Far too often, pricing for distributors turns into a futile exercise in juggling. At any given moment you may be 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 and it can become too much to handle.
Most distributors still adhere to 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. But today we make that point that we need to change the way pricing is viewed. “Embrace the complexity” because in the end it's really very simple.
But, how you ask? There are three aspects of the distribution pricing model that are primed for disruption and it starts with being open to change.
Step 1. Building 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.
Step 2. The Unified Pricing Database
To increase visibility into pricing options, adopt a platform that brings your data into one space. New profit opportunities will arrive as a result of the increased cross-analysis capabilities. Take your large accounts as examples. You likely have a few large accounts that receive the bulk of your attention. These are negotiated heavily and scrutinized at every step of the process to ensure maximum profitability. Market factors, competitor movement, and cost are all considered when setting and analyzing these prices.
Now, imagine if your data is in one place and that large account scrutiny can be automated across your entire portfolio of accounts, increasing the profitability of those deals.
The staff is in place and the technology is up and running. Progress is being made, but you still aren’t quite sure what to look for.
Step 3. Where to LookStandard distribution pricing models segment at the base level: product category, region, and size of customer for example. While a good start, this is nowhere near enough. With the cross-analyses in your new system, you must look into internal and external data — current and historical. From these analyses you will be able to look horizontally, in addition to vertically.
Market factors are a great place to start. Are there big changes occurring? Are your suppliers’ raw materials being affected? Be proactive in your analysis and research to prepare your own system for changes.
Additionally, your customers are possibly the biggest source of insight. It seems obvious, but this group is frequently overlooked. When analyzing your contracts, look at your customer’s willingness to pay. Are they buying more of a certain product? Are they purchasing more products off contract? Are they not purchasing off contract at all?
These questions lead to immense profit opportunities and take all factors into account when defining your value. Of course, these are small on a case-by-case basis, but the incremental impact to your bottom line is substantial.
Segmentation by product category, region, and customer size is still useful, but more so when used in conjunction with other product, customer, and transaction attributes like: commodity versus non-commodity, strategic customer versus non-strategic, customer value and product classification.
Your pricing team can then work with your frontline sales organization by guiding them with data-based insights along with the supporting metrics and tools to ensure your frontline is confident in the guidance. A strong collaboration between pricing and sales solidifies positive pricing behaviors.
Focusing on cost or list price is a temporary profit squeeze that keeps you chasing an unsustainable benchmark of success. Often customers ask - What is the price for this item? In the MDS-Nx System that price is really a function or algorithm - so it's not a simple answer. But if you build a function and rely on your system it becomes a simple task , with a much more complex answer.