Pricing and Channels of Distribution Final

Channel Service Equilibrium

- As the channel provides higher service levels, the end users' cost decreases, e.g. price, time, stress. - The channel can provide this higher service level, but only at an increasing cost for the total system. - The ideal channel minimizes total system cost (every member included) of serving end users. - Not always achievable, e.g. resource constraints, legal constraints, channel conflict.

Different discounts and allowances

- Cash Discount: for cash, early or prompt payments. - Volume Discount: for customers who buy in large quantities. - Advance-Purchase Discount: for buying ahead of time. - Seasonal Discount: for products/services that are going out of season - or coming into season. - Trade Discount (B2B): standard price reduction, from producers to their intermediaries, to boost sales (pass through?). - Trade Allowance (B2B): paid by producers to intermediaries togain their support for consumer promotions (executed?).

Private Labels

- Copycat products made by contract manufacturer (usually). - Brand tied to specific retailer; priced below national brand. - More profitable: very little spent on marketing, innovation. - Early PL offerings were inferior to national brands. However,consumers accepted the lower quality => Why? - The ideal price gap is 8%-10% below national brands; salessuffer if the gap is much higher or lower => Why? - PL is the share leader in many grocery categories => Why? - During the pandemic, PL sales actually suffered

What's the rationale behind price discrimination? Why is it OK compared to other discrimination?

- Different prices for different buyers- for essentially the same product. - Optimize revenue, profit by basing price on willingness to pay. - A form of segmentation: different buyers with different PVs. - Enabled by deep market researcher attitudes, motivations, beliefs. - However, not all price differences = price discrimination.

Reading: "A Cosmetics Brand Defies Inflation With Its $3 Lipstick."

- ELF took the step of sharing details of the price hike with their consumers - the company offsets rising costs by adding more higher-end products (good, better, best strategy) - changes to low prices are more noticeable than changes to high products --> to make consumers feel better about price increases they were very transparent and open about it --> they manage costs by having about 25% of employees based in China, and maintaining relationships with supplies to keep costs down -------> they also kept short-term commitments to keep costs down

Contractual system: franchising

- Franchisor grants distribution rights to franchisee(s). - Franchisee pays fee to franchisor, i.e. startup fee, then annual stream based on % of sales. - Chances of survival: 90% if buying franchise (vs. 70% if buying existing business, 20% if starting from scratch). Franchisor benefits: o Expansion via someone else's energy, capital. o Control and coordination of marketing policy.o Economies of scale in procurement, promotion. Franchisee benefits: o "Be my own boss." "Live the American dream." o Enter business with little or no experience. Trade-Name Franchising: - Franchisor grants franchisee the right to sell the franchisor's product => use brand name, serve designated area. - Examples: auto dealers, soda bottlers, gas stations. Business-Format Franchising: - Franchisor grants franchisee the right to sell in designated area, utilizing the franchisor's business model => brand, operating manuals, marketing assets, quality control, information systems. - Examples: restaurants, hotels, realtors,car rental, house cleaners.

What does federal law have to say about price discrimination?

- In the United States, price discrimination to end users is legal... - ...except to the extent that firms that target certain segments for higher prices are challenged from a Constitutional standpoint. - The Robinson-Patman Act allows for price discrimination when price differences don't exceed the differences in cost of manufacture, sale, or delivery resulting from differing methods or quantities.

Stimulating demand: push

- Intermediaries have primary role of stimulating demand => ensure that end users come upon the product. - Intermediaries require higher margins to cover cost of sales promotions. -Role of producer: o Makes first move, i.e. initial push. o Plays a smaller role in stimulating demand - hence lower margins. GOAL OF PUSH: be there when the consumers are looking Use PUSH for products with little point of difference or brand awareness e.g. new (consumer is going to buy whats available so our product needs to be present on the shelves) - also effect for shopping goods that require high level of in store sales support (ex: clothing, appliances, makeup etc._ ---> ex: the sales person helps you buy a dishwasher

good volume discounts

- Leverage "law of diminishing utility" => Entice bigger purchase than planned. (ex: you might only need one egg McMuffin but the deal is buy one get the second for $1) - Compete with other volume discounts => Don't risk losing the sale to rivals. (doing it as a reaction) - Lock in buyers in a competitive market => Defend share, deter entrants. (if we HAVE to) - One large order vs. many small ones => Achieve greater operational efficiency. Key goal of volume discounts is to incentivize additional purchase.

Bad volume discounts

- Lower price "just because" => Encourage bigger purchases. (it should be an award because they bought more than they were planning to) - Incentive to close the deal => May actually love the product! - Reward for biggest customers => Better ways to show appreciation. (giving a gift etc. is normally a lot cheaper than a volume discount) One-size-fits-all discounts => Negotiate with every customer. (every customer is willing to pay something different) Bulk discounts aren't always bad. The issue is overuse or lazy use.

Stimulating demand: pull

- Producer has primary role of stimulating demand => ensure that end users seek out the product. - Producer needs higher margins to cover marketing expenditure. - Role of intermediaries: o Provide shelf space, ensure stock ;amplify producer promo at POS. o Play smaller role insupporting and selling - hence, lower margins. IT IS THE PRODUCERS JOB TO ENSURE THAT THE END USER SEEKS OUT THE PRODUCT Use PULL to encourage planned purchase, i.e. end user enters the store seeking a specific brand (ex: you saw a Nike ad, then you walk into the Nike store with the intention of buying that product) *** it works best if product has high differentiation or faces challenges within channel

How do co-op promotions affect B2B transactions? Why does either side care?

- Producer, retailer share cost of promotion to end users. - Funds can be offered in lieu of (or for smaller ) discounts. - Pro: both channel members participate in driving sales. - Con: co-op funds might not be spent well or spent fully.

A la carte pricing

- Products sold individually and priced individually. - Mainly benefits the buyer: transparency, choice, greater control (real and perceived).

Why does psychological pricing matter and what should businesses do about it?

- Science of making a price more attractive via structure, context, and optics. - In a rational world, only price level would affect the purchase decision... - ...but it turns out, buyers don't always act rationally. So presentation matters! - We can influence how customers perceive fairness, attractiveness, and exclusivity. No trickery. Nothing unethical. Just human psychology

Horizontal channel system: What is it and why does it matter?

- Two or more channel members at the same level that collaborate. - Members share or exchange their respective assets for mutual gain - Typically occurs between non-competing companies, with different benefits for each partner => synergy. - Can be temporary or permanent partnership, as needed.

Viewing: "How Warby Parker Disrupted, Then Adopted Brick-and-Mortar Retail."

- Warby Parker doesn't worry about profitability of stores, seeing them as a marketing strategy - they ship customers 5 glasses options so the customer can try on multiple styles and then just ship them back but there are problems ... - shipping customers 5 might not be enough - making customers return makes it more complicated for them

Balancing power and control: What are outcomes shown in the 2x2 model juxtaposing supplier power vs. control program?

- When a producer raises expectations and standards, it's understandable for intermediaries to push back. - To minimize resistance and improve compliance, producer must balance its power vs. control programs.

Vertical channel system: What is it and why does it matter?

- When channel members at different levels integrate to better meet end users' needs. - Synergy => leverage respective strengths. - Closely managed, centrally coordinated =>economies of scale, marketing impact. - Three types => three different control levels.

Reading: "In Luxury Market, Being Amazon Is Still a Burden."

- amazon is letting luxury brands decide pricing and inventory - Louis Vuitton remains highly skeptical about selling on Amazon - shoppers must be invited, which offers a sense of exclusivity

Reading: "Concert Ticket Prices Soar on Consumer Demand, Not Just Inflation."

- artists are trying to get in line with supply and demand - concert promoters are making more use of dynamic pricing - artists want to cut down on money lost to the secondary market - artists are increasingly comfortable with charging higher prices

Reading: "About 150 U.S. Cadillac Dealers to Exit Brand, Rather than Sell Electric Cars."

- cadillac executives see EV's as a way to change the brands image

Viewing: "Behind Chick-fil-A's Unconventional Franchise Model."

- chick-fil-a selects and owns the locations, and builds the restaurants - the company's operator-training program is likened to a Harvard MBA - compared to other big fast-food franchises, the entry fee is very small

Reading: "Never Mind the Delivery, More Online Consumers Are Turning to Pickup."

- costs associated with home delivery are 5x greater than for store pickup - driving people to physical stores can entice them to buy additional products - Sur La Table items bought through Amazon can be picked up in store

Reading: "Brands Wanted to Cut Out Stores. Not Anymore."

- costs of online marketing and shipping often exceed retailer markups

Reading: "Why $19 Is Apple's Favorite Price for Accessories."

- experts say that demand would be lower at $9 than $19

Reading: "7 Lessons on Dynamic Pricing (Courtesy of Bruce Springsteen)."

- high price comes with high expectations - avoid surprising customers about prices - be skeptical of stated willingness to pay - you don't have to give discounts to loyal customers

Producers decision framework

- information tends to deteriorate when passed through multiple intermediaries - if information is more important to end users, shorten the channel or used specialized intermediaries - logistics tends to improve when intermediaries handle the goods and facilitate access - if logistics is more important to end users, lengthen the channel or offer specialized arrangements Producers tend to be lower-cost providers of information -> direct producers tend to be higher-cost providers of logistics -> indirect ** when information and logistics are equally important, or neither is highly important --> potential mismatch ---> consider hybrid structure, i.e. provide information flow separately from logistics flow

Why is Place often considered the most complex of the 4 Ps?

- involves many disparate, moving parts - a lot of time and resources to establish partners, policies, and practices - can be deeply entrenched and difficult to escape, e.g. relationships, inventory, access to end users

What might justify different prices for essentially the same product?

- more fabric vs less fabric - more intricate sewing/fit for womens vs mens jeans

Reading: "What B2B Companies Get Wrong About Volume Discounts."

- not all customers need (or want) a discount for large purchases --> sometimes companies are basically "throwing away free money" because they are providing discounts after consumers had already been mentally prepared to pay the stated price and therefore did not need a discount

Reading: "How E-Commerce Fits into Retail's Post-Pandemic Future."

- part of the consumers journey is the desire for a sense of community - the first question must be: what consumer experience do I need to offer? - the consumer experience is evolving to one that's rooted in relationships

Reading: "You Hated Your Cable Package. Your Streaming Services Are Bringing It Back."

- partners may disagree on how split customer data and ad revenue - major retailers like Costco are looking at offering streaming packages - streaming companies are going so far as to partner with competitors (hulu, disney+) - the goal is NOT to mimic the cable bundle

Reading: "Maker of Sharpies Drew the Line on Trade Promotions - and Paid in Lost Sales."

- push strategy - vertical conflict - not using trade allowance the way it is intended - Newell's CEO was willing to accept the sales hit from "punishing" Office Depot - It's common for retailers to charge suppliers for prominent displays in stores - office depot was accused of using the funds to pad its profit as sales declined

Distribution Channel

- set of independent and interdependent parties involved in the process of making the product available for purchase and use Producers --> intermediaries --> end users manufacturer sells to the wholesaler (so the wholesaler becomes the customer) wholesaler sells to the retailers (so the retailer is the customer of the wholesaler then the retailer sells to the customer

Reading: "Bud Light Maker Offers Distributors Free Beer, More Ad Spending After Dylan Mulvaney Backlash."

- share plans and strategies w intermediaries - gave each retailer a case of beer : push - The beer company pledged to greatly increase it's bud light advertising budget - the distributors had to tell retailers that they have little control over campaigns - many distributors said they were thrilled with the new Super Bowl advertising

Reading: "Distribution Policy."

- shopping goods such as TVs usually are sold through selective distribution - intensive distribution: available everywhere - product classification is fluid (convenience, shopping, or speciality)

Reading: "Ford and GM Warn Dealers to Stop Charging So Much for New Cars."

- some dealers realize that charging about MSRP can hurt customer loyalty - many dealers say that they're just reacting to supply and demand - it's the industry norm for dealers to honor the suggested retail price ** auto makers try to curb the practice of adding fees to the suggested retail price, saying the tactic could cost dealerships future vehicle inventory

Reading: "Retailers Couldn't Stock Hand Sanitizer Fast Enough. Now They Can't Give It Away."

- stores needed to find space for other items (shelf space is SUPER valuable) ---> it hurt Walgreens etc, but it also hurt the producers because if the retailer has glut it backs all the way up to the manufacturer - the CDC said COVID is an airborne illness so hand sanitizer wasn't that valuable anymore, therefore they oversupplied for low-demand (ALSO hand sanitizer expires) ---> By the end they were using online auction sites and giving them away for free

What's the point of bundled pricing? Why does it work - for both seller and buyer?

- the point of bundle pricing is to sell more products bundled as opposed to one not bundled (ex: it is cheaper to have hulu, disney+, and ESPN together but normally people would only get one and this way they are paying a little more for all 3) - Two or more products sold together at a lower price than when sold separately. - Mainly benefits the seller: higher sales volume, lower marketing costs, simplicity, innovation subsidy. - some times the bundle isn't actually as beneficial for the buyer

Reading: "The $.99 Pricing Trick Really Does Work. Sometimes."

- when shoppers see $2.99 they see $3 subconsciously - when shoppers see $4.00 next to $2.99 they perceive it as $4 and $2 - when shoppers see $4.00 next to $2.99 at the same time, left side bias disappears

Break-even point

- when total revenue = total costs - the break-even point is when from every dollar you have covered your fixed and variable costs and are now making profit - fixed costs: costs that don't change (i.e. rent, electricity, etc) - variable costs: costs that are subject to change (someone's hourly wage, cost of food items, cost of supplies etc.) BEPquantity = FC / P-UVC = FC/CM BEPsales = BEPquantity x Price

Reading: "Whole Foods Calls the Shots for Startups."

- whole foods is fine with being seen as a demanding retailer - selling in whole foods means you are in whole foods stores and amazon - the little start-ups are the one's with less power

Reading: "Does Your Razor Need a Gender?"

- younger adults are particularly skeptical of gender-specific razors - womans razors are more expensive (for no reason lol)

3 steps of financial analysis

1. Determine the initial unit CM. 2. Calculate the BE sales change for the planned price change (that is, relative to the current profit level). 3. Determine profit implications of the actual sales change: Is it more or less than the BE sales change? This particular analysis is a decision-making tool. It is not a projection or prediction of the outcome!

Channel breadth: What does it mean and why does it matter?

1. Intensive distribution (be in as many places as we can) - convenience goods (soda, candy bars, etc) - minimal search - low differentiation 2. Selective distribution - shopping goods (TVs, computers, etc) - moderate search - moderate differentiation between products (found in fewer locations) 3. Exclusive distribution - specialty goods (ex: Tiffany engagement ring) - extensive search (willing to go a long distance to get it) - high differentiation

bundle vs. a la carte: Who benefits more from each strategy?

A la carte: benefits the buyer (transparency, greater control) bundle: benefits the seller (high sales volume, low marketing costs)

What is the "pink tax"? What are arguments for and against the pink tax?

Arguments for a "pink tax": - Sometimes, differences in cost dictate differences in price - A higher price may be what makes the product possible, e.g. low volume. - In many categories, women truly have higher willingness to pay. Arguments against a "pink tax": - If women believe they're being treated unfairly, they might boycott. - Ethics: a subjective and tricky topic!

How do B2B transactions differ from B2C transactions?

B2B = Business to business - The manufacturer sells to their customer which would be the wholesaler. They then sells to the retailer who sells to the consumer

G-B-B Offensive strategy #3: Patron Tequila

Basic Patrón was selling very well. Added Best version: Roca Patrón, $69. Roca made using Tahona technique. Add Best version to elevate entire brand: - "Halo effect" improves the perception of lower-priced products. - Gives loyal users a reason to "graduate" rather than defect. --> "Artisan crafted": from 60% to 64%. --> "Small-batch producer": from 47% to 58%. --> "Image I want to convey": from 59% to 65%.

How are offline and online channels blurring?

Bricks & Clicks Click & Mortar Certain companies that started as a website opened a store, and vise versa

What's the relationship between breadth and length? Why is that? How does the decision about breadth affect the decision about length?

COME BACK TO

What's the ideal way to manage the channel: carrot vs. stick?

Carrot (creating goodwill): - belonging - motivation - communication Stick (Exert control): - information systems - performance standards - evaluation methods ** successful channel management requires both carrot AND stick

§ How does dynamic pricing work? What makes it ethically challenging (e.g. Uber example)?

Change price in accordance with supply and demand: ---> Continually optimize revenue, profit. ---> Can be in real time, thanks to technology. ---> Enabled by sophisticated software, algorithms. Ex: Buffs ticket prices change as the game approaches. Ex: Buff ticket prices change to close the gap between what scalpers get and what CU gets. - Often synonymous with surge pricing, yield management. - Common for airlines, hotels, rental cars, sporting events, concerts, hot-selling items, ride-hailing services. - Key issue: Consumers want to be treated fairly. In the "gigeconomy," workers want to be treated fairly too. UBER EXAMPLE: In April 2022, a subway shooting in New York City left people scrambling to escape the area. Uber and Lyft prices rose quickly. What did this mean for (1) riders,(2) drivers, (3) Uber and Lyft? 1. riders were forced to pick whether they valued spending the money or their lives more (and made it unaccessible to people who couldn't afford it) 2. it incentivized drivers to take rides however, it also meant they had to drive into a shooting area, which endangers them (so do they value earning money or their lives more) 3. ultimately, Uber and Lyft were making more money off of a tragedy while also endangering their employees

Corporate system: vertical integration, horizontal integration.

Common ownership across various levels of the channel.

B2B Payment terms

Common payment terms: - Payment in advance. - Due upon receipt. - Net 7, 10, 30, etc. - Line of credit. - X/Y Net Z. Example: 2/10 Net 30 2% discount applies...If paid within 10 days...Otherwise, the net is due...In 30 days, no discount. Buyers: buyers prefer high discounts and long pay times Sellers: Sellers prefer low discounts and short pay times It's important to find a middle ground

Eliminating the Middleman

Direct distribution is usually preferred if: - Producer wants maximum control of pricing and promotion. - Product is large, bulky, expensive, complex, hard to handle. - Competitors have strong presence within the intermediaries.

Vertical Conflict

Direct vs. Indirect Sales: - Example: Producer decides to sell directly to consumers, bypassing its retailer. - Undercuts intermediary's revenue, profit; intermediary may cut support or retaliate. Oversaturation: - Example: Producer lets too many retailers in a particular area sell its product. - Creates excessive competition, prompting retailers to direct anger at the producer. Most common cause --> members with different goals

How does e-commerce create utility: form, place, time, possession?

Effective channels create utility Form: in the format the buyer needs it Place: where the buyer needs the product Time: when the buyer needs the product Possession: make easier to take ownership (ex: KAYAK -- everything found in one place

Margin analysis: Explain the challenges of maintaining profit margin for all channel members.

Every channel member expects certain amount of profit for adding its value. But... Ex: What if COGS turns out to be different from expectations?Ex: What if consumers think the retail price is too high? Example: Wholesaler Margin target: 20%WP = PP / (1 - mgn %) $300 = $240 / (1 - 0.20) Equation Margin target: 20%Price = Cost / (1 - mgn %) Example: Retailer Price target: $500 Margin target: 40% WP = RP x (1 - mgn %) $300 = $500 x (1 - 0.40) Ways to get COGS down - sacrifice a feature ---> shrinkflation - find other suppliers (source elsewhere) IF YOU HAVE A LOWER COGS THAN EXPECTED - could ask producers to take smaller margins - could reduce product quality

B2B: Freight costs

FOB = freight on board - Who pays for freight matters in competitive marketplace. - Critical for products with high weight/bulk relative to value. - High shipping costs can limit company's service/sales area. - Freight equalization: Set price based on distance between buyer and nearest supplier - even if it's a competitor. AKA lowest cost for transport possible FOB Shipping Point: Seller transfers to the buyer before the goods are shipped (preferable for sellers) FOB Destination: the seller maintains ownership of the goods until it reaches the buyer (preferable for buyers)

What's the point of offering tiered pricing (Good, Better, Best)? What are benefits for sellers? For buyers?

FOR THE SELLER - tiered pricing keeps the seller from reducing the perceived value of the current product by lowering its price etc. - helps protect against shrinkflation FOR THE BUYER - it gives the buyer options, and also

Contractual system: alliances, franchising, e.g. trade name, business format.

Formal agreement among independent channel members Alliances: - Two or more independent channel members, each bringing a respective strength that complements the other. - Clear terms, e.g. scope, scale, division of revenue/profits.

How does a traditional indirect channel work? What does each intermediary do?

Intermediary (1) takes possession of product, (2) creates value for the next level, (3) captures profit upon resale For producers, intermediaries provide greater efficiency, lower barriers to entry, lower risk, and higher flexibility. But gains in efficiency => less coordination and control.

Administered system: category captaincy.

Leadership assumed by one member of the channel. Administered System: Captaincy - Producer assumes leadership within a retailer => and brings some proprietary knowledge or capability. - "Category captain" responsible for driving total category growth => in the retailer's best interest. - Captain determines brand assortment, number of SKUs, shelf space and placement for all competitors.

Horizontal Conflict

Loss Leader: - Example: A retailer takes a significant price cut - even losing money - to drive traffic. - Other retailers feel pressure to slash their own prices (price war!) and reduce their own profits. Turf War: - Example: Producer sells to multiple wholesalers in the same area, with unclear boundaries for each. - Without boundaries, intermediaries might rely on "unfair" practices to compete for customers.

How does the producer create goodwill (carrot): belonging, motivation, communication?

Motivation: - Offer favorable terms, incentives. - Financial: margins, commissions,promotions, allowances, returnpolicies. - Non-financial: celebrations, gifts,contests, recognition. Communication: - Information at regular intervals. - Share goals, strategies, research. - Via newsletters, calls, texts, visits. -Create two-way information flow.

G-B-B Offensive strategy #4: Apple iPhones

Offers iPhone SE, $349 (2/3 less than iPhone X). Additional revenue, e.g. charger, case, $19 cloth! Recurring revenue, e.g. iTunes, App Store, iCloud. Use Good version as entry point: - Use complementary products/services to generate incremental revenue. - Initiate trial, move toward repeat, leverage loyalty

Information/fulfillment matrix: Information

Offline: - most suitable for high-touch products - but brick-and-mortar retailers become vulnerable to showrooming Online: - most suitable for low-touch products - but uncertainty about some aspects can prevent first-time purchase

G-B-B Offensive strategy #2: Uber Ride-Hailing Service

Original: uberX. Extension: uberPOOL. Create low-priced Good version: - Original product typically becomes the Better version. - Makes brand more accessible to price-sensitive customers. - Provides reason for dormant customers to reconsider. - Can limit need for discounts/sales, i.e. protect pricing power. --> UberPOOL = 20% of all rides, > 50% in big cities. --> Added Express POOL as "pretty good" version.`

Factors that suppliers should consider when choosing intermediaries

Personnel standards: - number of salespeople and support staff - education and training - staff turnover/retention Economic profile: - financial stregth, stability - history and reputation - coverage and scale - degree of exclusivity Inventory support: - stocking levels - storage and transport capability - proximity to end users Marketing support: - merchandising and POS capability - co-op promo support - promo $ pass-through

Information/fulfillment matrix: Fulfillment (i.e. logistics)

Pickup - no shipping costs or waiting time for buyer, but search and travel costs - impacts store size, location, design - must ensure right product mix and inventory levels Delivery - less immediate gratification for buyer - retailer can fulfill orders from central distribution point - central fulfillment allows for better forecasting

Direct channel

Producer ---> End-user - producer performs all channel functions - investment in sales force, branch offices, subsidiaries, warehouses, transport ** simplest channel because there is no intermediary but could be complicated because you have to do everything Producer advantages - direct control of the marketplace - information straight from the market - quick adjustments to the marketing mix - sales actions more efficient, lasting - no intermediary markups Producer disadvantages - A lot of costs (both money and time) - requires high share to absorb costs - needs intense training, management

Indirect channel (wholesaler)

Producer --> wholesaler --> retailer --> end-user - distributors serve various retail formats, typically with specialization - offer a range of services, e.g. configuring, storing, delivering, merchandising - wholesalers take ownership, physical possession, financial risk - ex: Coca-cola - doesn't actually sell soda, they sell syrup to bottlers (wholesaler) who then sells to the retailers

Measuring retail performance: How do distribution and velocity explain sales performance?

Questions to ask: - how well is our product selling at retail? - what is driving that retail performance? - what should we do to improve results? Syndicated Data Analysis Sales = Distribution x Velocity Distribution = how widely available is the product? (can't sell unless its stocked in adequate number of stores) Velocity: how well does the product sell where it's available (being in stores doesn't necessarily mean end users are buying it)

Price elasticity

Refers to consumers' responsiveness or sensitivity to changes in price--> always taken in absolute value If unit change = 15% ➠ neutral response ➠ unitary demand. If unit change > 15% ➠ high response ➠ elastic demand. If unit change < 15% ➠ low response ➠ inelastic demand. If we decrease price 15%, how much will volume increase? If we increase price 15%, how much will volume decrease? Determining price elasticity: Remember that it's all about rate of change (i.e. percentages) and relativity of change. Elasticity (absolute value) = % change in quantity demanded / % change in price

G-B-B Offensive strategy #1: Six Flags Amusement Parks

Regular: basic wait-in-line privileges. Gold: $80 more, cuts wait up to 50%. Platinum: $135 more, cuts wait up to 90%. Create high-priced Best version: - Persuade current customers to spend more. - Attract a new segment of high spenders. - Never underestimate customers' willingness to pay or the number of customers willing to pay for an upgrade. --> "It's amazing how many people pay for this." (Six Flags CFO)

How does the producer exert control (stick): information, performance, evaluation?

Set standards => 250 items: - Freshness and color of donuts. - Maintenance and cleanliness. - Quality of in-store service. Enforce standards => visits: - Periodic surprise inspections. - By district managers, mystery shoppers, other franchisees.

Webrooming vs. showrooming: What's the difference? Why do consumers do this? How does either one affect retailers?

Showrooming What's the impact on OFFLINE retailers Webrooming What's the impact on ONLINE retailers

Source 1 of Production power

Source 1: Value of the producer's brand to intermediaries. - Indicators of high value to the intermediary: o End users strongly prefer the brand, e.g. uniqueness, brand equity, market share, loyalty. o Brand accounts for relatively high percentage of the intermediary's total revenue. o Brand demonstrates "staying power," e.g. financial stability, long history, commitment. - The more "pull" the brand has with end users, the more powerful the producer is.

Source 2 of Production Power

Source 2: Quality of relationship and producer support. - Indicators of good relationship and support: o Producer's objectives and strategy are consistent. o Producer's sales reps maintain frequent contact. o Intermediary is knowledgeable about the brand. o Intermediary's share of effort > share of sales. - Good relations and support are "easy carrots": o Don't require high status in the marketplace.o Actions, improvements can be easily executed.

Source 3 of Production Power

Source 3: Walking away is hard for the intermediary. - Indicators that it's hard to walk away: o Very costly for intermediary to drop producer'sbrand andd replace it with another - if at all. o Intermediary carries high inventory or hasinvested inn producer-specific assets, e.g. training, systems. - Consider the willingness of rival producers to work with the intermediary and vice-versa, i.e. opening the door?

Different ways to bundle

Standard Bundle: - Two or more complementary items offered in single-price package. Cross-Sell: - Products that complement a bigger purchase - sold separately, but at a discount. Add-Ons: - Peripheral offerings (e.g. services), bought separately, that can increase buyer satisfaction.

Implementing G-B-B Pricing

Step 1: Determine number of tiers (make it logical, intuitive). Good: subtract features <-- Better: current product --> Best: add features Step 2: Identify key features that distinguish each version. - Ensure each version represents a different level of value. - Better should include some features from Good. - Best should include some features from Better. - Maintain a natural, well-understood progression. Step 3: Use fences to prevent cannibalization. - Goal of Good: Attract budget-minded buyers without losing revenue from current buyers, i.e. no one "trades down." - Fences discourage trading down by making it difficult, painful, or unpleasant, i.e. high switching costs.

System 1 vs. System 2: How do they affect buyers' perception of prices?

System 1: Fast, Autopilot, Effortless, Impulsive, Instinctive, Error-prone, Has biases System 2: Slow, Pilot, Effortful, Controlled, Deliberate, Reliable, Is flexible

For the 13 tactics, you don't need to memorize every detail. But you should understand the general explanation for why they work. Many of the reasons overlap, and are explained by Prospect Theory and S1/S2 thinking.

Tactic 1: Reduce the left digit by 1 (ex $20 --> $19.99) ---> Left digit anchors the perceived magnitude, i.e. big/small (also makes the cents smaller to further emphasize left side) Tactic 2: Display prices in a smaller font ---> Buyer's perception is that smaller font ≈ smaller price. Tactic 3: Remove the comma (ex: $1,499 --> $1499) ---> The absence of a comma can make the price seem smaller, (e.g. physical length, phonetic length.) Tactic 4: Offer installment payments (ex: 5 payments of $99) ---> When given the option to pay in increments (vs. lump sum), buyers anchor on the smaller price. Tactic 5: Use the right roundedness ---> remove cents from emotional purchases, add cents to rational purchases Tactic 6: Sort prices from high to low ---> Anchoring: Buyers tend to anchor their choices to a reference point; any adjustments from there tend to be small. ---> Loss aversion: Buyers perceive each subsequent item as a loss,e.g. loss of ability to pay lower price, loss of better quality. Tactic 7: Selectively use % vs. $ discount ---> Give % discounts on prices under $100, give $ discounts on prices over $100 Tactic 8: Remove the currency symbol (ex: $13 --> 13) ---> The "pain" of paying can be easily triggered, e.g.presence of a dollar sign Tactic 9: Use more-frequent increases ---> DON'T DO year 1: $80, year 2: $80, year 3: $90 ---> DO year 1: $80, year 2: $85, year 3: $90 Tactic 10: Give a reason for the discount ---> Clearance = $100 off of $250 ---> Emphasize that the discount is temporary and provisional. Tactic 11: Use words of small magnitude ---> Carefully choose the language next to the price, because words can taint buyers' perceptions. Tactic 12: Show price at optimal time ---> Luxury products: product quality, not economic value, show product first. ---> Utilitarian products: show price first

Defensive strategy

Town Sports Fitness Clubs: - Town Sports: $40/month. - Planet Fitness: $10/month. - Town kept standard price, i.e. Better. - Added Good: $19/month with fences. Defend with low-priced Good version: - Avoid knee-jerk reaction to cut price. - Cutting price: Everyone would pay less, slashing profit. - Adding Good: Some may defect to cheaper rival - but some will choose Good and most will stick with full price.

Contribution margin

UVC = VC / Q Unit CM = P - UVC Total CM = Revenue - VC Unit CM% = (P - UVC) / P Total CM% = (Revenue - VC) / Revenue you must set price so that every unit sold covers at least UVC, the resulting CM goes towards FC then profit

intermediaries create value

Value added activity: Physical possession, ownership/title, risk-taking, promotion = Flow of activity: DOWNSTREAM Value added activity: information, negotiation, financing = flow of activity: BOTH Value added activity: ordering, payment = flow of activity: UPSTREAM better service of downstream needs: transactional, logistical facilitation intermediaries should cut producer's costs, complexity of doing business

Channel length

What tasks must be done within the channel to "move" these different products? Timex watch, $25: - Distribution in many outlets. - Broad display in those outlets. - Efficient restocking of outlets. Rolex watch, $25,000: - Impeccable product display. - Well-informed salespeople. - Customization and service.

Financial Analysis

Why do it?? - to identify tradeoffs between price level and sales volume and their impact on total profit 3 questions: 1. Should we change our price due to certain circumstances? 2. If we do change price, how will it affect sales volume? 3. How will the change in sales volume affect total profit?

Why should a channel become longer? What's the benefit of a longer channel?

ex: reflection trainer from Lulu Lemon - exclusive information = short channel (the more information needed the shorter the channel) ex: workout recovery drink - intensive logistics = long channel

Information vs. Logistics

information: Primary information: - features and benefits - competitive comparison - demos and training - ongoing consultation - quality assurance Purchase customization: - product configuration - build to order - price negotiations - contract terms Logistics: product variety: - Assortment at POS (point of sale) - SKU breadth and depth convenience/accessibility: - ease of locating POS - search and travel time Immediacy/flexibility: - time between order and receipt of goods - minimum order quantity or product size

Indirect channel (agent)

producer --> agent --> wholesaler --> retailer --> end-user - hired to represent producers, e.g. brokers --> They open doors and facilitate connections to sell your products - typically specialize in specific wholesale or retail segments - paid via commission, e.g. sales volume - don't take possession, i.e. less risk

Indirect channel (retailer)

producer --> retailer --> end user - simplest form of indirect - various formats that sell to end users, e.g. traditional brick-and-mortar stores, online marketplaces - retailers take ownership, financial risk, physical possession ex: Honda - dealerships (its the law so there isn't a monopoly from the manufacturers) ex: COACH - sold through retailers like Nordstrom's etc.

Indirect channel producer advantages/disadvantages

producer advantages: - minimal costs, risks when entering - less need to build channel expertise - less need to understand the needs of downstream customers producer disadvantages: - lack of control of the marketplace - lack of direct market information - minimal contact with end users - risk of product substitution by the intermediary

Inherent discrepancy

producers make large quantities of a limited variety of goods. end users want only a limited quantity of goods

Channel goal

right time right place right form right price