Pricing is perhaps the most important factor in a wholesale distributor’s business, yet everyone refuses to talk about it.
For one, wholesale distributor pricing is confidential; thriving distributors don’t want to share their secret sauce for fear of being undercut. Since a distributor’s business resolves around purchasing products from a supplier and reselling them to customers, pricing is the central influencer of success: margin.
If there is one subject keeping wholesale distributor CEOs awake at night, it’s pricing. A mere 1% increase in pricing positively impacts EBITDA by 22%. Wholesale distributors can’t afford NOT to talk about the elephant in the room – pricing.
Wholesale distributor pricing: 6 core problems
Setting market-aligned prices that work for each selling situation can be extremely complex for wholesale distributors. Many distributors are responsible for thousands of products and customers around the globe. At the same time, they face competitive dynamics such as growing threats from non-traditional online competitors.
To build a successful approach, distributors must consider six key problems with traditional distributor pricing strategies.
- Volume
- Complex
- Real-time
- Column price
- Contract price
- Cash-back contracts
Volume – Pricing within wholesale distribution is often personalized for each unique product offering and individual customer. This creates millions of prices for a distributor to manage. To understand how problematic this is, let’s imagine a wholesale distributor runs 50,000 articles and services 50,000 individual customers.
The result? Five billion prices in the distributor’s pricing matrix. This seriously impacts price maintenance in situations where, for example, distributors update list prices at the beginning of the year. The pricing system or team must update billions of prices overnight. Is this really sufficient?
Complex – Marketing and quota-driven sales staff can easily manipulate complex, multi-tiered pricing structures to win more deals. From the existing catalog price, customer-facing staff can invent various conditions and lower product prices through a waterfall of price conditions.
This waterfall, also known as the calculation schema, gathers all pricing conditions within an order. Each condition often applies to each different level of the waterfall, causing over discounting. When you have up to 100 pricing conditions, this is a nightmare.
Real-time – With all the conditions and schemas that go into the personalization of pricing, a customer’s price could change at any time. This makes it difficult for a sales team to provide accurate data to a customer based on real-time conditions.A distributor’s ability to calculate real-time pricing is especially important in sales negotiations.
For example, if a sales rep visits a customer, they may need to simulate an “up-to-date price list” that considers the real-time value of the parameters influencing the price.
The need for real-time pricing is amplified by the growing share of e-commerce channels in the COVID era. In e-commerce, the customer’s unique price must be easily and accurately accessed on a web page in real time, not the generic catalog price.
Column price – Column price uses customer segmentation groups and a net price table, offering unique pricing based on the customers’ level of importance. Unfortunately, a lot of negotiations and special customer agreements compromise this approach.Distributors leverage the column price to tackle the traditional complexity and real-time nature of pricing.
This method theoretically lessens the number of individual prices. In reality, customers of all shapes and sizes still try to negotiate a one-off price, while sales feels pressured to offer discounts to close the deal.
Contract price – Wholesalers often contract prices for a particular quantity of products or length of time with key accounts during the RFP process. This approach typically offers different prices depending on the product and context. Only the products that are not included in the contract may have a real-time negotiated price.
This means that eventually each customer will get their own price anyway, depending on the context in which the customer is asking for a price quote. For example, the price given to a plumbing company might vary, depending on whether they want tubes to build a house or an office tower!
Cash-back contracts – It’s common for distributors to negotiate rebates or other incentive programs with both suppliers and customers, further complicating a pricing strategy.
For example, a supplier may provide an incentive to a distributor for buying a certain quantity of products within a defined period. In turn, distributors often make long-term pricing incentives for their own customers to influence buying behavior. These two-way incentive agreements can be hard for distributors to manage amid an increasingly tight margin.
Intelligent pricing and optimization
Each of these exceedingly complex and often problematic pricing strategies can benefit from optimization. To understand how, let’s look at a couple key areas.
The first is the right execution of the price in real time, considering offers or pricing conditions that were publicly or privately communicated. A pricing tool must deliver real-time prices to all channels as it is been settled and contracted, avoiding discrepancies across systems.
The quality of execution is also highly important for calculating incentives such as “cash back contracts” for customers that are off invoice. These credits take into account each individual invoice and can be hard to control. A high-quality pricing tool helps avoid disputes, drive loyalty, and provide productivity and confidence to the internal team.
The second area of importance is intelligent price optimization. When there is no formal contracted price, inside sales staff and the customer negotiate. Generally, inside sales can bargain inside a particular threshold of prices. Intelligent pricing ensures sales successfully secures the deal while protecting loyalty and margin.
By pairing an intelligent ERP system with best-in-class price management and optimization solutions, wholesale distributors can be on the cutting-edge of pricing strategies and earn back the profit that is rightly theirs!
