Growing and Managing A Small Business: An Entrepreneurial Perspective

Growing and
Managing
a Small
Business
An Entrepreneurial
Perspective
Copyright Houghton Mifflin Company. All rights reserved.
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Chapter 12
Distribution and Pricing
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Learning Outcomes
Explain how distribution can be a competitive
strategy for a small business.
Discuss the role of intermediaries in the
distribution channel
Identify the issues involved in exporting and
importing products
Discuss the roles of pricing objectives,
strategy, and structure in determining the
best pricing for an entrepreneurs product or
service

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Chapter Outline
SUPPLY/DISTRIBUTION
STRATEGIES
INTERMEDIARIES
IMPORT/EXPORT
STRATEGIES
PRICING STRATEGIES
Getty Images
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The Strategic supply/distribution chain
Strategically, how integrated do you want your business
to be? Do all the functions yourself or outsource?

1. Backward integration decisions
whether the owner wants to contract with others to provide
the inputs (raw materials, components, and supplies) needed
in your business, or whether s/he wants to own and control
the supply network

2. Forward integration decisions
whether the business owner should hire others to handle the
distribution function, or whether s/he wants to directly manage
the distribution network all the way down to the end user
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SUPPLY CHANNEL CHOICES
BACKWARD INTEGRATION CHOICES

Outsourcing
Use long-term contracts to assure/guarantee your supply needs

Quasi integration
Hold a minority ownership position in your supplier organizations

Tapered integration
Supply yourself with some (but not all) of your own internal needs

Full backward integration
Produce all your own supplies and components internally
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DISTRIBUTION CHANNEL CHOICES
FORWARD INTEGRATION ISSUES

Direct distribution channels
The manufacturer does not use intermediaries and sells directly
to consumers (full forward integration)

Indirect distribution channels
There are intermediaries between the producer (the
manufacturer) and the consumer (end user)
The challenge is selecting the best channel members to handle
product distribution and delivery for the small business
Using agents, quasi and tapered forward strategies are possibilities

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Illustration of Indirect Distribution Channels
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Distribution channel partners
are really your customers
Distribution channel members are really the
small business owners customers, because
they are the ones who provide the revenues
to the business.
Channel members can be segmented into
types...dealers, sales agents, retailers,
wholesalers and so forth. Each of these
channel members may perform a different
function and has different requirements
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Multiple Channels of Distribution
Multiple channels enable many customer touch-
points or points where products and services can
be purchased or serviced, and they enable the
customer to take more control of the transaction 1.

Technology has made it possible for companies
with multiple channels to gather important
customer data across channels that identify new
customer needs and provide feedback on current
products and services.

1. Stone, M., Hobbs, M. & M. Khaleeli. (2002). Multichannel Customer Management: The Benefits and Challenges.
Journal of Database Management. 10(1):39.
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How to Use the Internet:
Four Distribution Strategies
1. functional decomposition: the small
business uses the Internet to provide
information or display the products,
but the customer still makes the final
purchase transaction through a
distributor.
www.realtor.com

Becomes a cost center...no direct sales here

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Four Internet Distribution Strategies
2. cloning: duplicates the small
businesss distribution strategy on the
Internet...we now have dual channels.

Motel 6 ... You can make reservations
via the phone or via the internet

coordination and competition issues

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3. forward integration: bypasses its
intermediaries in the channel and sells directly to
the customer/end user.

builds stronger relationship with customers
able to more quickly meet customer needs
saves costs of intermediaries
development of e-commerce is high-cost
upsets intermediaries...do you still need them?

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4. strategic industry alliance: complementary
businesses join forces to provide a common
distribution channel to customers who demand a
variety of choices and volume prices

example = MovieLink

requires a lot of coordination among allies
saves on costs, synergistic
no single firm has to own/control everything
provides a variety of products and channels to
customers
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Intermediaries
1. Suppliers
2. Wholesalers and
Distributors
3. Logistics Firms
4. Agents and
Manufacturers Reps

Getty Images
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Suppliers
Good Prices
Good Quality ... cutting edge products/supplies
Stability ... been in business a long time
Reliability
- shipping ... costs and timing
- use more than one supplier
Partnership
- build close relationship
- working together
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Wholesalers / Distributors
Find customers and outlets for your products

Provide...
warehousing and storage of products
transportation to retailers
advertising and promotion
packaging and displays
training of retail sales personnel
service backup
restocking of retailers shelves
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Logistics Firms
If you cant afford your own distribution
center...outsource these services...

Logistics Firms Provide...
packing and packaging
warehousing
inventory control
transportation and trucking

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Agents/Manufacturers Representatives
Agents do not buy or hold inventory...but act as
brokers between manufacturers and distributors
or retailers. The manufacturer only pays a
commission on what the agent sells.

A manufacturers representative is an independent
sales agent paid on a commission who handles
the manufacturers business in exclusive, specific
territories.

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Import/Export Strategies
Find the Best Global Market
International trade statistics yearbook
Attend foreign trade shows
Export Financing
Banks, internal cash flows, venture capital, prepayment or progress
payments from the foreign company making the order
Guaranty from Import-Export Bank, or large deposit from buyer
Letters of Credit
A bank document that guarantees a customers bank drafts up to a
certain amount for a limited time
Foreign Agents, Distributors, Trading Companies
Agents buy goods at discount, then sell and collect on their own

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Choosing an Intermediary
1. Check the intermediarys current listing of
products to see if the companys products
seem to fit in with the intermediarys
expertise.
2. Understand with whom they will be
competing (that is, does the intermediary
also handle the companys competitors?).
3. Does the intermediary have enough
representatives in the territory to
adequately handle the market?
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Choosing an Intermediary
4. Look at the sales volume of the
intermediary. It should show a relatively
consistent level of growth.
5. Make sure the intermediary has sufficient
warehouse space and an up-to-date
communication system.
6. Examine the intermediarys marketing
plan.
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Choosing a Freight Forwarder
A freight forwarder handles all aspects of
delivering the product to the customer.

The ability to fill a shipping container to capacity is
crucial to reducing costs

Freight forwarders prepare shipping documents
Includes bill of lading (contract between shipper and carrier)
exporter declaration form (details contents of the shipment)
present documents to the companys bank for collection

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Pricing decisions...do you have a strategy?
We just charge the same amount as everybody
else...that must be the correct price...

1. Cost-based versus market-based pricing
charge to cover costs plus add something for profit
focus on demand, competitor prices, and your marketing strategy
2. Reactive versus proactive
respond quickly to competitor price changes by matching them
novel or aggressive pricing moves; pioneering price moves
3. Standardization versus flexibility.
charge everyone the same price, regardless of competitors pricing
prices vary to meet the needs of specific customers or different contexts

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Long-term Pricing Objectives
The company must have a long-term pricing
objective ... What is it?

Consider...
The level of sales you want to achieve
The profit margin you seek

Long-term goals are statements of position in
the market
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Examples of Long-term Pricing Objectives
Be the lowest-priced supplier in the industry
Create the widest price range
Maximize penetration of a market
Create price leadership in the industry
Position the firm in a specific market segment
Obtain a specific market share
Maximize profits
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Four Pricing Conditions - 1
New Product Pricing
You can price high (Premium Pricing) relative to the market...at
least for a time because there isnt any competition yet

Price skimming - charge the maximum, recover development costs
Penetration pricing - low price initially, but raises it as market share
builds
Experience-curve pricing start with high price, drops as production
costs drop

Competitive Pricing
Leader pricing enjoy the greatest market share; they set the prices
Parity pricing constantly adjusts prices to be in-line with competitors
Low-price supplier - has superior cost controls, offers low prices &
make profits

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Four Pricing Conditions - 2
Product Line Pricing
Complimentary pricing price the core product low; make profits on
accessories, supplies, or services
Price bundling several products bundled together; price set is
lower than individual items...but we sell more
Customer value pricing modify the product/service to customer
specifications/needs and price accordingly

Cost-based Pricing
Most common approach ... Ignores market influences and what
the customer is willing to pay...just be sure we at least cover our
direct costs

Mark-up pricing Cost-plus pricing; determine actual costs and add
something additional for profit
Rate of return pricing All prices are set as a percentage of costs;
...example, all book prices are marked up 33% above costs.

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Pricing Strategy
Increase sales
Lower prices to increase volume sold
Increase market share
Lower prices increases volume, thus increasing market share
Maximize cash flow
Raise prices and reduce direct costs and overhead
Maximize profit.
Raise prices, lower prices and raise volume, decrease overhead
Set up entry barriers to competition
Lower prices based on efficiency, economies of scale, keeping overhead low
Define an image
Raise prices based on higher perceived quality
Control demand
Dont have enough resources to meet demand, so raise prices

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Pricing Structure
It is important to understand what
customers are willing to pay based on the
perceived value of the product.

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Price Tactics
Tactics have to do with the actual price that is
assigned to a product or service.

Price is often used to convey positioning. For
example: a price of $3.99 suggests a bargain; a
price of $4.00 does not.

Rebates, coupons, discounts, and promotions
are all tactics to drive the customer to the product
based on price.
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Warning Signs
of Pricing Problems
Prices are always based on costs.
Different people in the organization set
prices with no agreement among them.
Prices always follow the competition.
New prices are generally a percentage
increase over the previous years prices.
Prices to all customers are the same.
Discounts are standardized.
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End Chapter 12

Growing and Managing A Small Business: An Entrepreneurial Perspective

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