Pricing methods, channels of distribution and ecommerce

Last time

Before we start: last time, in Market research, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Price and place

A product can be perfect, but if the price is wrong or customers cannot find it, it will not sell. Price and place are the next two parts of the marketing mix. This lesson covers pricing methods, the routes a product takes to the customer, and selling online.

Cost-plus pricing

Cost-plus pricing adds a percentage mark-up to the cost of making the product. If a shirt costs 40 dollars to make and the mark-up is 50 per cent, the price is 40 plus 20, which is 60 dollars. It is simple and covers costs, but it ignores what customers will pay and what competitors charge.

Competitive pricing

Competitive pricing sets the price at or near competitors' prices. It avoids losing customers to cheaper rivals, and suits markets with similar products. But the price may not cover the firm's own costs if they are higher than rivals'.

Penetration and skimming

Penetration pricing sets a low price to enter a market and win customers quickly, then raises it later. Price skimming sets a high price when a product is new and unique, such as a new phone, then lowers it over time. Penetration risks losses; skimming needs a product customers really want.

Promotional and dynamic pricing

Promotional pricing cuts the price for a short time, such as a sale, to boost sales or clear stock. Dynamic pricing changes the price often, with demand, such as taxi fares at busy times or airline tickets. The right method depends on the product, the competition and the firm's objectives.

Channels of distribution

A channel of distribution is the route a product takes from the producer to the consumer. Direct: producer straight to consumer, by a factory shop or website. Through a retailer: producer, retailer, consumer. Through a wholesaler: producer, wholesaler, retailer, consumer. Wholesalers buy in bulk and sell in smaller amounts to shops.

Choosing a channel

Each channel has a trade-off. Fewer stages mean more control and profit; more stages mean wider reach.

What decides the channel

The product: perishable food needs a short, fast channel; technical products may need specialist shops. The customers: many, spread out customers need wholesalers and retailers; a few local customers can be served directly. And cost and control: a direct channel keeps profit and control over how the product is sold.

Ecommerce

Ecommerce is buying and selling goods and services over the internet, through websites, apps and social media. Opportunities: customers anywhere, at any time; no shop rent; and data on what customers buy. Threats: strong price competition, delivery costs and returns, website costs, and security risks such as fraud and hacking.

Ecommerce for customers

Customers gain choice, easy price comparison and home delivery. But they cannot see or try the product, delivery takes time, and they may fear fraud. So many businesses combine shops and online sales.

Mistakes that lose marks

Mistake one: confusing penetration with skimming. Mistake two: saying a direct channel reaches more customers. It usually reaches fewer. Mistake three: giving threats of ecommerce to customers when the question asks about the business. The fix: name the method, and its effect on the business.

The full-marks tip

The full-marks tip: match the pricing method to the situation: penetration to enter, skimming for something new and unique. For distribution, compare control and profit against reach.

On one card

So, on one card: price and place. Keep it for revision.