A Guide to Strategic Pricing for Distributors

 

Just as competition is the cornerstone of capitalism, pricing is the cornerstone of competition. Consumers weigh a series of factors when making purchasing decisions mostly price and quality, both of which have upstream impacts on retailers, distributors, and manufacturers.

Distributors, being the middle link in the traditional supply chain (manufacturers > distributors > retailers), have the most fluid and risky pricing strategies. Supply and demand have the most to do with retail pricing. Manufacturer pricing is driven by production costs and desired margins. Distributors have to account for both customer demand as well as production costs, plus other things like transportation costs and storage fees, while still finding margins for profit.

Obviously, there are a few more wrinkles to account for in supply chain pricing but it should also be obvious how an ineffective distributor pricing strategy could eventually end up hurting the business. We’re going to explore a few of the factors to weigh when determining distributor pricing.

The first concept to understand when determining strategic prices for distributors is margins. Margins represent the percent of difference between the amount you paid and the amount you sold it for. Without margins, no one would make a profit and it’s important to understand that, whether a manufacturer, distributor, or retailer, all companies want to return a profit.

Manufacturers can essentially guarantee that they return a profit because they build the product and set the initial price accordingly. Distributors have to pay the manufacturer price and their margins are determined by how much they can sell it to retailers for. Retailers want to increase their margins by purchasing from distributors for as low as possible and therein lies the conundrum: how to maximize margins and also keep retailers happy with low prices.

Also, cost of goods sold isn’t the only cost that the distributors incur. They also have to distribute. Distributors also have to account for the cost to transport goods which can include international tariffs, maintaining a fleet of vehicles, and the cost to store product in a warehouse. All of these costs cut into margins, further complicating the idea of maintaining profits in a distributor pricing strategy.

It’s also important to consider that strong distributor and retailer relationships can last for a long time. In fact, it’s not uncommon at all as long as both parties continue to see mutual benefits. So, consider this when pricing, as well. Sometimes it makes more sense not to squeeze every penny out of a company and forge a longer-term relationship built on mutual trust instead.

When it comes to strategic pricing for distributors, like many pivotal business strategies, a lot comes down to process. Having an ineffective pricing process will increase missed opportunities, are more likely to experience discount problems and have a higher likelihood of inconsistency across the sales team. Meanwhile, thorough pricing processes do the opposite: minimize missed opportunities, reduce the risk of discounting too much and enforce global consistency.

In building a distributor pricing strategy, make sure to build a concurrent process along with it that addresses three major factors that, if structured around effectively, often yield good results: monitoring specific and potentially costly scenarios, increasing sales rep product knowledge and the ability to update or redirect pricing strategy to keep up with industry and market demands.

Pricing transparency and honest evaluation are critical. While developing the distributor pricing strategy, consider the effectiveness of the strategy already in place. Review the last year of deals and keep a tally of which deals adhered directly to the pricing model, which ones were special deals, which ones are apart of an existing customer contract and which ones had manual pricing overrides.

If the majority of the deals were for overridden prices, then the pricing model may need to be updated. If only a handful of the deals were from unique, case-specific pricing, it may not make sense to dedicate a disproportionate amount of strategic time to those deals. All in all, make sure to have a clear understanding of how your deals are priced and what pricing processes led to them.

Monitoring specific scenarios

Build a list of scenarios and combinations of factors that, if they happened, would raise red flags for your organization. This can include incompatible products being sold together, customer purchasing volume changing drastically, or something as simple as a new customer wanting a particular product that you don’t have. Each company’s list will be different but this is a good place to start when determining pricing as a distributor.

Then, for each item on the list, review the processes in place and determine how that red flag scenario can happen and how often. Ideally, each scenario only has a handful of ways to occur but if you find that there are multiple ways for particular red flag criteria to be met, then there may be a larger problem.

Sales Rep Product Knowledge

Depending on the size of your product catalog, expecting sales reps to stay familiar and educated about them all may be a formula for failure. Chances are, there are product documents stored in a database somewhere that sales reps can use themselves, and also share with customers, to increase knowledge. This accounts for why our studies show that sales reps spend 68% of their time researching.

When building a process for distributor pricing, work in a component of sales rep education. The easiest way to accomplish this is with a technological solution that educates sales people on-the-go, especially considering how taking extra time to learn about a product could result in a lost deal. PROS has several tools, like Opportunity Detection and Guided Selling, designed to minimize the need for manual research giving sales reps time back to do more strategic sales activities.

Build in flexibility

Some markets and industries change daily so it’s important to have processes that allow for flexibility in pricing strategy. If the foundation of your distributor pricing strategy changes too much, you may want to consider thinking higher level about your strategy. But changing things like discount limits and product pairings several times could be necessary so work to build a pricing process that can handle these changes without too much interruption.

Once you’ve outlined what processes exist, where they are most useful and what scenarios are costly to the bottom line, consider using a technological aid to reinforce these processes and prevent these scenarios. Time spent educating salespeople or awaiting discount approval or building quotes, for example, is all time that customers can use to look up other distributors.

CPQ solutions go a long way to eliminate tedious time spent preparing quotes for clients, a process that can take weeks for complex configurations and pricing models.

 

About the Author

Richard Blatcher

Richard is the Senior Industry Solutions Manager at PROS. He manages the global go-to-market strategy for PROS Automotive and Industrial Manufacturing solutions.

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