Developing A Better Product Pricing Strategy

Once a distributor determines what type of service model they follow, the next step in the pricing analysis is to examine different types of pricing structures that make up its revenue. To accomplish this, Deist suggests creating a simple pie chart based on the total revenue. Distributors should create the chart by determining what percentage of the firm’s overall revenue is generated by its price matrix, contracts with a customer, national contracts with suppliers and prices set by overrides. 

“What you often find is there is a lot of opportunity just from doing things like reducing the amount of pricing that is done from very low contract levels and discretionary overrides, and trying to get a handle on your current pricing model,” says Deist.

With this analysis, a distributor will see how the bulk of pricing is determined and thus be able to develop the most effective pricing model for the business.

For example, if most of a distributor’s pricing is determined through a matrix, then getting a full understanding of customer pricing sensitivity through qualitative analysis may be the approach to take, says Deist.

“The right approach for any given company depends on their current state of how they are doing pricing,” Deist says.

According to Al Bates, founder of the Profit Planning Group, Boulder, Colorado, the next step to creating a strong pricing model is to analyze the price sensitivity and demand for each product that the distributor offers.

Bates believes that distributors will find that they are pricing themselves out of the market on some products, while not making enough margin on others, such as support products.

“I think a problem that a lot of distributors have is that they don’t differentiate as well as they should,” he says. “It’s a need to stretch the price matrix, but that requires an awful amount of analysis.”

Once a distributor has a clear picture of exactly how they price products and customers, they should explore opportunities where it may make sense to raise prices and improve profit margin. 

One of these opportunities comes on the heels of manufacturer price increases.

For example, if a manufacturer has just increased a certain product’s price by 5 percent, a distributor may want to increase the price for that certain product by 8 percent for a group of customers that it has been historically under pricing — while leaving the price unchanged for a group of customers that it found it has been historically overpricing, says Deist.

“As a distributor, you want to take advantage of that triggering event, but you don’t just want to move in lockstep with the manufacturers,” he adds.

Bates recommends distributors use percent-for-percent instead of dollar-for-dollar pricing when they experience a pricing increase from a manufacturer. For example, if a janitorial supply distributor had a price of goods sold at $100, the cost of goods sold of $60 and a gross margin of $40, a five percent price increase from their suppliers would raise their cost of goods sold to $63.

If the distributor does dollar-for-dollar, they would raise their prices to $103 so that their gross margin remains at $40. But if they choose percent-for-percent, then they would raise their prices five percent to $105, earning $42 in gross margin — $2 more than if they did dollar-for-dollar, Bates explains.