If your company is selling through distribution, it’s well aware of the common challenges and issues that distributors will pose, such as continual price pressures, not comprehending nor selling the value of your company’s products (or services) and demand for lucrative volume discount programs to name a few.
As a result, it can be a daunting effort to keep your price discounting in check, while trying to persuade distributors to sell the value of your product. In order to more effectively handle these types of challenges, there are several factors that should be taken in to consideration, such as distributors’ performance, behaviors, and alternative pricing techniques.
When pricing through distribution, you know that one needs to price accordingly to motivate distributors to sell your products or services. However, one also needs to keep in mind whether you’re adhering to your company’s objective. Is it to increase market-share? Profitability? Whatever your company’s objective is, in your pricing to distributors, you want to allow them some room to make a profit. Therefore, selling through distribution requires looking at a host of typical pricing factors. But one area that should be included and given close attention to in your analysis is a distributors’ performance. For example, when evaluating this, you should carefully review:
- The product mix that your distributors are selling.
- The distributor’s incentive programs. They may be too rich and disproportionately reward more low-value vs. high-value product sales.
The overall relationship your company and its distributor have with each other is key. This can be a challenge depending on the distributor itself. Some will use “street-bully” or devious tactics to get what they want. It’s not uncommon that some distributors will be difficult to work with. Are they concerned about, or do they understand, the value of your product? Some will make unreasonable demands, such as asking for continual deep discounts or allowances. 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 effectively with distributors, you also need to understand not only their challenges and issues, but also the behaviors they may exhibit to obtain the best pricing. They may impose unreasonable timetables. For example, a distributor might claim “I need a price now!” threatening to take the business elsewhere.
They may demand lower prices or claim your company’s pricing practices lack flexibility, just to name a few antics. To more effectively handle these common types of behaviors you should determine:
- What is fact or fiction. Get to know your distributors well. Make an effort to better understand the distributor’s challenges, issues and concerns.
- Is your distributor is loyal and a true ally or a hindrance to your business? Is the distributor generating significant and profitable sales revenue for your company or not?
Though the onus is primarily on the sales force to develop and maintain a good working relationship with distributors, it’s also important that the pricing group is able to implement strategic pricing tactics through distribution. We know distributors usually do not pay list price. However, it’s important to control price discounting to distributors, as the pricing waterfall chart below shows.
The chart illustrates (concepts developed by McKinsey & Co.) how the difference between list price and “pocket-price” can result in a significant reduction to bottom-line profit. It’s important to understand this concept in order to help manage these discounts effectively.
Educating the sales force about the pricing waterfall concept is an important factor in helping them more effectively manage the discounts they may offer a distributor. It can also encourage more thoughtful judgment as to how the sales force’s decisions will affect the company’s profitability. However, a few ways a company can attempt to minimize these revenue leakages are as follows:
- Leverage your company’s advantage. Is it the incumbent supplier? Try to capitalize on that 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 do it at a premium.
- Discount on incremental sales volume only. Entertain earned discounts not negotiated.
- Obtain something in return for price concessions. Reward a change in distributor behavior, i.e., offer discounts for using EDI or telephone service support, thereby reducing or eliminating on-site sales visits. Or, modified payment terms. Has the distributor asked for continual price reductions? If so, consider adjusting their lengthy payment terms.
These are some pricing tactics and strategies one can implement when pricing through distribution. Distributors are in business to make a profit just as your firm is. However, it doesn’t mean you have to give your product away at ridiculous prices. In working with distributors, developing an effective relationship is important, as is any successful relationship. Your pricing team should take the time to truly understand your distribution channels. Have them join your company’s sales force on account calls to understand the distributor’s challenges, issues and concerns. Ensure that your sales team has a good understanding of your products and pricing tactics and remember:
- Control your discounting
- Obtain something in return for price concessions.
- Leverage your company’s advantage.
- Evaluate distributors performance.
Peter Maniscalco is a contract senior pricing consultant for the Strategic Pricing Management Group, an international pricing management consulting firm. He is based in the greater Philadelphia area. His specialty is B2B and B2C product and services pricing for multi-industries. He can be reached at [email protected] or (484) 947-6450, as well as on LinkedIn.