Pricing Strategy and Channels of Distribution: Where Value Delivery and Value Capture Intersect

Channels of distribution are a critical component of a firm's go-to-market strategy. A company may elect to sell its products directly to customers (DTC) without the assistance of any intermediaries or, alternatively, it may seek several channel partners to help it reach various customer segments at various locations. Regardless of the route(s) taken to make products and services available to customers, a company needs to understand the pricing implications of its chosen channel structure. This note covers several key concepts, frameworks, and analyses any business should master in order to effectively link efforts to deliver value (via its channels strategy) and efforts to extract value (via its pricing strategy). In particular, the note covers situations where the channel players apply a margin (or markup) to determine their price, as well as settings where they leverage information on market demand to maximize profits. Sources of pricing friction between manufacturers and retailers are highlighted, such as double marginalization, and ways to mitigate these frictions are featured. Furthermore, a number of key pricing practices that channel members engage in are covered, such as MSRP (manufacturer suggested retail price), MAP (minimum advertised price), pass-through rate, and consignment selling. To help illustrate the key ideas, the note provides multiple examples and intuitively explains the steps involved in setting prices in light of the channel structure.

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