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IF View - Issue No. 06

PRICING IN THE
DISTRIBUTION
CHANNEL

Issue No 06

Marketing Channel Strategy Consultants
USA - EUROPE - AUSTRALIA - BRAZIL - HONG KONG
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Introduction

One of the primary challenges in marketing is to correctly price products and services for end users. This challenge is magnified for products that are sold through intermediaries. Legal constraints and the structure of most distribution channels do not allow suppliers to exercise control over pricing to end users. Pricing is determined by resellers. To ensure proper end user pricing, suppliers must first correctly structure pricing for distribution channel members.

Common Challenges in Channel Pricing

"Distributors wonít sell our products unless we give away large discounts which make the channel unprofitable for us".

"Our dealers compete against each other on price only. Our product is cheapened in the market place. We have no control over the resale price. After they sell the product, dealers donít support it".

"Some of our major accounts are now buying from our dealers, instead of buying directly from us. They can get a better price from dealers, but we end up supporting the product".

Strategic Elements in Channel Pricing

There are three concepts that form the framework for channel pricing.

1. Channel Power

Who has power in the channel? Is it the supplier or the reseller? Is the end user buying a brand or a product with features; or is the end user buying a complete solution that is offered by the reseller?

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2. Reseller Profitability

Resellers are most committed to those product lines that produce the most profit. The primary challenge for suppliers is to make their resellers more profitable than their competitors can make them. Reseller profitability is determined by sales volume, margin per unit sold and costs in running the business. Suppliers can increase reseller profitability by providing high unit margins, high volume products or business support services which reduce reseller costs.

3. Value Added Compensation

Resellers should be compensated (but not over compensated) for the services they provide to their customers on behalf of suppliers.

 

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Developing Channel Pricing Guidelines

  1. Establish a targeted end user price. The actual end user price will be a function of the number of channels that serve a particular market, the number of members within each channel and the pricing structure within channels.
  2. Channel pricing must be developed in conjunction with other financial considerations (credit, payment terms, stocking, returns policy, product warranty provision, territorial protection, co-operative funding programs, end user support, installation).
  3. Reseller margins should vary in proportion to the cost of functions performed by the reseller.
  4. Prices charged should be in line with prices charged for comparable rival brands. Variations are acceptable but must be justifiable to resellers and to end-users.
  5. It is acceptable for suppliers to have a different price structure for different product lines. The price structure should reflect the attractiveness of the product line.

Conclusion

To be successful, firms must correctly price and position their products in an increasingly competitive market. Pricing, as part of a sound channel strategy can be a key part of product positioning. Incorrect channel pricing can detract from company strategy and seriously damage a supplierís positioning in the market and within the chosen channels.

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