Week 7 Sample answer - the levels of distribution intensity PDF

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the levels of distribution intensity...

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INTRODUCTION TO MARKETING PRACTICE SHORT ANSWER QUESTION

Explain, using your own examples (fictional or real companies), the levels of distribution intensity. Organisations have three options for intensity of distribution: intensive, selective or exclusive distribution. These distribution intensities refer to the degree to which a product is made physically available in the market. Intensive distribution is a form of distribution “aimed at having a product available in every outlet at which target customers might want to buy” (Lamb et al. 2018, p. 173). Simply, it is a form of distribution that aims to maximise market coverage. Typically, intensive distribution is reserved for convenience products, those products that are frequently consumed out of necessity and which require little customer decision making. An example of a brand that is distributed intensively is Coca Cola. Coca Cola is a product that is made available everywhere drinks are sold, including supermarkets, service stations, restaurants and bars. This intensive distribution has enabled Coca Cola to become a market leader as a result of the benefits of high market spread and subsequent relatively low product price. Selective distribution is a form of distribution which eliminates all but a few retailers in the distribution channel. Compared to intensive distribution, products sold through selective channels are typically harder to access, but are not difficult to access. A characteristic of selective distribution is that consumers must actively seek out the product, but not in a way that causes issues in purchasing out of scarcity. Selective distribution is typically employed by those organisations that sell shopping products, as it is too costly to distribute these items intensively but are demanded too heavily to employ exclusive distribution. An example of a product that uses selective distribution is Levi’s jeans. While Levi’s does not stock their products in almost every store that sells jeans, they still have a significant presence with their own storefronts as well as select retailers like Myer and David Jones. Finally, exclusive distribution is a form of distribution which offers the most restrictive form of market coverage. It eliminates all but one retailer in specific geographic region, meaning that customers must actively seek out the product to a much higher degree than selective distribution. Exclusive distribution benefits organisations by applying a prestigious element of the brand through scarcity, however this can backfire if demand for a product is high and distribution is so exclusive that customers cannot actually purchase the product. As a result, exclusive distribution is typically reserved for specialty products and some shopping products which have very specific target markets. An example of this is Beyonce’s Lemonade album. Originally, and for two years after its launch, Lemonade was only available through Tidal’s streaming service. This exclusive agreement with Tidal saw subscriptions skyrocket during the launch of Lemonade.

INTRODUCTION TO MARKETING PRACTICE LONG ANSWER QUESTION

Snappy Tom has developed a new range of cat food, “SnappyLuxe for Kittens” which from its original market testing and research results, is likely to be very popular among owners of pedigree and purebred kittens. The firm’s main objective is to make as much profit in the short term as possible from this new product range, given that a) the product might be a short-term fad, and b) demand for the product may be relatively inelastic to start with. Is Snappy Tom likely to use skimming or penetration pricing to initially price this new product? Why? Explain the advantages and disadvantages of this strategy. Then select and fully explain (including advantages and disadvantages) two other methods the company could use to price this new food range. Price skimming is a pricing strategy where an organisation charges a high introductory price for a product, then gradually decreases the price as the product transitions through the product life cycle to eventually capture the majority of the market. This type of strategy is particularly useful for brands positioned as high quality – the high initial price of new products reaffirms an organisation’s positioning as premium, and works to strengthen brand associations with quality. In a skimming approach, profit per unit is higher. However, sales may be low initially during the introductory stage of the life cycle if not coupled with heavy (and usually expensive) promotion (Lamb et al. 2018). Likewise, organisations that choose to implement a skimming strategy must ensure that customers perceive significant value in their product offering, otherwise competitors can easily undercut a skimming organisation and steal market share. Penetration pricing is a pricing strategy which involves an organisation charging a low introductory price for a product (‘penetrating’ the market) in order to capture a large share of the market as quickly as possible. Entering a market using a penetration strategy can be useful to discourage new entrants. Once a firm has a high market share, competitors may be

unwilling to enter the market, giving penetrative firms an easier opportunity to harvest a market. One of the biggest disadvantages of penetration pricing is the nature that lower profits are achieved per unit compared to a skimming strategy. If the product is not adopted quickly, an organisation will quickly find themselves losing money. Because the product is predicted to be a short-term fad, it is likely that Snappy Tom will utilise a penetration pricing strategy when introducing the product to the market. As the product is not predicted to have a long life-span, it will be important that Snappy Tom capture as much of the market as possible as quickly as possible to maximise profitability. Because short-term profitability is the objective, selecting a skimming strategy might not meet this goal. Price skimming, while providing potentially higher profits in the long-run, will not deliver high profits in the short-term which is necessary of a fad product. In this case, however, there would be advantages to selecting a skimming strategy. First, as demand for the product is predicted to be inelastic, Snappy Tom could charge a high initial price and still see similar adoption rates as if they were to introduce the product at a low cost. In addition, it is likely that owners of pedigree and purebred kittens will have certain quality expectations with the food they feed their pets. Charging a high introductory price for the new cat food product will have a positive effect on customer perceptions on the product itself, with customers potentially perceiving the product as higher quality due to its higher cost. On the balance of advantages and based on the organisation’s key objective of short-term profit however, the penetration strategy is most beneficial. Snappy Tom could utilise odd-even pricing as part of their pricing strategy to increase units sold on top of a penetration strategy. Odd-even pricing involves strategically selecting a price that will connote certain product attributes to consumers. In the case of Snappy Tom, it might be worthwhile using odd pricing to sell the new product. For example, the organisation could price a packet of cat food for $2.99 rather than $3.00. Odd-numbered prices are perceived by customers as being on sale, potentially leading them to purchasing greater volumes of the product per transaction (Lamb et al. 2018). This will aid in providing higher levels of short-term profit, but may be unsustainable in the long-term. This type of strategy may also lower customers’ perceptions of the product’s quality, with evenly priced products being perceived as higher quality. In addition, Snappy Tom may want to implement some form of price bundling to supplement a penetration pricing strategy. Price bundling involves “marketing two or more products in a single package for a special price” (Lamb et al. 2018, p. 272). It could be beneficial for Snappy Tom to sell the new product in bulk, potentially with 14 units per package to feed one cat for one week. Offering the product using price bundling will decrease customer cost per unit and will work to further penetrate the market. As consumers will be aware that the cost of cat food is a continual cost rather than a one-off cost, this type of bundle will increase the convenience of the purchase and incentivise customers to buy in bulk, meeting the organisational objective of short-term profit. While Snappy Tom could use either skimming or penetration strategies, the implementation of a penetration strategy best aligns with the organisation’s goal of short-term profit. To

supplement this strategy, the organisation can use odd-even pricing and price bundling to fine tune the price of the product and maximise profit in the short-term. Reference list Lamb, C. W., Hair, J. F., McDaniel, C., Summers, J. & Gardiner, M. (2018). MKTG4 (4th ed.). Melbourne, Australia: Cengage....