, given its price? Or will they believe the value is not equal to the cost and choose an alternative, or decide they can do without the product or service? Equally important is how much buyers are willing to pay for the offering. Figuring out how consumers will respond to prices involves judgment as well as research.

Price elasticity, or people's sensitivity to price changes, affects the demand for products. Think about a pair of sweatpants with an elastic waist. You can stretch an elastic waistband, but it's much more difficult to stretch the waistband of a pair of dress slacks. Elasticity refers to the amount of stretch or change. The waistband of sweatpants may stretch if you pull on it.

Similarly, the demand for a product may change if the price changes. Imagine the price of a 12- pack of sodas changing to $1.50 a pack. People are likely to buy a lot more soda at $1.50 per 12- pack than they are at $4.50 per 12-pack.

Conversely, the waistband on a pair of dress slacks remains the same (doesn't change) whether you pull on it or not. Likewise, demand for some products won't change even if the price changes. The formula for calculating the price elasticity of demand is as follows.

Price elasticity = percentage change in quantity demanded ÷ percentage change in price

Figure 6.9 The Relationship Between Price and Demand Elastic demand

Price goes down as demand goes up

Price goes up when demand goes up

When consumers are very sensitive to the price change of a product—that is, they buy more of it at low prices and less of it at high prices—the demand for it is price elastic. Durable goods such as TVs, stereos, and freezers are more price elastic than necessities. People are more likely to buy them when their prices drop and less likely to buy them when their prices rise. By contrast, when the demand for a product stays relatively the same and buyers are not sensitive to changes in its price, the demand is price inelastic. Demand for essential products such as many basic food and first-aid products is not as affected by price changes as demand for many nonessential goods.

The number of competing products and substitutes available affects the elasticity of demand. Price elasticity is also affected by whether a person considers a product a necessity or a luxury as well as the percentage of a person's budget allocated to different products and services. Some products, such as cigarettes, tend to be relatively price inelastic since most smokers keep purchasing them regardless of price increases and the fact that other people see cigarettes as unnecessary. Service providers, such as utility companies in markets in which they have a monopoly (only one provider), face more inelastic demand since no substitutes are available.

Competitors

How competitors price and sell their products will affect a firm's pricing decisions. If you wanted to buy a certain pair of shoes, but the price was 30 percent less at one store than another, what would you do? Because companies want to establish and maintain loyal customers, they will often match their competitors' prices. Some retailers, such as Home Depot, will give you an extra discount if you find the same product for less somewhere else. Similarly, if one company offers you free shipping, you might discover other companies will, too. With so many products sold online, consumers can compare the prices of many merchants before making a purchase decision.

Inelastic demand

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

The Economy and Government Laws and Regulations

The economy also has a tremendous effect on pricing decisions. In Week 1, we noted that factors in the economic environment include interest rates and unemployment levels. When the economy is weak and many people are unemployed, companies often lower their prices. In international markets, currency exchange rates also affect pricing decisions.

Pricing decisions are affected by federal and state regulations. Regulations are designed to protect consumers, promote competition, and encourage ethical and fair behavior by businesses. For example, the Robinson-Patman Act limits a seller's ability to charge different customers different prices for the same products. The intent is to protect small businesses from larger businesses that try to extract special discounts and deals for themselves to eliminate their competitors. However, cost differences, market conditions, and competitive pricing by other suppliers can justify price differences in some situations. In other words, the practice isn't illegal under all circumstances. You have probably noticed that restaurants offer senior citizens and children discounted menus. Movie theaters also charge different people different prices based on their ages and charge different amounts based on the time of day, with matinees usually less expensive than evening shows. These price differences are legal.

Price fixing, which occurs when firms get together and agree to charge the same prices, is illegal. Usually, price fixing involves setting high prices so consumers must pay a high price regardless of where they purchase a good or service. Video systems, LCD (liquid crystal display) manufacturers, auction houses, and airlines are examples of offerings in which price fixing existed. When a company is charged with price fixing, it is usually ordered to take some type of action to reach a settlement with buyers.

Price fixing has occurred over the years. Nintendo and its distributors in the European Union were charged with price fixing and increasing the prices of hardware and software. Sharp, LG, and Chungwa collaborated and fixed the prices of the LCDs used in computers, cell phones, and other electronics. Virgin Atlantic Airways and British Airways were also involved in price fixing for their flights. Sotheby's and Christie's, two large auction houses, used price fixing to set their commissions.

By requiring sellers to keep a minimum price level for similar products,
unfair trade laws protect smaller businesses. Unfair trade laws are state laws preventing large businesses from selling products below cost (as loss leaders) to attract customers to the store. When companies act in a predatory manner by setting low prices to drive competitors out of business, it is a predatory pricing strategy.

Similarly, bait-and-switch pricing is illegal in many states. Bait and switch, or bait advertising, occurs when a business tries to "bait," or lure customers with an incredibly low-priced product. Once customers take the bait, sales personnel attempt to sell them more expensive products. Sometimes the customers are told the cheaper product is no longer available.

Product Costs

The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be considered when a pricing decision is made. So do the costs related to promotion and distribution. For example, when a new offering is launched, its promotion costs can be very high because people need to be made aware that it exists. Thus, the offering's stage in the product life cycle can affect its price.

The point at which total costs equal total revenue is known as the breakeven point (BEP). For a company to be profitable, a company's revenue must be greater than its total costs. If total costs exceed total revenue, the company suffers a loss.

Total costs include both fixed costs and variable costs. Fixed costs, or overhead expenses, are costs that a company must pay regardless of its level of production or level of sales. A company's fixed costs include items such as rent, leasing fees for equipment, contracted advertising costs, and insurance. As a student, you may also incur fixed costs such as the rent you pay for an apartment. You must pay your rent whether you stay there for the weekend or

not. Variable costs are costs that change with a company's level of production and sales. Raw materials, labor, and commissions on units sold are examples of variable costs. You, too, have variable costs, such as the cost of gasoline for your car or your utility bills, which vary depending on how much you use.

Consider a small company that manufactures specialty DVDs and sells them through different retail stores. The manufacturer's selling price (MSP) is $15, which is what the retailers pay for the DVDs. The retailers then sell the DVDs to consumers for an additional charge. The manufacturer has the following charges:

Copyright and distribution charges for the titles

$150,000

Package and label designs for the DVDs

$10,000

Advertising and promotion costs

$40,000

Reproduction of DVDs

$5 per unit

Labels and packaging

$1 per unit

Royalties

$1 per unit

In order to determine the breakeven point, you must first calculate the fixed and variable costs. To make sure all costs are included, you may want to highlight the fixed costs in one color and the variable costs in another color. Then, using the formulas below, calculate how many units the manufacturer must sell to break even.

The formula for BEP is as follows:

BEP = total fixed costs (FC) ÷ contribution per unit (CU) contribution per unit = MSP – variable costs (VC)
BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to break even

To determine the breakeven point in dollars, you simply multiply the number of units to break even by the MSP. In this case, the BEP in dollars would be 25,000 units times $15, or $375,000.

6.9 KEY TAKEAWAY

In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. These factors include the offering's costs, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the stage of its product life cycle, and its promotion and distribution. In international markets, firms must look at environmental factors and customers' buying behavior in each market. For a company to be profitable, revenues must exceed total costs.

In many instances, it is the customer who is the ultimate determiner of the correct price. The customer may want a price that is based on his or her perception of the value of the benefits received from the offering, and therefore the company needs to find the price that represents that value. This is called value-based pricing. So long as that price exceeds the company’s costs and allows the company to make the appropriate return or profit, value-based pricing represents a good match between the customer’s needs and the company’s pricing objectives. It is important to note that a value-based price is not necessarily a low price. It may be that the value price greatly exceeds the company’s costs and allows it to make a high rate of return.

A company might consider good-value pricing, especially in times of economic uncertainty. Good-value pricing strategy offers a right combination of benefits at a fair price. When the economy is not strong, customers might be more willing to accept a lesser degree of quality in goods and services so long as the price is right. The fast food industry was quick to pick up on the needs of consumers after 2008 by offering dollar menus. Retailer outlet malls are also an outgrowth of the concept of good-value pricing. Good-value pricing is so popular with many consumers that some retailers have adopted everyday low price policies where their consumers can always expect their stores to have the lowest prices available on brand merchandise. Walmart is a prominent example of a retailer known for its everyday low price policy.

Another consumer-focused pricing strategy is value-added pricing, where a consumer pays a regular price for a product but receives something "extra" with the purchase. This is a commonly used strategy when dropping a price may have long-term consequences for the brand and its image, so the company delivers more value that the customer is not expecting. For example, it is common for high-end cosmetics companies to include samples of the company's other products with purchase, or high-end automobile dealerships to include free service with each car purchase. Value-added pricing can also create a competitive advantage.

Introductory Pricing Strategies

Think of products that have been introduced in the last decade and how products were priced when they entered the market. Remember when the iPhone was introduced, its price was almost $700. Since then, the price has dropped considerably even for new models. The same is true for DVD players, LCD televisions, digital cameras, and many high-tech products. As we mentioned in Week 5 as part of our discussion on offerings, a skimming price strategy is when a company sets a high initial price for a product. The idea is to go after consumers who are willing to pay a high price (top of the market) and buy products early. This way, a company recoups its investment in the product faster.

The easy way to remember a skimming approach is to think of the turkey gravy at Thanksgiving. When the gravy is chilled, the fat rises to the top and is often "skimmed" off before serving. Price skimming is a pricing approach designed to skim that top part of the gravy, or the top of the market. Over time, the price of the product goes down as competitors enter the market and more consumers are willing to purchase the offering.

In contrast to a skimming approach, a penetration pricing strategy is one in which a low initial price is set. Often, many competitive products are already in the market. The goal is to get as much of the market as possible to try the product. Penetration pricing is used on many new food products, health and beauty supplies, and paper products sold in grocery stores and mass merchandise stores such as Walmart, Target, and Kmart.

Other Pricing Approaches

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

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

Figure 6.10

Walmart uses a combination of odd-even pricing and everyday low pricing in this store in Gladstone, Missouri.

Source: Photo by Walmart. (2011). Flickr. Used under the terms of the Creative Commons Attribution 2.0 Generic license.

Prestige pricing occurs when a higher price is used to give an offering a high-quality image. Some stores have a quality image, and people perceive that perhaps the products from those stores are of higher quality. Many times, two different stores carry the same product, but one store prices it higher because of the store's perceived higher image. Neckties are often priced

using a strategy known as price lining, or price levels. In other words, there may be only a few price levels ($25, $50, and $75) for the ties, but a large assortment of them at each level. Movies and music often use price lining. You may see a lot of movies and CDs for $15.99, $9.99, and perhaps $4.99, but you won't see a lot of different price levels.

Remember when you were in elementary school and many students bought teachers little gifts before the holidays or on the last day of school. Typically, parents set an amount such as $5 or $10 for a teacher's gift. Knowing that people have certain maximum levels that they are willing to pay for gifts, some companies use demand backward pricing. They start with the price demanded by consumers (what they want to pay) and create offerings at that price. If you shop before the holidays, you might see a table of different products being sold for $5 (mugs, picture frames, ornaments) and another table of products being sold for $10 (mugs with chocolate, decorative trays). Similarly, people have certain prices they are willing to pay for wedding gifts—say, $25, $50, $75, or $100—so stores set up displays of gifts sold at these different price levels. IKEA also sets a price for a product—which is what the company believes consumers want to pay for it—and then, working backward from the price, designs the product.

Leader pricing involves pricing one or more items low to get people into a store. The products with low prices are often on the front page of store ads and "lead" the promotion. For example, prior to Thanksgiving, grocery stores advertise turkeys and cranberry sauce at very low prices. The goal is to get shoppers to buy many more items in addition to the low- priced items. Leader or low prices are legal; however, as you learned earlier, loss leaders, or items priced below cost in an effort to get people into stores, are illegal in many states.

Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids. Companies must submit their bids by a certain time. The bids are reviewed all at once, and the most desirable one is chosen. Sealed bids can occur on either the supplier or the buyer side. Via sealed bids, oil companies bid on land for potential drilling purposes, and the highest bidder is awarded the right to drill. Similarly, consumers sometimes bid on lots to build houses. The highest bidder gets the lot. On the supplier side, contractors often bid on different jobs and the lowest bidder is awarded the job. The government often makes purchases based on sealed bids. Projects funded by stimulus money were awarded based on sealed bids.

Bids are also being used online. Online auction sites such as eBay give customers the chance to bid and negotiate prices with sellers until an acceptable price is agreed upon. When a buyer lists what he or she wants to buy, sellers may submit bids. This process is known as
a forward auction. If the buyer not only lists what he or she wants to buy but also states how much he or she is willing to pay, a reverse auction occurs. The reverse auction is finished when at least one firm is willing to accept the buyer's price.

Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product or from whom. Going-rate pricing is often used on commodity products such as wheat, gold, or silver. People perceive the individual products in markets such as these to be largely the same. Consequently, there's a "going" price for the product that all sellers receive.

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

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

Pricing products consumers use together (such as blades and razors) with different profit margins is also part of product mix pricing. Recall from Week 5 that a product mix includes all the products a company offers. If you want to buy an automobile, the base price might seem reasonable, but the options such as floor mats might earn the seller a much higher profit. While consumers can buy floor mats at stores like Walmart for $30, many people pay almost $200 to get the floor mats that go with the car from the dealer.

Nearly everyone has a cell phone. Are you aware of how many minutes you spend talking or texting and what it costs if you go over the limits of your phone plan? Maybe not if your plan involves two-part pricing. Two-part pricing means there are two different charges customers pay. In the case of a cell phone, a customer might pay a charge for one service such as 1,000 minutes, and then pay a separate charge for each minute over 1,000. Get out your cell phone and look at how many minutes you have used. Many people are shocked at how many minutes they have used or the number of messages they have sent in the last month.

Have you ever seen an ad for a special item only to find out it is much more expensive than what you recalled seeing in the ad? A company might advertise a price such as $25*, but when you read the fine print, the price is really five payments of $25 for a total cost of $125. Payment pricing, or allowing customers to pay in installments, is a strategy that helps customers break their payments into smaller amounts, which can persuade customers to buy higher-priced products.

Promotional pricing is a short-term tactic designed to get people into a store or to purchase more of a product. Examples of promotional pricing include back-to-school sales, rebates, extended warranties, and going-out-of-business sales. Rebates are a great strategy for companies because consumers think they're getting a great deal. Many consumers forget to request the rebate. Extended warranties have become popular for all types of products, including automobiles, appliances, electronics, and even athletic shoes. If you buy a vacuum for $35, and it has a one-year warranty from the manufacturer, does it really make sense to spend an additional $15 to get another year's warranty? However, when it comes to automobiles, repairs can be expensive, so an extended warranty often pays for itself following one repair. Buyers must look at the costs and benefits and determine if the extended warranty provides value.

We have discussed price discrimination, or charging different customers different prices for the same product. In some situations, price discrimination is legal. As we explained, you have noticed that certain customer groups (students, children, and senior citizens) are sometimes offered discounts at restaurants and events. However, the discounts must be offered to all senior citizens or all children within a certain age range, not just a few. Price discrimination is used to get more people to use a product or service. Similarly, a company might lower its prices in order to get more customers to buy an offering when business is slow. Matinees are often cheaper than movies at night; bowling might be less expensive during nonleague times.

Price Adjustments

Organizations must also decide what their policies are when it comes to making
price adjustments, or changing the listed prices of their products. Some common price

adjustments include quantity discounts, which involves giving customers discounts for larger purchases. Discounts for paying cash for large purchases and seasonal discounts to get rid of inventory and holiday items are other examples of price adjustments. Other price adjustments might be related to FOB (free on board) origin, meaning the title changes at the origin and buyer pays the shipping; or FOB (free on board) destination, meaning that the seller pays the shipping.

Uniform-delivered pricing, also called postage-stamp pricing, means buyers pay the same shipping charges regardless of where they are located. If you mail a letter across town, the postage is the same as when you mail a letter to a different state. A manufacturer might give a retail store a trade allowance such as funds to advertise the product in local media, or a discount to restock the manufacturer's products. Reciprocal agreements are agreements in which merchants agree to promote each other to customers. Customers who patronize a particular retailer might get a discount card to use at a certain restaurant, and customers who go to a restaurant might get a discount card to use at a specific retailer.

Figure 6.11

In this promotion at a California shopping mall, participants received transit tokens.

Source: Southern California Rapid Transit District Metro Library and Archive. (1985). Used under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic license.

A bounce back is a promotion in which a seller gives customers discount cards or coupons after purchasing. Consumers can then use the cards and coupons on their next shopping visits. The idea is to get the customers to return to the store or online outlets later and purchase additional items. Some stores set minimum amounts that consumers have to spend to use the card.

Week 6 References Section 6.1

Austin, J. (2009, November 27). Pop-up stores offer long-term strategy. Fort Worth Star-Telegram, 1C–2C.

CBSNews.com. (2007, November 16). Developing a channel strategy. Retrieved April 13, 2012, from http://www.cbsnews.com/8301-505125_162-51168339/developing-a-channel- strategy/?tag=mncol;lst;1

Lancaster, G., & Withey, F. (2007). Marketing fundamentals (p. 173). Burlington, MA: Butterworth- Heinemann.

Littleson, R. (2007, February 6). Supply chain trends: What's in, what's out. Manufacturing.net. Retrieved April 13, 2012, from http://www.manufacturing.net/articles/2007/02/supply-chain-trends-whats-in- whats-out

Lyons, D. (2009, November 9). The lost decade. Newsweek, 27.

Section 6.2

Birchall, J. (2010, January 4). Walmart aims to cut supply chain cost. Financial Times, 4.

Fitzpatrick, M. (2005, October 1). The seven myths of channel integration. Chief Marketer. Retrieved December 12, 2009, from http://chiefmarketer.com/multi_channel/myths_integration_1001

Kraemer, K. L., & Dedrick, J. (2002). Dell computer: Organization of a global production network. Center for Research on Information Technology and Organizations, University of California, Irvine. Retrieved April 13, 2012, from http://escholarship.org/uc/item/89x7p4ws#page-2

Wilson, J., & Blas, J. (2009, June 17). Machines with Midas touch swap chocolate for gold bars. Financial Times. Retrieved December 12, 2009, from http://www.ft.com/cms/s/0/5232dc6c-5ad4-11de-8c14- 00144feabdc0.html?nclick_check=1

Section 6.3

Section 6.4

Frazier, G. L., Maltz, E., Antia, K. D., & Rindfleisch, A. (2009, July 1). Distributor sharing of strategic information with suppliers. Journal of Marketing, 73(4). Retrieved December 12, 2009, from http://www.atypon-link.com/AMA/doi/abs/10.1509/jmkg.73.4.31?cookieSet=1&journalCode=jmkg (

Burrows, P. (2008, February 12). Inside the iPhone gray market. BusinessWeek. Retrieved December 12, 2009, from http://www.businessweek.com/technology/content/feb2008/tc20080211_152894.htm

The Food Channel. (2008, May 21). Pizza Hut's online ordering called 'virtual waiter.' Retrieved December 12, 2009, from http://www.foodchannel.com/stories/421-pizza-hut-s-online-ordering-called-virtual- waiter

Section 6.5

Daszkowski, D. (n.d.). What is a franchise? About.com. Retrieved December 12, 2009, from http://franchises.about.com/od/franchisebasics/a/what-franchises.htm

Gelles, D. (2009, March 31). Skype expands mobile push. Financial Times, 20.
Hitt, M., Black, S., & Porter, L. (2009), Management, 2nd ed. (Chapter 5). Upper Saddle River, NJ: Prentice

Hall.

IrieAuctions.com. (2009). Ten mistakes to avoid with channel partners. Excerpted from J. Addison, Revenue rocket: New strategies for selling with partners. Retrieved December 12, 2009, from http://www.irieauctions.com/Alternate_Distribution_Channel.htm

Neff, J. (2009, June 8). P&G acquires the upscale Art of Shaving retail chain. Advertising Age, 80 (2118), 2. Smith, J. N. (2008). Fast fashion. World Trade, 21(12), 54.

Section 6.6

EPCglobal. (n.d.). FAQs. Retrieved from http://www.epcglobalinc.org/consumer_info/faq Kumar, S., & Craig, S. (2007). Dell, Inc.'s closed loop supply chain for computer assembly

plants. Information Knowledge Systems Management, 6(3), 197–214.
Weisenthal, J. (2009, May 6). Slammed KFC scrambling to source more chicken. The Business Insider.

Retrieved December 2, 2009, from http://www.businessinsider.com/kfc-2009-5

Section 6.7

BusinessDictionary.com. (n.d.). Stock-keeping unit (SKU). Retrieved December 2, 2009, from http://www.businessdictionary.com/definition/stock-keeping-unit-SKU.html

De Lollis, B. (2008, March 23). CEO profile: At Goya, it's all in la familia. USA Today. Retrieved February 18, 2015, from http://usatoday30.usatoday.com/money/companies/management/2008-03-23-bob- unanue-goya-foods_n.htm

Specter, S. P. (2009). Industry outlook: Mostly cloudy, with a few bright spots. Modern Materials Handling, 64(3), 22–26.

Thirumalai, S., & Sinha, K. K. (2005). Customer satisfaction with order fulfillment in retail supply chains: Implications of product type in electronic B2C Transactions. Journal of Operations Management, 23(3–4), 291–303.

Wikipedia. (n.d.). Distribution center. Retrieved April 13, 2012, from http://en.wikipedia.org/wiki/Distribution_center

Winnett, R. (2004, September 12). Soaring prices: Speculators hijack the oil market. TimesOnline. Retrieved December 2, 2009, from http://business.timesonline.co.uk/tol/business/article481363.ece(accessed December 2, 2009).