Needless to say, the COVID-19 pandemic disrupted B2B distribution markets. These disruptive developments impacted distributor price management in important ways as well. Some of the impact may permanently alter key aspects of distribution price management.
Here are four pricing-related, long-term takeaways for distributors from the (seemingly/hopefully) winding down COVID-19 pandemic:
1- Understand e-commerce as a pricing driver
E-commerce adoption has become a major driver behind pricing projects. Before COVID-19, margin expansion was the main driver behind most distributors’ pricing initiatives. As the pandemic accelerated e-commerce adoption, our pricing consultancy has seen a different driver gaining importance: the need for consistent and credible pricing across electronic and traditional sales channels. Margin expansion will likely return to its historically prominent role as the economy stabilizes and steady growth returns. But as others have noted, e-commerce is here to stay. Accordingly, the need for consistent, credible pricing may have gained more permanent prominence. And in light of the importance of pricing consistently across channels, the days of pricing by way of routine manual overrides may be numbered.
2- Know the reason behind demand changes
COVID-19 highlighted the importance of understanding the forces driving changes in demand conditions, in selecting an appropriate price (or non-price) response. COVID-19’s disruptive impact was responsible for the alarming fall in volume levels in the spring of 2020, and not overpricing. At some distributors/in some markets, cooler heads prevailed. Many distributors recognized that price drops may not bring back volume if the end-demand is not there. They remained confident about the strengths of their value propositions, and they implemented only targeted price drops (e.g., to deal with a specific competitive threat). The ones that followed these strategies likely were hurt less by the economic turmoil. The industry’s collective experience underscores and confirms what many have observed in various settings: When businesses price with emotion, and they implement large-scale, non-targeted price cuts to chase volume, things rarely work out (whether COVID-19 conditions, or something else drives the panic/emotions).
3- Analyze secondary price structure
COVID-19 also highlighted the importance of analyzing secondary price structure elements. Before COVID-19, many distributors gave little thought to their minimum order quantity thresholds or late payment fees/charges – beyond perhaps undertaking some sporadic ad-hoc reviews. The pandemic’s impact has made customers in certain industries/market segments much more sensitive to these details. All of a sudden, buying in larger quantities, or being asked to pay within a two-week window, became a big deal to some customers. Some more sophisticated distributors adjusted their policies to make it easy for certain customers to keep doing business with them. The long-term lesson here: effective, holistic price management should keep all elements of the price structure aligned with market conditions, not just the product price, per se.
4- Keep ethics in mind
COVID-19 may end up being a case study for the role of ethics in distributor pricing. As COVID-19 wreaked havoc on supply-demand conditions in certain historically stable markets, some distributors sought to capitalize by substantially raising prices on shortage products. The “price-gouging behaviors” of certain wholesale distributors have even faced legal challenges. Regardless of how these legal issues are worked out in the courts, it remains to be seen if markets hold bad actors accountable for ethically questionable pricing practices during the pandemic. We may learn just how important it might be to keep prices within parameters limited by ethics considerations. This may be a particularly relevant lesson for those deploying or considering artificial intelligence-enabled pricing solutions, as they may be (and perhaps should be) actively contemplating these topics.
Lee Nyari is managing partner of The Innovative Pricing Group, a consultancy offering strategic price management solutions for distributors (pricinginnovation.com). Nyari is a seasoned distribution pricing executive with decades of experience leading strategic distribution pricing initiatives. His deep distribution industry pricing background is coupled with engagement leadership roles at top-tier strategy consulting firms. Nyari is a Certified Pricing Professional, a Certified Public Accountant, and he holds a full-time MBA in Marketing Strategy from Kellogg School of Management.