Pricing and Distribution (Place)
What this domain tests
This domain tests pricing objectives and methods, and the design of distribution channels. Expect numerical break-even questions and questions that ask you to choose a channel level and justify it.
Core rules and concepts
- Pricing objectives include survival, sales growth, market share, profit, and quality leadership.
- Cost-based pricing adds a markup to cost; break-even quantity = fixed cost ÷ (price − variable cost per unit). Value-based pricing starts from perceived customer value; competition-based pricing follows rivals.
- Penetration pricing sets a low entry price to build share; skimming sets a high initial price to recover investment from early adopters.
- Channel levels count intermediaries between producer and consumer: zero level is direct; producer–retailer–consumer is one level; producer–wholesaler–retailer–consumer is two levels; producer–agent–wholesaler–retailer–consumer is three levels.
- Intermediaries perform sorting, storage, transport, financing, risk bearing, and market information functions.
Worked example
A new online tutoring service has fixed costs of ₹8,00,000, a price of ₹4,000 per student, and variable cost of ₹1,500. Break-even is 8,00,000 ÷ (4,000 − 1,500) = 320 students. The firm chooses a direct zero-level channel and penetration pricing for the first year. Reasoning: direct delivery controls quality and data; the low price builds trial; 320 is the minimum enrolment before profit. A three-level channel would add commissions and push break-even higher.
Traps that cost marks
Do not use fixed cost alone as break-even. Do not count the producer or consumer as a channel level. Do not assume intermediaries only add cost; they add time, place, and possession utility. Do not choose skimming for a price-sensitive mass market without justification.