Price and Distribution Products
Goals:
Key Terms:
Value and Price – When you decide to purchase a product, how do you determine what to pay? Do you always pay the price that is marked on the product by the seller? Do you compare prices of several businesses to find the lowest price? Do you consider how much money you have available to spend in determining what price to pay? Are you concerned with whether the seller is making a profit and whether that profit is high or low? Determining the best price for a product is a difficult marketing challenge.
Pricing Factors – Many factors go into a decision about a fair price. What you might consider an appropriate price may be different from the decision of other customers. There are both general
and specific factors that influence the price paid for a product.
Supply and Demand – A product that has a ready supply will have a lower price than a product with a very limited supply. If demand for a product is high, prices will increase. Products with low levels of demand will have comparatively low prices.
Uniqueness – When a product has few close competitors because it is unique, the price will be higher than products that are very similar to others.
Age – When products are first introduced to the market, prices will be quite high. As products age, the price gradually decreases.
Season – Many products are used at a particular time of the year. Winter clothes, air conditioners, heaters, and holiday decorations have high levels of sales for a short time and then almost no sales for the rest of the year.
Complexity – Highly complex and technical products have higher prices than simple products. Products with many features and options will also command higher prices.
Convenience – People pay for convenience. If a product is easily available and the seller provides a high level of customer service, prices will go up. Customers expect to pay less if they shop at a large warehouse store that is not conveniently located and offers little service.
Price a Product – Price is the money a customer must pay for a product or service. The price of a product changes as it moves from producer to consumer. The price is set by the business following a formula that identifies the components of the price:
Selling Price = Product Costs + Operating Expenses + Profit
Selling Price – the price paid by the consumer for the product.
Product Costs – the costs to the manufacturer of producing the product or the price paid by other businesses to buy the product.
Operating Expenses – all expenses of operating the business that are associated with the product. This can include salaries, storage, and display equipment, facilities, utilities, taxes, and many others.
Profit – the amount of money available to the business after all costs and expenses have been paid.
Gross Margin – the difference between the selling price and the product costs. The amount of money on hand to pay for operating expenses and provide a profit.
Markup – the amount added to the cost of a product to set the selling price. A markup is stated as a percentage of the product’s cost or as a percentage of the product’s selling price. If a product costs $15 and has a 100% markup on cost, the selling price is $30.
Markdown – a reduction from the original selling price. Businesses are not always able to sell products at the original price they set. If customer demand is not as high as projected, if the selling season is ending, or if there is a flaw in the product the business may have to take a markdown.
A markdown should be thought of as a pricing mistake because it reduces the amount of money the business has to cover operating expenses and profits. Small markdowns result in most of the remaining products being sold while still making a profit. The leftover products may need to be sold at large markdowns that still provide some money to cover the product costs and expenses.
Channels of Distribution – Do you own any products that were produced in China, India or New Zealand? What was the process of getting that product from that country to your city? It was probably a very difficult and time consuming ordeal. Have you ever shopped at a Farmer’s Market? There, local producers sell their fruit, vegetables and other homegrown products. In each case the products have to be produced (harvested) and brought to market. Each situation describes a distribution process.
Distribution involves determining the best methods and procedures to use so customers can find, obtain, and use a product or service. Distribution is the locations and methods used to make a product or service available to the target market. The route a product follows and the businesses involved in moving a product from the producer to the final consumer is known as a channel of distribution.
Need for Distribution Channels – In complex economies, exchanges are much more difficult due to several differences that exist between producers and consumers.
Differences in Quantity – Businesses produce or sell large amounts of each product to many customers. Each consumer needs only a very small number of products at a given time.
Differences in Assortment – Businesses typically specialize in producing a specific type of product while consumers want to purchase a variety of products.
Differences in Location – In today’s economy, thousands of miles often separate producers and consumers. Businesses need to distribute their products to customers in many countries.
Differences in Timing – Businesses gain efficiency by producing large amounts of a product at one time. Some agricultural products can only be produced at a specific time of the year. Consumers may want to buy products at a different time than when they are produced.
Distribution channels develop to make adjustments in these differences. The distribution channel takes the large quantities produced and breaks them into quantities customers want to buy. The channel gathers products from many producers to offer customers the array of products they need in convenient locations. They move products from where they are produced to where they can be sold. Distribution channels store products from the time they are produced until customers want to buy them.
Channels and Channel Members – The businesses that take part in the channel of distribution are known as channel members. All marketing functions and activities are performed by a channel member or by the consumer.
Channels are either direct or indirect. In a direct channel of distribution, products move from the producer straight to the consumer with no other organizations participating. An indirect channel of distribution includes one or more other business between the product and the consumer. These other businesses provide one or more of the marketing functions.
In indirect distribution channels for products that are sold to business customers, typical channel members are specialists providing one of the marketing functions. The channel member may be a transportation company, a sales organization, or a financial organization. They obtain products from a number of small manufacturers and market them to many business customers.
Retailers are a well-known and important part of distribution channels for consumer products. Retailers are the final business organization in an indirect channel of distribution for consumer products. Retailers offer a range of products at convenient locations for customers. They help consumers to select the best products, they can provide financing and delivery, they may even offer repairs and other customer services. Retailers help manufacturers by storing, displaying, and advertising the products often paying the manufacturer well before the final consumer buys the products.
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