The Value Of Strategic Pricing For Distributors Facing Significant Margin Erosion 🚠
Attempting to increase margins using a pricing and distribution strategy is not as simple as adding a markup to existing pricing. Many distributors have steered away from strategic pricing because the prospect of changing prices across thousands of products to price is just too daunting. However, if businesses want to avoid selling below cost and instead drive profitability, they must implement strategic and careful pricing adjustments, especially during 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 market and P&L. First, we define the distributors’ roles in business and the challenges they face. Then we move on to defining distributor development processes for pricing. Following that, we explain why pricing is the best value creation driver that they can utilise. 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. And by the end, you will learn about the best distribution business strategies and how to implement them.
The Right Pricing Strategy: Why Should Distributors Move Away From Cost-Plus?
Inflation is nearly at its peak. Having customer focused pricing based on thorough customer value driver analysis; and a rigorous cost estimation procedure is one of the best ways to prevent margin erosion from undisciplined pricing practices. This will direct your pricing adjustments across a large product portfolio and guarantee you don’t sell below your costs using broad price rise actions in the market.
What does the sales 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:
- 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 are frequently confronted with a multitude of challenges daily, particularly where there are a lot of competitors offering similar products or services. Thanks to the rise in internet usage and eCommerce. 50% of customers have already begun acquiring or investigating the possibility of acquiring at least ten distributors.
The challenge is for distributors to make themselves more appealing and valuable when offering similar products. How? They must maintain product quality, exceptional stock availability, shorter delivery periods, and spotless operational execution.
Distributors are the go-between for the producer and the retailer. This plays a critical role throughout the product lifecycle, helping retailers get the most out of their products. That can start anywhere from procuring to assisting in boosting production, and figuring out alternatives for raw resources when it comes to market supply issues.
What is a distribution pricing sales structure?
A distribution pricing strategy can significantly impact a business’s success. It is essentially a guide in determining the price point at which products are supplied by the customer segment and at the SKU level. 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. If necessary, this will 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 practice is to have a proper customer pricing, value driver and cost evaluation process in place. This ensures that you can implement a value-based strategy while not selling below your costs. Value-based pricing has many upsides because it is premised on what the customer values and are willing to pay. Although shifting to a value-based approach will take time and effort, emphasising value to your customers and products is a superior way to protect long-term profitability.
Pricing and Distribution Strategy: How can you improve your pricing?
Business distribution pricing development is a cooperative effort to optimise 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 one-size-fits-all strategy for pricing development. 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 tough competition. They may recommend price drops since they believe it will keep clients satisfied and enable them to achieve their targets.
However, other factors such as inadequate product supply and poor customer service can scupper more contracts than high prices. The truth is that low prices seldom determine sales growth.
According to the latest study, pricing is not even in the top five of what customers consider when choosing a distributor. In fact, depending on the item, most customers are far less price sensitive. The research which included hundreds of distributors also highlighted that price is the most crucial factor in securing deals on high-value products. Thus, pricing is the primary value creation driver that offers distributors the most margin growth prospects.
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 instilled pricing practices in their sales force and employ analytics or 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 scale through pricing:
1. Establish a pricing organisation to increase distribution sales.
This can aid the sales force to generate 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.
Our findings show that with the right setup and pricing team in place, incremental earnings gains can begin in as little as 12 weeks. The team can capture at least 1.0-2.25% more margin after 6 months using well-researched price management techniques. And after 9-12 months, companies are frequently generating 3-7% higher profits every year as they find more complex and previously unrealised possibilities, 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. They were tasked to drive annual profit growth, develop a long-term pricing structure, and defend against cyber threats. After many years, the pricing agency is now a profit generator in the sales force, consistently bringing significant net profit gains.
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’s never just about all the variable costs or expenses to achieve consistent returns and not 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 has little framework, thoroughness, and regulation required for continuous profit maximisation. A distributor must clearly define its pricing methodologies, trial and error phases, the right talent, sources, and outcomes to stay ahead of development and market competition.
For instance, an energy provider has put in place stringent performance monitoring aside from offering 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 undergo checking 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 potentials as well as market feedback from teams. They implement metrics or software tools to help them make competitive pricing decisions. This make price decision more objective.
For example, a tech solutions provider we know adopted data analytics to categorise its customers and products. It recommends pricing for every purchase based on its size, destination, and customer perception.
The technology allows their customer services and sales teams to retrieve product details, then set the price for products based on multiple criteria (as listed above), and employ meaningful sales guidelines by correlating their pricing to similar transactions. Not only does this new price setting process boost the sales teams confidence, it improve their ability to adjust prices to their optimal level. 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, negotiation, and handling 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 online support for inquiries.
In a short time, sales representatives grasped the developments, in addition to how and why prior pricing models had incurred expenses 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 with its sales reps who were rewarded solely on sales growth. To close deals, these sales team offered free and faster shipping, and lower prices too often.
But today’s top sales companies link compensation to both earnings and profit growth. That’s why the distributor altered its compensation approach, price strategy, and staff coaching. In the end, with the changes made, sales and profit margin expansion have both been maximised.
The distribution marketplace has become more competitive in recent decades. Top players increased profitability by 400 basis points on average, 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. As a consequence, they have seen profit increases ranging from 200 – 500 basis points. Besides that, they continue to improve margins without sacrificing volumes; widening their lead over the underperformers that do not invest in their pricing capability.
For a comprehensive view on integrating a high-performing pricing team in your company,
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 firstname.lastname@example.org if you have any further questions.
Make your pricing world-class!
- marketing strategy (15)
- Organisational Design (13)
- Podcast (114)
- Pricing Capability (60)
- Pricing Career Advice (10)
- Pricing Recruitment (15)
- Pricing Strategy (184)
- Pricing Team Skills (10)
- Pricing Teams & Culture (15)
- Pricing Transformation (18)
- Revenue Model (8)
- Sales Effectiveness (15)
- Talent Management (5)
- Technical Pricing Skills (28)