Creating a thorough and profitable pricing strategy is important for distributors caught in between paying a price to cover the production as set by manufacturers and selling at a price that will meet consumer demand after retailers mark it up. Distributors find themselves in a fluid situation having to adhere to events happening on both sides of them in the supply chain. Their positioning doesn’t only come with threats, though. Distributor placement in the middle of the supply chain also allows them to utilize various pricing tactics to influence their share of the market.
Simply by raising or lowering the prices they charge to retailers, distributors can sway trends that are dependent on things like product perception, competition, and price. Coming up with a pricing strategy, however, is a complex process with many layers of factors to consider. Distributors that are unable to refine their pricing strategy, whether due to lack of knowledge, resources or both, will struggle to compete with others that do.
Even for companies with a focus on strategic pricing for distributors, staying current with all the contributing factors is nearly impossible. Not only because the fluidity and dynamic nature of economic markets are ever-changing but also because certain contributing factors are hard to predict with intuition alone. That’s when the use of revenue management or pricing optimization technologies are most effectively used, to work smarter not harder.
PROS has collected over thirty years of purchasing data and industry knowledge in order to build out its proprietary Dynamic Pricing Science. Still working within the predetermined distributor pricing strategy, Dynamic Pricing Science evaluates tangible metrics like wallet share, competition price points and supply along with intangible variables like willingness-to-buy and brand loyalty to determine a price point that customers will pay at any given time.
Four Pricing Strategies
Prior to leveraging the benefits of the technology, however, comes the strategy. These pricing strategies can be categorized in one of four ways: economic, penetration, skimming and premium selling. Here’s what those mean:
Sometimes, economic factors like supply and demand determine pricing strategy. As you may remember from your ECON 101 class in college, high demand and low supply will lead to higher prices. Conversely, low demand and high supply will usually lead to lower prices.
Unfortunately, it’s seldom that simple. High demand and low supply, according to some pricing strategies, could result in sourcing a lower quality product in order to maintain the price point, instead of raising them.
Imagine you own an electronics store and everybody is buying televisions for the Holidays this year. Rather than stocking up on the most expensive, televisions, you get lower quality ones banking on the demand to keep products moving. This keeps consumers happy but could also create an opportunity for a company with one of the other three strategies to capitalize.
This is an area where distributors have flexibility but must also be diligent in maintaining relationships with manufacturers so that they can constantly purchase from different sources looking for profitable scenarios. Distributors also have to be careful about their own inventory and making sure that an evolution in pricing strategy doesn’t result in deadstock.
Companies looking to disrupt a particular industry may implement a pricing strategy based on penetrating, or saturating, the market. This tactic involves selling higher quality products at a lower price point. The idea is that the discount will increase demand and therefore market share.
If your electronics retailer can sell 4K televisions at the same price that the others are selling standard LEDs, people will flock to your store. This contributes to why it’s important to not only have a certain amount of flexibility in pricing strategy but to also have an understanding of what competitor pricing strategies look like and how they could influence yours.
If two stores both selling TVs are next to each other and one follows an economic pricing strategy and the other is looking to penetrate, well lots of things could happen. First, the demand that the first store experienced – which gave them confidence that they could push the lower quality product without seeing a drop in customer flow – will decrease in favor of the second store. That would open the door for the second store to raise the prices on the nicer TVs. This could then cause customers to settle for the lesser TV if the price point is the primary factor.
This is just one possible scenario and one resulting behavior from it, further highlighting the complexity of pricing strategy and why it’s so hard to do effectively without leveraging scientific resources.
The opposite of penetration is skimming. Rather than offering a high-quality product at a low price, skimming promotes hiking up the prices on a lower quality product. While this may generate immediate spikes in sales, it’s not a smart strategy to implement long-term.
Consumers aren’t stupid and they’ll eventually catch on that the price point isn’t worth the product. As a distributor, you would run the risk of having retailers go elsewhere to stock their shelves potentially leaving you with inventory that no one wants to buy anymore because they don’t trust your price to quality ratio.
The last pricing strategy is potentially the most straightforward. Premium pricing means that the product is high quality and the price reflects that. Companies operating under this philosophy are less concerned with universal demand and prioritize the quality of the product over the price itself.
Consider you are a distributor selling handbags. You have premium purses made with the finest materials that you paid a lot of money for. Rather than lowering the price to get into department stores which have a high volume of customers, you decide to keep the prices high and sell only to luxury clothing stores. While the customer volume may be lower, that is something that’s inherent with this strategy. It may take a little longer to move the product because the price point excludes some people but that’s why the quality of the purse takes priority over the price in this distributor pricing strategy.
Premium strategies allow companies to reduce the number of competitors they have since they knowingly exclude customers below a certain price point. This strategy also involves other aspects of the company like marketing and outreach. Since the goal isn’t for widespread appeal largely resulting from an expensive price point, it’s important to also target customers who are less price sensitive. These more rare customers are more likely to pay for something regardless of the price. What this strategy also does, however, is opens the opportunity for a company with a penetration pricing strategy to slide in and steal market share.
As you can see, there are countless ramifications to pricing changes at all stages of the supply chain. The use cases here are only a sliver of the possibilities and only account for a handful of factors. The reason why the revenue management and pricing optimization tools at PROS are so transformational for companies that use it is because it analyzes decades of data and, using machine learning and the same pricing algorithm that sets airline ticket prices every day, determines the price that your customers will need to see to make that final purchasing decision.
Dedicating the necessary human resources to doing this level of analysis would require a robust team of data scientists, analysts, strategists and executives working around the clock to constantly weigh, synthesize and adjust. That doesn’t include implementing that pricing strategy across an entire, potentially global, sales force.
Once your company decides to focus on a more comprehensive and effective distributor pricing strategy, it won’t take long to see that technology needs to be a crucial part of it. With the landscape of most markets and industries changing constantly, leveraging a seasoned, tested and proven scientific method of evaluating those changes will quickly prove to be what sets your company apart from those that don’t.
About the AuthorMore Content by Richard Blatcher