Key Takeaways
- A pricing and distribution strategy can protect margins by moving beyond cost-plus pricing and broad price increases.
- Value-based pricing helps distributors align prices with customer value while protecting long-term profitability.
- Data analytics and stronger pricing processes make pricing decisions more objective and reduce pricing mistakes and volatility.
- Pricing teams, sales training, and aligned compensation can turn pricing capability into sustained profit growth.
Increasing margins through a pricing and distribution strategy is not as simple as adding a markup to existing prices. Many distributors have avoided strategic pricing because changing prices across thousands of products can seem too daunting. However, if businesses want to avoid selling below cost and improve profitability, they must implement strategic and careful pricing adjustments, especially during periods of inflation. It is not easy, but it is necessary. So, how can distributors accomplish this?
In this article, we discuss how distributors can implement a pricing strategy to regain control of their pricing and P&L. First, we define the role of distributors in business and the challenges they face. Then we examine the processes distributors can use to develop their pricing. Following that, we explain why pricing is a key driver of value creation. Finally, we will look at how distributors can scale with a competitive pricing organisation.
At Taylor Wells, we believe that those who see strategic pricing as the cornerstone of business competence will keep succeeding in the coming years. By the end, you will understand the key distribution strategies and how to implement them.
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Pricing and Distribution Strategy: 5 Ways to Protect Margin
A strong pricing and distribution strategy can help distributors protect margins without relying on broad price increases or cost-plus pricing alone. The article identifies five practical ways to strengthen pricing and profitability:
- Establish a pricing organisation. A dedicated pricing team can improve pricing procedures and profit governance; incremental earnings gains can begin in as little as 12 weeks.
- Use a value-based pricing approach. Pricing around customer value and value drivers helps businesses distinguish themselves while protecting long-term profitability.
- Strengthen sales and distribution processes. Clear pricing methodologies, the right talent, and defined outcomes can help sales teams manage pricing more consistently.
- Integrate data analytics. Analytics can help distributors assess customers and products, make pricing decisions more objective, and reduce unintended mistakes and pricing volatility.
- Compensate and train salespeople appropriately. Linking compensation to earnings and profit growth, alongside training and coaching, can reduce the pressure to win deals through unnecessary discounts.
Together, these approaches show how distributors can build pricing capability while protecting margins and supporting profitable growth. The next sections explain the commercial challenges behind these decisions and why moving beyond cost-plus pricing matters.
See whether your pricing is under controlThe Right Pricing Strategy: Why Should Distributors Move Away From Cost-Plus?
In periods of cost pressure and market volatility, customer-focused pricing based on thorough value-driver analysis and rigorous cost estimation can help prevent margin erosion from undisciplined pricing practices. This approach can guide pricing adjustments across a large product portfolio and help prevent you from selling below cost through broad price increases.
What does the distribution model mean?
What is the best pricing and distribution strategy during times of high inflation? Let’s take a step back and first understand the nature of distribution businesses and the commercial and operational challenges they face today.
Almost every business relies on distributors. They can be classified into four broad categories:
- manufacturers
- suppliers
- independent tradespeople
- import agencies
Now, let’s delve a little deeper into this type of business.
A distribution model involves wholesalers, resellers, and brokers. It describes how products are transported from the producer to the retailer and where consumers buy them.
When developing a distribution model, executives must consider their supply chain network, transactional capabilities, procurement processes, operations, product innovation, commercial practices, and customers, to name but a few. For example, if a product is perishable, then proper storage is required. When choosing transportation, the volume should also be taken into account. Customer characteristics also influence distribution. For example, more outlets should be available if a purchase is made frequently.
Distributors face numerous challenges, particularly when many competitors offer similar products or services. The rise of internet usage and eCommerce has made it easier for customers to research and compare distributors.
The challenge for distributors is to make their offerings more appealing and valuable when competing with similar products. How? They must maintain product quality, exceptional stock availability, shorter delivery periods, and spotless operational execution.
Distributors are the go-between for producers and retailers. They play a critical role throughout the product lifecycle, helping retailers get the most out of their products. This can include everything from procurement and production support to finding alternatives for raw materials when supply issues arise.
What is a distribution pricing structure?
A distribution pricing strategy can significantly impact a business’s success. It essentially guides price-setting for each customer segment and SKU. But this should be done with caution. For example, setting your prices too high may cause clients to opt for alternatives. On the other hand, setting your product’s price too low may devalue your product. This can make it difficult to raise the price later. Both mistakes will result in gradual margin erosion.
One of the best ways to avoid margin erosion from poor pricing practices is to have a proper process for evaluating customer pricing, value drivers, and costs. This helps you implement a value-based strategy without selling below cost. Value-based pricing has many upsides because it is premised on what the customer values and is willing to pay. Although shifting to a value-based approach takes time and effort, emphasising the value of your products to customers is an effective way to protect long-term profitability.
Pricing and Distribution Strategy: How can you improve your pricing?
Distribution pricing development is a collaborative effort to optimise pricing capabilities and market share. Unfortunately, some companies don’t see the value of pricing development and think it isn’t necessary. But they’re missing out on huge potential.
There is no single strategy that works for every pricing development process. Traditionally, the procurement team and distributor will select an approach that is best suited to their partnership, logistics chain, and sector.
Why should distributors strategically reposition their price list?
Many experienced sales representatives think increasing prices means risking sales, particularly when they face tough competition. They may recommend price drops because they believe these will keep clients satisfied and help them achieve their targets.
However, other factors, such as inadequate product supply and poor customer service, can cost distributors more contracts than high prices. The truth is that low prices seldom determine sales growth.
McKinsey research, based on a survey of more than 200 distribution customers, found that pricing ranked sixth among the factors customers considered when choosing a distributor. However, the research also found that price was the most important factor in winning deals on key value items. As a result, pricing is one of the most powerful value-creation levers for distributors and can provide significant opportunities for margin growth.
Be a Market Leader: Improve Your Pricing and Direct Distribution Sales
Some distributors have already invested in building their pricing strategies to improve margins. They’ve embedded pricing practices within their sales force and use analytics and other value capture methods. In light of our experiences with successful pricing organisations and assisting distributors in their pricing journeys, here are five ways to strengthen pricing and protect margins:
1. Establish a pricing organisation to increase distribution sales.
This can aid the sales force in generating value by driving better pricing procedures and profit governance throughout the organisation, offering a comprehensive outlook as to how pricing impacts customers using advanced technologies.
With the right setup and pricing team in place, incremental earnings gains can begin in as little as 12 weeks. Taylor Wells research also indicates that organisations can capture at least 1.0–2.25% more margin after six months and frequently generate 3–7% higher profits annually after 9–12 months as they identify additional opportunities, efficiencies, and risks.
To illustrate, the sales model of a major grocery distributor needed to improve its pricing. With the assistance of its branch offices, it decided to establish a centralised pricing organisation. The organisation was tasked with driving annual profit growth, developing a long-term pricing structure, and defending against cyber threats. Over time, the centralised pricing organisation became an important contributor to profit improvement across the sales organisation.
2. Consider a value-based pricing approach for your sales and distribution price list.
Value-based pricing benefits both distributors and their clients. Businesses can clearly distinguish themselves from their competitors. They are also better rewarded for generating value. The selling price is determined by evaluating the value you offer and the value drivers of customers. It is not simply about covering variable costs and expenses; it is about achieving consistent returns without having to sell at a loss.
Customers are less likely to react negatively to a value-based pricing strategy, even when prices rise. What the company must do is properly communicate the value of its services and products. Similarly, offering incentives and loyalty programmes also minimises risks. This is critical to preventing clients from switching to your competitors.
3. Boost overall direct sales distribution processes.
We have observed that many sales teams’ pricing lacks the framework, thoroughness, and regulation required for continuous profit maximisation. A distributor must clearly define its pricing methodologies, trial and error processes, talent requirements, data sources, and desired outcomes to stay ahead of market developments and competition.
For instance, an energy provider has put in place stringent performance monitoring and provided sales representatives with regular supervision. At different levels of the organisation, such as sales reps, executives, store managers, and senior leadership, pricing standards and objectives are checked and guide mentoring.
4. Integrate data analytics in deciding your sales and distribution price list.
Sales representatives do not always provide the best price. Successful distributors also use sophisticated analytics to identify pricing opportunities and gather market feedback from teams. They implement metrics or software tools to help them make competitive pricing decisions. This makes price decisions more objective.
For example, a tech solutions provider we know adopted data analytics to categorise its customers and products. It recommends a price for every purchase based on its size, destination, and customer perception.
The technology allows its customer service and sales teams to retrieve product details and set prices based on multiple criteria, as listed above. It also helps them apply meaningful sales guidelines by comparing their pricing with similar transactions. This new pricing process not only boosts the sales team’s confidence but also improves its ability to adjust prices to optimal levels. Ultimately, data analytics has reduced unintended mistakes and pricing volatility, effectively increasing profits.
5. Compensate & provide adequate training for your salespeople.
If you want pricing efforts to have a long-term impact, you must invest in the sales team’s capability to set the price according to value, negotiate, and manage pricing arrangements. This will also help them appreciate their job and be more loyal to your mission. Pricing organisations can achieve positive outcomes by initiating pricing action plans.
A raw materials distributor, for instance, embarked on an extensive pricing reform, introducing new regulations, mechanisms, and software that sales representatives had to learn. The company provided online courses, management tutorials, and support for inquiries.
Within a short time, sales representatives understood the new processes, as well as how and why previous pricing models had increased costs for the company. Finally, managers became pricing leaders for their teams.
To achieve a robust pricing and distribution strategy, compensate your sales team accordingly. A microchip distributor in Sydney, for example, was experiencing significant margin loss despite rising sales. They found that the problem was that its sales reps were rewarded solely for sales growth. To close deals, these sales reps offered free and faster shipping, and lower prices too often.
Leading sales organisations can link compensation to both earnings and profit growth. That’s why the distributor altered its compensation approach, price strategy, and staff coaching. As a result, both sales and profit margins increased.
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Bottom Line
McKinsey research found that the distribution marketplace has become increasingly competitive. Over a ten-year period, average gross margins across its global index of distributors contracted by 100 basis points, while top-performing distributors increased margins by an average of 400 basis points, highlighting the potential impact of stronger pricing capabilities and creating a gap between distributors who perform best at pricing and those who do not.
Distributors who recognise the value of pricing and distribution strategy have invested in developing best-in-class pricing to drive commercial strategy. McKinsey’s analysis also found margin uplifts of 200 to 500 basis points among distributors that invested in best-in-class pricing organisations. These distributors continued to improve margins and expand their advantage over those that had not invested in pricing capability.
For a comprehensive view on integrating a high-performing pricing team in your company, download a complimentary whitepaper on How To Drive Pricing Strategy to Maximise EBIT Growth.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
