Distribution and Pricing
This domain tests channels and pricing: intermediaries, distribution intensity, logistics, pricing objectives, and pricing methods.
Core rules
- Channel levels: direct (zero-level), one-level (retailer), two-level (wholesaler-retailer).
- Intermediaries perform transactional, logistical, and facilitating functions.
- Distribution intensity: intensive for convenience goods, selective for shopping goods, exclusive for specialty and luxury goods.
- Logistics includes warehousing, inventory, transportation, and order processing. Channel conflict can be vertical or horizontal.
- Pricing objectives include profit, sales, status quo, and survival.
- Cost-based pricing includes markup and cost-plus. Demand-based includes skimming, penetration, and prestige. Competition-based pricing follows market levels.
- Break-even units = fixed costs / (price - variable cost per unit).
Worked example
A retailer buys a lamp for $40 and uses a 40% markup on cost. Selling price = $40 + (0.40 x $40) = $56. If the markup is 40% on selling price instead, price = $40 / (1 - 0.40) = $66.67. For a new app, penetration pricing sets a low initial price to build users; skimming sets a high price to recover development costs from early adopters.
Traps that cost marks
- Mixing markup on cost with markup on selling price.
- Confusing penetration and skimming.
- Choosing exclusive distribution for convenience goods.
- Ignoring total channel cost and service output.
- Assuming intermediaries always raise prices without adding value.