Pricing Tactics & Strategies Through Distribution
If your company sells through distribution, you’re well aware of the common challenges and issues. You’re likely to experience continual price pressures, a lack of understanding about how to sell the value of your company’s products or services, and demands for lucrative volume-discount programs. As a result, it can be daunting to keep price discounting in check, while trying to persuade distributors to sell the value of your product. To more effectively manage these challenges, there are several factors that should be taken into consideration, including distributor performance, negotiations and alternative pricing techniques.
First off, you’ll need to price well to motivate distributors to sell your products or services. You’ll also need to keep in mind that it’s important to adhere to your company’s pricing objectives: Is the goal to increase market-share or profitability? Whatever the objective, in pricing to distributors, you’ll want to allow them room to make a profit, which requires looking at a host of pricing factors. One area that should be considered in your analysis is the distributor’s performance. For example, carefully review two important factors:
- The product mix your distributors are selling and if it’s the right one.
- The distributor’s incentive programs, which may be too rich and disproportionately reward more low-value vs. high-value product sales.
The overall relationship between your company and its distributors is key, and can be a challenge depending on the distributor. As with any business relationship, some will use hard negotiating tactics to get what they want, while others may make unreasonable demands for deep discounts or allowances. It’s important to determine if they’re concerned about your business and whether they understand the value of your products, both of which will alleviate some of the challenges.
Working with distributors is a team-effort for the pricing group and the sales force, which is usually at the forefront of these encounters.
To work together effectively, you’ll need to understand the distributor’s challenges and issues, and also the negotiating tactics they may exhibit to obtain the best pricing. For example, a distributor may impose unreasonable timetables, claiming they need an immediate price and threatening to take business elsewhere if they don’t get it. They may also demand lower prices or claim your company’s pricing practices lack flexibility. To manage these common types of negotiations, it’s important to determine the following:
- Get to know your distributors well and make an effort to better understand the distributor’s challenges, issues and concerns.
- Determine if the distributor is generating significant and profitable sales revenue for your company, and whether the company is loyal and a true ally or simply an impediment to your business. These factors will determine the value of a long-term relationship.
While the onus rests primarily with the sales force to develop and maintain a good working relationship with distributors, it’s also important that the pricing group be able to implement strategic pricing tactics. Distributors don’t typically pay list price; however, it’s important to control price discounting as the pricing waterfall chart below shows.
The chart illustrates the difference between list price and pocket-price and the result of a significant reduction to bottom-line profit. It’s important to understand this concept to help manage these discounts effectively. (Concepts developed by McKinsey & Co.)
Educating the sales force about the price waterfall concept is an important factor in helping them more effectively manage discounts they offer. It can also encourage more thoughtful judgment as to how sales decisions will affect the company’s profitability.
Companies can attempt to minimize these revenue leaks by following these tips:
- Leverage your company’s advantage. If you’re the incumbent supplier, capitalize on that factor by selling or reminding distributors of your company’s excellent customer service and/or inventory supply. Offer additional value-added services, such as priority scheduling and delivery — but at a premium!
- Discount only on incremental sales volume. Entertain earned rather than negotiated discounts.
- Obtain something in return for price concessions. For instance, reward a change in distributor negotiations by offering discounts for using EDI or telephone service support, which reduces or eliminates on-site sales visits. You can also modify payment terms if the distributor continually asks for price reductions, particularly if you’re experiencing lengthy payment times.
These are some pricing tactics and strategies you can consider when pricing through distributors. Remember they’re in business to make a profit, just as you are. That said, it doesn’t mean you have to give your product away at sub-optimal prices. In working with distributors, develop an effective relationship.
Your pricing team should take the time to truly understand your distribution channels. Consider having them join your company’s sales force on account calls to understand the distributor’s challenges, issues and concerns. Ensure your sales team has a good understanding of your products and pricing tactics, and remember to:
- Control your discounting.
- Obtain something in return for price concessions.
- Leverage your company’s advantage.
- Evaluate every distributor’s performance.
In the end, everyone’s a winner, which ultimately makes for the best relationships.