Pricing strategies for distributors are critical; wholesalers and distributors compete on pricing with giants like Amazon and Walmart, and live in a world with razor-thin margins. So how do they survive?
Distributors employ the top 5 pricing strategies illustrated in to squeeze the most profit out of each and every sale.
Before we get into the logistics of the best pricing strategies, don’t think for a minute that today’s distributors survive by competing solely on price. Quite the contrary. With pricing pressures from e-commerce competitors, it’s the value-added services like support, customer service, and industry expertise that keeps distributors cemented as a valuable fixture in the supply chain. However, all customers are price sensitive to some extent, so, in addition to the value-added services distributors bring, it’s important that they make their customers feeling they are consistently getting the best possible prices.
So the question becomes, “How low can you go?” Fortunately, today’s distribution software can handle the heavy lifting in the background to tell you that answer. Behind the scenes, it can compute pofit on each item, as price varies. It can suggest additional items each customer is likely to want – items that carry a higher profit margin, making up for lower margins on other items in the same order. It can set lower and upper limits on pricing, so your salespeople don’t get carried away when trying to close a sale. In general, ERP software should support all distribution pricing strategies, and help you squeeze every last cent out of each sale, while still making your customers feel like they are getting a fantastic deal.
Is this trickery? Or just an intelligent way to leverage technology to your advantage?
The top pricing strategies for distributors are made up of a series of layered discounts available to different types of customers and on different tiers of products, in a way that mathematically maximizes a distributor's overall profitability. In a sense, pricing strategies serve as a way to provide preferential treatment to each and every customer, based on their pain points and unique purchasing patterns.
Let’s look at 5 ways distributors can squeeze more out of their pricing.
Pricing Strategy #1: Contract Pricing
At the very least, use contracts to give your customers your best pricing. You can set up contracts by:
- customer
- product
- category & subcategory
- vendor
- expiration date
- ship-to or bill-to
Pricing Strategy #2: Special Pricing
Special pricing strategies are user-defined strategies tied directly to margins. They might entail giving discounts off list prices, or the reverse: marking up from your cost.
Pricing Strategy #3: Advertised Pricing
Does your ERP software allow you to program date-sensitive, short-term pricing on products you are advertising? What about at certain times of the year, when you may offer a blanket discount to keep your cash registers ringing? Terrific! Then take advantage of loss leaders.
Some distributors use loss leaders to stimulate sales of certain products, then advertise those loss leaders. Even though profit margins on loss leaders might be negative, what distributors profit on each overall order compensates for that. Advertised pricing is a way to structure these promotions by automating start times and end times, so your sales people don’t have to worry about the details. Instead, they can focus on what they do best: selling.
Pricing Strategy #4: Quantity Break Pricing
If your customers are not feeling like they are getting royal treatment with pricing strategies #1-3, try tossing in some quantity breaks. There’s nothing like a two-fer to bolster sales volume. When applied to slow moving product categories, quantity break pricing is a great way to clear out sluggish or unwanted inventory. Try setting quantity breaks:
- for specific customer pricing tiers
- for all customers
- for a specific product, where you can assign a specific dollar price or give a percentage discount off list
- at each quantity break level (e.g. 10% off 1-50 items, 15% off 51-100 items, and so on)
Pricing Strategy #5: Discounts by Warehouse
Offering discounts by warehouse gives distributors an opportunity to move select inventory faster. A ‘warehouse’ doesn’t need to be a physical warehouse: it can be grouped inventory that you’ve moved to a certain part of your existing warehouse or inventory that is associated with one of your business units. Just use your software’s ability to group, price, and sell products by ‘warehouse’. You can use this strategy on just about any classification of inventory.
Conclusion: Let Your Distribution Software Support Your Pricing Strategies
Distributors work in a fast-paced environment, often processing thousands of transactions each day. You don’t want your sales people fumbling around trying to figure out exactly what pricing incentives have been approved and which are restricted: the process of offering discounts to entice and keep customers should be quick and easy. By setting up and maintaining pricing structures inside your distribution software, you can be assured that you will squeeze every cent out of each and every order.
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