Far too often, pricing for distributors turns into a futile exercise in juggling.
At any given moment you are dealing with up to thousands of customers purchasing from your list of hundreds of thousands of products after intensely negotiating their contracts. Mixed with supplier prices, transportation, and other costs, this can lead to razor-thin margins. Add deliberations with your suppliers and wavering inventory turnover rates across regional locations and it can become too much to handle.
Now factor in the multiple technological solutions distributors tend to use to manage their various data elements, such as customer rebates, supplier programs, competitive cross reference files, etc. This creates a cycle of missed opportunities to improve margins and profit.
Modern distributors still abide by traditional pricing methods that focus their efforts on avoiding complications. Whether they base prices on cost, their customers, or their competition, a simplified pricing model does more harm than good, despite the occasional growth spurt.
Innovations in the field have changed the way pricing should be viewed. “Embrace the complexity” should be the new mantra of distributors everywhere.
But, how? It’s all well and good to preach about the benefits of improved pricing. Yet, the different factors I mention above can scare even the most forward-thinking professionals from making a change, as long as they are seeing minor growth.
There are three aspects of the distribution pricing model that are primed for disruption and it starts with guidance.
Building a Pricing Function
Pricing, as distributors know it, relies heavily on the cost of the product or raw material. From the get-go, it seems like minimal control of the price is in the hands of the distributor; the supplier sets the starting price level. More often than not, the price charged by your supplier will fluctuate, and you will follow suit as you see fit to avoid losing much business.
Wouldn’t it be nice to have the guidance to know when and where you can pass along these price increases?
Within the structure of your organization should be a pricing function. This can be in the form of a centralized group controlling the prices for the company, a decentralized function that allows each region or product manager to utilize their localized knowledge, or a center-led format, which uses the centralized group to set prices, but allows the decentralized group to have the final say on what to do.
No matter what you choose, the important facet of this model is focusing more on pricing as an adjustable asset in your control to emphasize the value of your products, not the cost.
Above I mentioned cost, customers, and competition. With the pricing function established, your new pricing models can incorporate all three, rather than just one at a time. As each aspect is incorporated, the value of your product begins to take shape.
This is the first step, but your pricing function cannot succeed with disconnected data.