Pricing Strategies for Distributors
Distributors sit in a zone we call Switzerland… the middle of the supply chain between the manufacturer and the final customer, which increases the complexity and scope of what they must manage. If you’re a distributor, you can actually use this position to your advantage!
In this post we’ll share some distributor pricing strategies you can use with core competencies (here’s a related article on Inbound Logistics), such as best-in-class supply chain management, integrated business planning, channel management, and managing for profitability, to create competitive advantage.
SMART distributors have aligned their business processes, people and technology with pricing strategies TO MAXIMIZE PROFITABILITY.
Complexities Are Shrinking Profits
In today’s distribution arena, demand is unstable [Boy, that’s the Understatement of The Year!]. Macro-economic complexities are increasing pressure and cutting deeper into distributors’ pockets, including:
- Trucking capacity shortages
- Tariffs, which inflate costs and muddy-up lead times
- Increased competitive pricing pressure from Amazon & industry-vertical e-commerce distributors
- Other factors – Watch webinar:
All of these factors contribute to symptoms like demand volatility, juggling between suppliers, unpredictable costs, price transparency across sales channels, and increasing financial difficulty trying to balance inventory investments against service levels. All of which shrink profits.
Distributors have a distinct advantage sitting in the middle of the value chain (see related article on Inc.com). They have visibility into data and can leverage multiple pricing approaches driven by this data. They can use outbound demand data across channels to determine a better list price, regardless of whether it is published or not.
What price optimization strategies are smart distributors using to continuously optimize product pricing across their locations and channels? Some examples include:
- Advanced price sensitivity measurements
- Bayesian inference across distributor product assortments
- Shared statistics & pricing metrics across product/location attributes
- Sophisticated pricing engines that account for supplier, business & other pricing constraints
- Science-driven competitive positioning
- Better customer segmentation
- Pricing metrics to improve supplier negotiations
Be sure to catch our podcast on AI-based pricing solutions with supply chain management:
Distributors can use competitive price data to measure which competitors and competitive products influence demand, and the boundaries of price increases/decreases before competitor prices really force lost sales. Direct-sales channels, including both traditional catalog sales and more dynamic ecommerce channels, benefit greatly from optimized list prices. Negotiated indirect channels also benefit by improving the competitiveness of starting prices and determining which channels are more or less price sensitive by product.
Customer Price Sensitivity
Customer price sensitivity can also be measured and used for customer segmentation. It can help drive stratification of offers and pricing approaches by customer segment. One example is identifying which products will respond better to temporary price reductions (or “pulses”) for selected channels and customers. Pricing analytics can highlight under-performing customers and provide guidance on structuring optimal price waterfall structures for net-negotiated pricing and provide better sales guidance to field sales.
Supplier Cost Management
Better list pricing, combined with margin objectives, can be used to determine supplier cost points and allow the distributor to optimize profit distribution between their organization and their suppliers. They are closer to customer demand; their neutral “Swiss” position can be used to leverage price analytics and price optimization in measuring customer willingness to pay.
Too many distributors let “the tail wag the dog,” allowing suppliers to dictate things like:
- Which products should be discounted on which channels (which doesn’t make sense, since distributors are better able to identify which customers are more or less price-sensitive),
- Which products on which channels are over- or underpriced, and
- Which would show the most financial benefit from adjustments to everyday prices and temporary price reductions (TPRs)
When a distributor starts to drive the pricing decisions – combined with replenishment optimization and supplier integration — that’s when they can fully realize maximum profitability. The dog wags the tail.
Integrated Business Planning + Pricing Management
Long-term distributor success in achieving profitability goals comes from better integrated, long-term planning. When pricing, replenishment and inventory optimization are integrated through processes and technology, distributors can realize what we call the multiplier effect:
Improved Fill Rates +
Reduced Inventory Investments +
= Max Revenue and Profitability from Available Inventory
Additionally, this ripple effect continues throughout the business – delivering a nice residual boost in the areas of product availability, customer service, price image and resulting customer satisfaction.
Integrated business planning accounts for price changes influencing demand, optimally categorizes demand, and drives organizational collaboration across Operations, Finance, Marketing, Sales and Service departments. The result is further alignment with long-term price optimization and strategic planning decisions.
Leverage Your “Swiss Status”
Distributors can and should take advantage of their central, “neutral” position in the value chain. They are uniquely positioned to leverage data to synchronically optimize inventory, replenishment and pricing management.
In summary, next-generation price optimization tools help distributors determine better list prices, use them to improve negotiated net pricing and sales guidance, and optimize margins and profits through proactive vendor management. These tools integrate long-term planning processes across the organization, enhancing the multiplier effect of strategic price management, replenishment and inventory decisions.
To learn more about pricing strategies, subscribe to PlanningPosts and reach out with your questions.