Channel flow and Retailing

The distribution mix

The success of any product depends on its distribution mix: the combination of distribution channels of the firm uses to get products to end-users. Intermediaries help to distribute a producer's goods: wholesalers sell products to other businesses, which resell them the final consumers. Retailers sell products directly to consumers.

Among the eight distribution channels, the first four are aimed at getting products to consumers, the fifth is for consumers or business customers, and the last three are aimed at getting products to business customers.
Channel 1 involves direct sales to consumers
Channel 2 includes a retailer
Channel 3 in involves both a retailer in a wholesaler
Channel 4 includes an agent or broker
Channel 5 includes only an aged between the producer and consumer
Channel 6, which is used extensively for e-commerce, involves a direct sale to an industrial user
Channel 7 entails selling to business users through wholesalers
Channel 8 includes retail superstores they get products from producers or wholesalers (or both) for reselling to business customers

Consumer Channel

Industrial channel

Retailing

U.S. retail operations fall under two classifications. 
Product line retailers featuring broad product lines include department stores in supermarkets. Small specialty stores are clearly defined market segments by offering full product lines in their rope product fields. Bargain retailers carry wide range is a products income in many forms, including discount houses, catalog showrooms, factory outlets, warehouse clubs (or wholesale clubs), and convenience stores.

Nonstore retailing includes direct response retailing, in which firms make direct contact with customers to inform them about products and take sales orders. Mail order (or catalog marketing) is a form of direct response retailing, as is telemarketing. Electronic retailing uses communications networks that allow sellers to connect to consumers computers. Internet retail shopping includes electronic storefronts where customers can examine the stores products, place orders, and make payments electronically. Customers can also visit cyber malls -- a collection of virtual storefronts representing a variety of product lines on the Internet.

Physical Distribution

Physical distribution refers to all the activities needed to move products from producers to consumers, so that products are available when and where customers want them at reasonable cost. Physical distribution activities include providing customer services, warehousing, and transportation of products. Warehouses provide storage for products and may be either public or private. Transportation operations physically move products from suppliers to customers. Trains, railroads, planes, water carriers (boats and barges), and pipelines are major transportation modes used in the distribution process.

Promotions

Although the ultimate goal of promotion is to increase sales, other roles include communicating information, positioning a product, adding value, and controlling sales volume. In deciding on the appropriate promotional mix -- the best combination of promotional tools (for example advertising, personal selling, public relations) -- marketers must consider the good or service being offered, characteristics of the target audience and the buyer's decision process, and of course the promotional mix budget.

Advertising media includes television, newspapers, direct mail, radio, magazines, outdoor advertising, and the Internet, as well as other channels such as Yellow Pages, movies, special events, and door-to-door selling. The combination of media that a company chooses is called its media mix.

Personal Selling

Personal selling tasks include order processing, creative selling (activities that helped persuade buyers), and missionary selling (activity that promoted firms and products). Point-of-purchase (POP) displays are intended to grab attention and help customers find products in stores. Purchasing incentives include samples (which let customers try products without having to buy them) and premiums (rewards for buying products). At trade shows, seller's rent booths to display products to customers who have an interest in buying. Contests are intended to increase sales by stimulating buyers interest in a product.

Importance Terms

intermediary -- individual or firm that helps to distribute a product
wholesaler -- intermediary who sells products to other businesses for resale to final consumers
retailer -- intermediary who sells products directly to consumers
distribution channel -- network of interdependent companies to which a product passes from producer to end-user
direct channel -- distribution channel in which a product travels from producer to consumer without intermediaries
sales agent/broker -- independent intermediary who usually represents many manufacturers and sells to wholesalers or retailers
industrial (business) distribution -- network of channel members involved in the flow of manufactured goods to industrial customers
merchant wholesaler -- independent wholesaler who takes legal possession of goods produced by a variety of manufacturers and then resells them to other businesses
e-intermediary -- Internet distribution channel member that assists in moving products through to customers or that collects information about various sellers to be presented in convenient format for Internet customers
department store -- large product line retailer characterized by organization into specialized departments
supermarket -- large product line retailer offering a variety of food and food related items in specialized departments
specialty store -- small retail store carrying one product line or category of related products
bargain retailer -- retailer carrying a wide range of products at bargain prices
discount house -- bargain retailer that generates large sales volume by offering goods at substantial price reductions
catalog showroom -- bargain retailer in which customers place orders for catalog items to be picked up on premises where houses
factory outlet -- bargain retailer added by the manufacturer whose products bid to sells
warehouse club (or wholesale club) -- bargain retailer offering large discounts on brand-name merchandise to customers who have paid annual membership fees
convenience store -- retail store offering easy accessibility, extended hours, and fast service
direct response retailing -- nonstore retailing by direct interaction with customers to inform them of products and to receive sales orders
mail order (or catalog marketing) -- form of nonstore retailing in which customers place orders for catalog merchandise received to the mail
telemarketing -- nonstore retailing in which the telephone is used to sell directly to consumers
electronic retailing -- nonstore retailing in which information about the sellers products and services is connected to consumers computers, allowing consumers to receive the information and purchased the products in the home
e-catalog -- nonstore retailing in which the Internet is used to display products
electronic storefront -- commercial web site in which customers gather information about products, buying opportunities, placing orders, and paying for purchases
cybermall -- collection of virtual storefronts (business web sites) representing a variety of products and product lines on the Internet
interactive marketing -- nonstore retailing that uses a Web site to provide real-time sales and customer service
video marketing -- nonstore retailing to consumers via standard and cable television
physical distribution -- activities needed to move the product efficiently from manufacturer to consumer
warehousing -- physical distribution operation concerned with the storage of goods
private warehouse -- warehouse owned by and providing storage for single company
public warehouse -- independently owned and operated warehouse stores goods for many firms
order fulfillment -- all activities involved in completing a sales transaction, beginning with making the sale and ending with on-time delivery to the customer
promotion -- aspect of the marketing mix concerned with the most effective techniques for selling a product
positioning -- process of establishing identifiable product image in the minds of consumers
promotional mix -- combination of tools used to promote products
advertising -- promotional tool consisting of paid, not personal communications used by an identified sponsored to inform an audience about a product
advertising media -- variety of communication devices for carrying a seller's message to potential customers
direct-mail -- advertising medium in which messages are mailed directly to consumers homes or places of business
media mix -- combination of advertising media chosen to carry message about a product
personal selling -- promotional tool in which a salesperson communicates one-on-one with potential customers
order processing -- personal selling task in which salespeople receive orders and see to their handling and delivery
creative selling -- personal selling task in which salespeople tried to persuade buyers to purchase products by providing information about their benefits
missionary selling -- personal selling tasks and which salespeople promote their firms and products rather than try to close sales
sales promotion -- short-term promotional activity designed to stimulate consumer buying or cooperation from distributors and sales agents
coupon -- sales promotion technique and what a certificate is issued entitling the buyer to reduced price
point-of-purchase (POP) display -- sales promotion technique in which product displays are located in certain areas to stimulate purchase
premium -- sales promotion technique and which offers are free or reduced price items are used to stimulate purchases
trade show -- sales promotion technique in which various members of an industry gather to display, demonstrate, and sell products
publicity -- promotional tool in which information about a company or product is transmitted by general mass media
public relations -- company influenced publicity directed at building goodwill with the public or dealing with unfavorable events

Advertising and Sales Promotion

Advertising is only one element of the promotion mix, but it often considered prominent in the overall marketing mix design. Its high visibility and pervasiveness made it as an important social and encomia topic in Indian society. Promotion may be defined as “the co-ordination of all seller initiated efforts to set up channels of information and persuasion to facilitate the scale of a good or service. Promotion is most often intended to be a supporting component in a marketing mix. Promotion decision must be integrated and co-ordinated with the rest of the marketing mix, particularly product/brand decisions, so that it may effectively support an entire marketing mix strategy. The promotion mix consists of four basic elements. They are:-

1. Advertising

2. Personal Selling

3. Sales Promotion, and

4. Publicit

1. Advertising is the dissemination of information by non-personal means through paid media where the source is the sponsoring organization.
2. Personal selling is the dissemination of information by non-personal methods, like face-to-face, contacts between audience and employees of the  sponsoring organization. The source of information is the sponsoring organization. 
3. Sales promotion is the dissemination of information through a wide variety  of activities other than personal selling, advertising and publicity which       stimulate consumer purchasing and dealer effectiveness. 
4. Publicity is the disseminating of information by personal or non-personal  means and is not directly paid by the organization and the organization is   not the source.

 DEFINITION OF ADVERTISISNG

  The American Marketing Association,  Chicago, has defined advertising as “any form of non-personal presentation or promotion of ideas, goods or services, by an dentified sponsor.”

 FROM THE ABOVE DEFINITIONS:

·         Advertisement is a MESSAGE to large groups.

·         It is in the form of NON_PERSONAL COMMUNICATION.

·         It persuade the GENERAL PUBLICS to purchase  the goods or services, advertised.

·         It is PAID FOR by advertiser to publisher.

·         Advertising messages are IDENTIFIED with the advertiser.

  Advertising includes the following forms of messages:

       The messages carried in-

·         Newspapers and magazines;

·         On radio and television broadcasts;

·         Circular of all kinds, (whether distributed by mail, by person, thorough tradesmen, or by inserts in packages);

·         Dealer help materials,

·         Window display and counter – display materials and efforts;

·         Store signs, motion pictures used for advertising,

·         Novelties bearing advertising messages and Signature of the advertiser.

Advertising Objectives

 Each advertisement is a specific communication that must be effective, not just for one customer, but for many target buyers. This means that specific objectives should be set for each particular advertisement campaign. Advertising is a form of promotion and like a promotion; the objectives of advertising should be specific. This requires that the target consumers should be specifically identified and that the effect which advertising is intended to have upon the consumer should be clearly indicated. The objectives of advertising were traditionally stated in terms of direct sales. Now, it is to view advertising as having communication objectives that seek to inform persuade and remind potential customers of the worth of the product. Advertising seeks to condition the consumer so that he/she may have a favorable reaction to the promotional message. Advertising objectives serve as guidelines for the planning and implementation of the entire advertising programme.

Advantages  of  advertising

·         Advertising is considered multi dimensional.

·         It helps number of marketing activities.

·         It is a technique of sales promotion.

·         Sales volume is increased by advertising.

·         It helps and supports the salesman in selling the products.

·         Consumer knowledge about the product is increase by advertising.

·         It helps the consumer to save their time in purchases.

·         It helps the manufacturer sell their products.

·         It helps quick selling is possible which leads to more production at less cast.

·         The relation between wholesalers and retailers is improved through advertising.

·         Advertising introduces new products, stimulates markets regarding the existing    Product and repeated sales

BENEFITS TO MANUFACTURERS:

 1It increase sales volume. On the one hand, it reduces the cost of production and,on the      other increases profits.

1.     It helps easy introduction of products into the markets.

2.     It helps to create an image and reputation not only of the product  but also of the advertiser.

3.     Retail price maintance is possible.

4.     It helps to establish a direct contact between manufacturers and consumers.

                       

BENEFITS TO WHOLESALERS RETAILERS :

1.     Easy sale of the products is possible since consumers are aware of rhe product

and its quality.

1.     It increases the rate of the turnover of stock.

2.     It supplements the selling activities.

3.     The reputation credited is shared by the wholesalers and retailers and alike.

4.     It enables them to have product information.

BENEFITS TO CONSUMERS

1.     Advertising stresses quality and very often prices. This forms an indirect guarantee to     the consumers. Further more, large scale production assured by advertising enables the seller to sell the product at a lower cast.

2.     It provides an opportunity to the customers to compare the merits and demerits of various substitute products.

3.     This is perhaps the only medium through which consumers could know the varied and new uses of a product.

4.     Modern advertisements are highly informative.

BENEFITS TO SALESMEN

1.     Introducing the product is made easy.

2.     Advertising prepares necessary ground for a salesman to begin his work. Hence sales efforts are reduced.

3.     The contact established with the customer by a salesman is made permanent through advertising.

4.     The salesman can weigh the effectiveness of advertising when he makes a direct contact with the customer.

BENEFITS TO COMMUNITY

1.     Advertising in general is educative in nature. In the words of the late president Roosevelt of the USA, ‘Advertising brings to the greatest number of people actual knowledge concerning useful things; it is essentially a form of education and the progress of civilization depends on education’.

2.     Advertising leads to large scale production creating more employment opportunities.

3.     Advertising has made more popular and universal the uses of such inventions as the auto mobiles, radios, various household appliances. “Advertising nourishes the consuming power of man. Its creates wants for a better standing of living.. It spurs individual exertion and greater production”.

CONCEPT OF SALES PROMOTION

 Sales promotion consists of diverse collection of incentive tools, mostly short-term designed to stimulate quicker and / or greater purchase of a particular product by consumers or the trade.. Sales promotion includes tools for consumer promotion (for example samples, coupons, prizes, cash refund, warranties, demonstrations, contest); trade promotion (for example buying allowances, free goods, merchandise allowances, co-operative advertising, advertising and display allowances, dealer sales contests); and sales-force promotion (for example bonuses, contests, sales rallies).Sales promotion efforts are directed at final consumers and designed to motivate, persuade and remind them of the goods and receives that are offered. Sales persons adopt several techniques for sales promotion.

Definitions of Sales Promotion

 W.J. Stanton defines sales promotion as all those activities other than advertising, personal selling, public relations and publicity that are intended to stimulate customer demand and improve the marketing performance of sellers.

 Purpose of sales Promotion

 Sales promotion tools vary in their specific objectives. A free sample stimulates consumer trial, while a free management advisory service comments along-term relationship with a retailer. From the marketer’s perspective, sales promotion serves three essential rolesit informs, persuades and reminds prospective and current customers and otherselected audiences about a company and its products.  Because distribution channels are often long, a product may pass through many lands between a producer and consumers. Therefore, a producer must inform middlemen as well as the ultimate consumers or business users about the product. Wholesalers, in turn must inform retailers and retailers must inform consumers. As the number of potential customers grows and the geographic dimensions of a market expand, the problems and costs of informing the market increase.

Objectives of Sales Promotion

 The basic objectives of sales promotion are:

 i) To introduce new products

 To induce buyers to purchase a new product, free samples may be distributed or money and merchandise allowance may be offered to business to stock and sell the product.

 ii) To attract new customers

 New customers may be attracted through issue of free samples, premiums, contests and similar devices.

iii) To induce present customers to buy more

Present customers may be induced to buy more by knowing more about a product, its ingredients and uses.

iv) To help firm remain competitive

 Sales promotions may be undertaken to meet competition from a firm.

 v) To increase sales in off season

 Buyers may be encouraged to use the product in off seasons by showing them the variety of uses of the product.

 vi) To increase the inventories of business buyers

 Retailers may be induced to keep in stock more units of a product so that more sales can be effected.

RATIONALE OF SALES PROMOTION

 Rationale of sales promotion may be analyzed under the following points.

 ??Short-term results

 Sales promotion such as coupons and trade allowances produce quicker, more measurable sales results. However critics of this strategy argue that these immediate benefits come at the expense of building brand equity. They believe that an over emphasize on sales promotion may under mine a brand’s future.

 ??Competitive Pressure

 If competitors offer buyers price reductions, contest or other incentives, a firm may feel forced to retaliate with its own sales promotions.

 ??Buyers’ expectations

 Once they are offered purchase incentives, consumers and channel members get used to them and soon begin expecting them.

 ??Low quality of retail selling

 Many retailers use inadequately trained sales clerks or have switched to self service. For these outlets, sales promotion devices such as product displays and samples often are the only effective promotional tools available at the point of purchase.

 SALES PROMOTION PLAN PREPARATION

There is wide acceptance that sales promotion is one of the most mismanaged of all marketing functions. This can be attributed to the confusion as to what sales promotion really is - which often results in expenditures not being properly accounted for. Some companies record it as advertising expenditure, others as sales force expenditure and others as general marketing expenditure - while the loss of revenue from special price reductions is not recorded at all.

The companies can no longer afford not to set objectives or to evaluate results after the event, or to fail to have some company guidelines. For example, a 1 Euro case allowance on a product with a contribution rate of 3 Euro per case has to increase sales by 50% just to maintain the same level of contribution.

In order to manage a company's sales promotion expenditure more effectively, there is one essential step that must be taken. First, an objective for sales promotion must be established in the same way that an objective is developed for advertising, pricing, or distribution.

 Advertising, Promotion And The Brand

 By now it is clearly understood that The role of Advertising and promotion In fast moving consumer Good Markets. Advertising has been seen as one of the primary tools of Brand Building. The high cost and difficulties of mass advertising are seen as one of the major challenges to fast moving consumer good brands.

Post and Pre changes of Pricing Decisions

Price can be defined as the sum of the values that customers exchange for the benefits of having or using the product or service. It is the only marketing mix item that produces revenue; all other elements represent costs. Even so, many companies are not good at handling pricing. Pricing decisions are subject to an incredibly complex array of environmental and competitive forces.

Factors that affect pricing decisions

External factors that influence pricing decisions include the nature of the market and demand; competitors costs, prices, and offers; such as the economy, reseller needs, and government actions. The sellers pricing freedom varies with different types of markets. Ultimately, the consumer desides whether the company has set the right price. The consumer weighs the price against the perceived values of using the product -- if the price exceeds the sum of the values, consumers will not buy. Therefore, demand and consumer value perceptions set the ceiling for prices. Consumers also compare a product price to the prices of competitors product. As a result, a company must learn the price and quality of competitors offers.

Many internal factors influence the companies pricing decisions, including the firm's marketing objectives, marketing mix strategy, costs, an organization for pricing. Common pricing objectives include survival, current profit maximization, marketshare leadership, and product quality leadership. The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions and must be carefully coordinated with these other marketing mix variables. Costs set the floor for the companies price -- the price must cover all of the costs of marketing and selling the product, plus a fair rate of return. Finally, in order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.

Initiating and responding to price changes

When a firm considers initiating a price change, it must consider customers and competitors reactions. There are different implications in initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. And competitors reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider when responding to a competitors price changes. The company that faces a price change initiated by a competitor must try to understand the competitors intend as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by the competitors. When facing a competitors price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.

Companies are not usually free to charge whatever prices they wish. Many federal, state, and even local laws governing the rules of fair play in pricing. The major public policy issues in pricing include potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing).

Objectives of Pricing and Stratagies

Pricing Objectives:

You can't just say "we want a low price to sell a lot" - if your price is too low you will not cover your costs and you will go out of business. There are several different "Objectives" a company may orient themselves towards in order to obtain a profitable business situation.

Profit Oriented: Target Return - sometimes the vendor specifies a specific dollar amount or percentage amount that the price will be offered at in order to make a profit which has been calculated for a specific purpose. Usually this amount is part of a larger plan involving several product units in a product line

Profit Oriented: Maximize Profits - if the Competitive Market is not intense you may charge the highest price the market will bear because sometimes you may have an advantage for reasons based on  your geographic advantage
special features not available on other competitors' products very famous brand. etc.. 

Sales / Marketing Oriented: Increase Sales Volume 

Sales / Marketing Oriented: Increase Market Share 

Status Quo Goals: Just Meet the Competition - if the customer has many choices, and you barely have the resources to stay in the market, then just charge the same price. You don't have the resouces to survive a price war, and you don't have the ability to claim better quality to charge a higher price

Prof. Allen says
"Volume objectives include sales maximization and market-share goals, which are specified as a percentage of certain markets. In sales maximization, management sets an acceptable level of profitability and then tries to maximize sales.  This objective can lead to discounting or some other aggressive pricing strategy, such as rebates and sales. " 

 

Pricing Strategies.

There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations. See also eMarketing Price.

Competition-based pricing

Setting the price based upon prices of the similar competitor products.

Competitive pricing is based on three types of competitive product:

§  Products have lasting distinctiveness from competitor's product. Here we can assume

§  The product has low price elasticity.

§  The product has low cross elasticity.

§  The demand of the product will rise.

§  Products have perishable distinctiveness from competitor's product, assuming the product features are medium distinctiveness.

§  Products have little distinctiveness from competitor's product. assuming that:

§  The product has high price elasticity.

§  The product has some cross elasticity.

§  No expectation that demand of the product will rise.

Cost-plus pricing

Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.

This appears in 2 forms, Full cost pricing which takes into consideration both variable and fixed costs and adds a % markup. The other is Direct cost pricing which is variable costs plus a % markup, the latter is only used in periods of high competition as this method usually leads to a loss in the long run.

Limited Pricing

A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as strategic behavior is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time.

Loss leader

Basic Concept In the majority of cases, this pricing strategy is illegal under EU and US Competition rules. No market leader would wish to sell below cost unless this is part of its overall strategy. The idea of selling at a loss may appear to be in the public interest and therefore not often challenged. Only when the leader pushes up prices, it then becomes suspicious. Loss leadership can be similar to predatory pricing or cross subsidization; both seen as anti-competitive practices.

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Dynamic pricing

A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.

Target pricing

Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.

Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.

Marginal Cost Pricing

In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.