Pricing Strategies and Distribution Channels in Marketing
Understanding Pricing in Marketing
Price is the amount of money a person needs to obtain a product or service. All products and services have associated costs, including those offered for free. In marketing, pricing focuses on the “how” and the consequences of this criterion.
Types of Prices
- Gross Price: The price before discounts are applied.
- Net Price: The price used when offering two or more products or services together.
- Discount Price: The price perceived by the consumer as indicating a lower-quality product or service.
- Retail Price: A fixed price that does not vary in the short or long term.
- List Price: The basic price listed in a catalog.
- Market Price: The actual price at any given time in the market.
- Authorized Price: A price that requires a permit from the relevant administration to be increased.
- Recommended Price: The price that the manufacturer suggests to dealers.
Pricing Theories
- Classical Economic Theory: Views a person as an economic subject and assumes that demand for an item is exclusively determined by its price.
- Psychological Theory: Based on Freud’s theories, this theory suggests that price is less important because individuals acquire products to meet a need.
- Intermediate Theory: An eclectic approach that combines the individual’s attention to price with the psychological theory’s input values.
- Theory of Reference Prices: Studies the individual’s reaction when the price changes while other variables remain unchanged. Ernst Zollinger, the father of this theory, observed that consumers perceive an estimated price as fair; if the price increases or decreases significantly, it affects the product’s sales.
Methods to Change the Monetary Value
- Varying the price.
- Adjusting the quantity of the product or service, offering more or less for the same amount of money.
- Offering better trading conditions, primarily discounts.
- Changing the quality of the product or service.
- Modifying the services offered with the product.
- Changing the payment terms.
Fixed and Variable Costs
Fixed Costs: Costs that are generated regardless of production volume, also called overhead costs, such as rent or depreciation of business premises.
Variable Costs: Costs that vary with the level of activity, such as labor, raw materials, or transportation.
The point where revenues and costs are equal is called the break-even point.
Pricing Strategies
- Cost-Based Tactics: Setting prices based on total production costs.
- Market Demand-Based Tactics: Primarily considering the consumer and the elasticity of demand.
- Competition-Based Tactics: Setting prices according to competitors’ prices.
Distribution Channels
Distribution channels are the paths a product takes from the producer to the consumer without undergoing any substantial transformation. Key players include manufacturers, brokers, and consumers.
Functions of Intermediaries
- Reduce the Number of Contacts: The distribution channel reduces the number of transactions needed to reach different points of sale.
- Group Supply: The intermediary can perform functions for a higher volume of activity than a single product.
- Match Supply and Demand: Intermediaries buy large quantities of products that are then sold to other dealers, retailers, or consumers.
- Create Assortment: They can gather related products to facilitate the customer’s purchase, providing the assortment needed in one establishment.
Trade Marketing
Trade marketing aims to increase turnover and profits for both the manufacturer and the distributor. It is based on the manufacturer’s willingness to understand and address the demands and objectives of dealers, meeting their needs and solving potential problems.
Phases of Trade Marketing
- Market Phase: Manufacturers and distributors act independently.
- Negotiation Phase: Agreements are adopted, although relations are not on an equal footing. Large distribution chains make key marketing decisions that manufacturers must follow.
- Cooperation or Integrated Phase: The manufacturer recognizes the importance and power of the distributor.