Chapter 11
PRICING ISSUES IN CHANNEL MANAGEMENT
Teaching Notes
This chapter examines the nature of pricing in channel management. Students who are
new to marketing and/or business should be cautioned that key terms used throughout the
Chapter Objectives
Pricing strategy should incorporate channel considerations before being implemented. If
the channel members perceive a manufacturer’s pricing strategy to be congruent with
their own interests, they are likely to have a higher level of cooperation and the reverse is
also true.
In developing pricing strategies, there are eight guidelines: (1) profit margins should be
adequate for channel members, (2) margins offered to different classes of channel
There are five major pricing issues a manufacturer is likely to face: (1) pricing control in
the channel, (2) the impact of major price policy changes, (3) the passing of price
increases through the channel, (4) use of price incentives, and (5) the problems created by
“gray market” and “free riding”.
Learning objectives
1) Be aware of the importance of pricing issues in marketing channel management.
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Chapter Topics
1) Anatomy of Channel Pricing Structure
Chapter Outline
Anatomy of Channel Pricing Strategy
Participants at the various levels in the channel each want a part of the total price (the
price paid by the final buyer) sufficient to cover their costs and provide a desired level of
profit.
The “golden rule” of channel pricing when developing a pricing strategy is stated as
follows:
“It is not enough to base pricing decisions solely on the market, internal cost
considerations, and competitive factors. Rather, for those firms using independent
channel members, explicit considerations of how pricing decisions affect channel
member behavior is an important part of pricing strategy.”
Pricing decisions can have a substantial impact on channel member performance. If
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Guidelines for Developing Effective Channel Pricing Strategies
The author offers a set of eight classic guidelines for developing pricing strategies that
incorporate channel considerations. While not comprehensive, they do provide a basic
framework and benchmark for pricing decisions that incorporate channel considerations.
These are:
1) Each efficient reseller must obtain unit profit margins in excess of unit operating
costs.
2) Each class of reseller margins should vary in rough proportion to the cost of the
functions the reseller performs.
3) At all points in the vertical chain (channel levels), prices charged must be in line
with those charged for comparable rival brands.
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A) Profit Margins
Channel members need margins that are more than adequate to cover the costs associated
with handling a particular product.
Tables 11.2 and 11.3 provide examples of retailer and wholesaler margins and other
operating data.
B) Different Classes of Resellers
Ideally, the channel manager would like to set margins so that they would vary in direct
proportion to the functions performed by different classes of channel members. In
reality, however, margins at the wholesale and retail levels are typically governed by
strong traditions that permeate the industry.
Nevertheless, periodic reviews of the margin structures available to different classes of
channel members should be made, with a view toward making gradual changes if
warranted.
Oxenfeldt suggests that the following questions be posed in this review:
a. Do channel members hold inventories?
b. Do they make purchases in large or small quantities?
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C) Rival Brands
Differentials in the margins available to channel members carrying competitive brands
should be kept within tolerable limits.
D) Special Pricing Deals
Special pricing deals can take many forms including higher discounts, rebates, free
goods, enhanced quantity discounts, and others. The purpose behind such special pricing
E) Conventional Norms in Margins
Oxenfeldt points to the almost universal tendency of channel members to expect margins
to meet generally accepted norms.
F) Margin Variation on Models
Variations in margins on individual models and styles in a product line are common.
Traffic builders (often referred to as promotional products) are usually the lowest priced
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G) Price Points
Key Term and Definition
▪ Price points: Specific prices, usually at the retail level, to which consumers have
become accustomed.
In other words, consumers come to expect certain products to be available at customary
prices. It is important to stress that price points move up or down over time as a result of
inflation and changing technology.
H) Product Variations
When a manufacturer attaches prices to the various models within a given product line, it
Other Issues in Channel Pricing
The channel manager is faced with other channel pricing issues that require more specific
and detailed attention. Six of the most important are discussed in this section.
A) Exercising Control in Channel Pricing
As stated earlier, the manufacturer’s pricing strategies often require channel member
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Yet, from the manufacturer’s point of view, some of the most important pricing strategies
may call for having some degree of control over the channel members’ pricing policies.
In attempting to influence some control, the manufacturer is faced with the difficult and
delicate task of enforcing pricing policies without alienating channel members.
Although there is no surefire way to avoid the problem, several guidelines can be offered.
These are:
• Any type of coercive approaches to controlling channel member pricing policies
should be ruled out.
B) Changing Price Policies
Another important channel pricing issue that the manufacturer is almost sure to face at
one time or another is dealing with channel member reactions to major changes in the
manufacturer’s pricing policies and related terms of sale.
Key Term and Definition
▪ Markdown money: Payments made by a manufacturers to a retailers to help offset
the money retailers lose when merchandise does not sell well.
C) Passing Price Increases through the Channel
So long as each channel member is able to pass along manufacturer-initiated price
increases to the next channel member, and ultimately to the final user, the price increase
issue is not too worrisome.
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Such alternatives and strategies include the following:
• More thought to the long- and short-term implications of going through with the
price increase versus attempting to hold the line on prices should be considered.
• If passing on the price increase is unavoidable, the manufacturer should do
D) Dual Channel Pricing
When manufacturers distribute their products using multiple channels, such as direct
sales and via independent channel members, careful attention needs to be paid to the
E) Using Price Incentives in the Channel
Pricing strategy is frequently used by manufacturers as a promotional tool. A wide range
of pricing devices is used to carry out such pricing strategy, including special deals,
seasonal discounts, rebates, price reductions, coupons, two for the price of one, and a
variety of others.
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Key Term and Definition
▪ Forward buying: Channel members load up on the discounted products featured in the
promotion by passing on the lower price to the consumer for just a portion of time.
The rest of the product is held in inventory by the wholesaler or retailer for sale at the
regular price after the promotional period has ended.
F) Dealing with the Gray Market and Free Riding
Two of the most troublesome developments affecting the pricing policies and strategies
of many manufacturers of branded products are the gray market and the related
phenomenon of free riding.
Key Terms and Definitions
▪ Gray market: Refers to the sale, usually at very low prices, of brand-name products
by unauthorized distributors or dealers.
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Answers to Review Questions
1. While target markets, competitive forces and internal costs all are essential factors to
2. The channel manager must focus on the channels implication of the firm’s pricing
policies and strategies. It is his or her job to see that those policies and strategies are
3. The channel members and the manufacturer consummate an exchange: distribution
services for gross margin. In effect, gross margin is the price the manufacturer pays
4. Different classes of channel members may provide different levels of services. For
example, a large department store chain may carry a full line of the product, display it
more, and offer customers more service than a chain of discount stores. Ideally, the
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product aggressively and may eventually drop it altogether. Thus, the channel
5. Every industry develops its own jargon and its own norms. Among those norms are
the discounts “expected” to be offered by manufacturers and producers to channel
6. When manufacturers offer a promotional product at a below norm margin, channel
members are amenable if they are convinced that these products can be used in an
effective promotion program to build traffic or increase order size. Manufacturers
should select their promotional products carefully, and assist channel members in
using them, so that these goals are met. They also should recognize that channel
7. There are two aspects to the issue of price control in the channel: domain and legality.
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Beyond the domain question is the issue of legal compliance. Until recently, de facto
8. A change in the manufacturer’s pricing policies and terms of sale will activate
channel members’ kainotophobia (fear of change). How the channel members
9. Before attempting to simply pass major price increases through the channel
automatically, the manufacturer should explore three alternative strategies. First, the
long- and short-term effects of the price increase should be considered. If the long–
term effects in terms of maintaining channel member support are likely to be
10. Consumers and channel members may have very different reactions to manufacturer-
initiated price incentives because the price elasticity of demand for consumers and
11. Selling well-known brands is attractive because it can be quite profitable. Gray
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12. The answer can go either way on this question. First, on the negative side: From the
standpoint of the manufacturer, free riding distributors and dealers may provide poor
selection, sales assistance, and services, which in the longer run could do serious
damage to the manufacturer’s sales and reputation, especially if the free riders force
Commentaries on Issues for Discussion
1. Apple is well known for producing a premium brand of computer. It doesn’t try to
compete with other computer makers on price because Apple COO, Tim Cook,
believes this leads to diminished profits and loss of shareholder value. The golden
reputation of the Apple brand would undoubtedly be tarnished by intense price
competition. It’s too early for Apple to jump on price decreases since demand for
their products is still clearly strong.
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2. The intention of this issue is to focus a discussion of price on what is of most concern
to the retailer–whether the profitability of the merchandise will make it worthwhile to
carry. To deliver a gross margin of 35 percent that the retailer wants could mean that
the products could not be heavily discounted (given that the trade discount is the
3. Amazon pricing model was to pay wholesale price for books from publishers, selling
some below cost. Publishers opposed this model because Amazon’s approach of
setting the $9.99 price cap limited revenue for publishers. In addition, publishers
believed this strategy often diminished a book’s image and as a result, they began to
4. From Tina Anderson’s point of view as a consumer, the channel system offers her an
opportunity to purchase the camera at an exceptional price. If the warranty is still in
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5. Anheuser-Busch is dealing with channel member reactions to major changes in the
manufacturer’s existing pricing policies. This is due to in part to the cost-cutting
program in which Anheuser-Busch was engaged, and justified, as least in part, by the
discrepancy between the margins its distributors earned and those enjoyed by