When Grainger announced its web pricing initiative earlier this year, its executives made clear that it was targeting growth in the midsize, non-contracted market – the type of customer the distributor is looking to acquire. But its approach may be overly simplistic and costly, according to Lee Nyari in Grainger’s Pricing Initiative, pt 2: The Quest for Optimization.
While Grainger has seen a pick-up in volume from that target customer segment, it hasn't been enough yet to pay for the drop in gross margin from broad-based lower web prices. In June, Grainger projected a 210-basis point gross profit decline for the U.S. segment this year, and it doesn't expect to turn that around until 2019.
Grainger's web price structure appears to be "product myopic," Nyari notes, and doesn't consider how much customers in that core segment (and others) might be willing to pay for products at any given time.
"Even with limited understanding of the relevant markets that Grainger’s strategies impact, there is very good reason to suspect that demand in the non-contracted business segment may, in many cases, be all over the place, particularly when it comes to the most impacted subset of slower-moving SKUs," Nyari says.
As a result, Grainger may be missing on out significant price premium/margin for both the short and long term.
"In many cases, demand prior to the pricing initiative was high enough for customers to justify paying high list prices," Nyari writes. "If Grainger had not seen significant sales at or around list price, dropping these list prices would have been largely a non-event and doing so would not materially impact their margin rate."
To create a more optimal strategy for the short and long term, a company needs to understand its customers' motivations and willingness to pay for products and services. While extremely high list prices on a website (such as Grainger's prior to the initiative) may indeed turn off many customers on their first visit, dropping those prices significantly may undercut the profitability. It's a balancing act to find that right price point for the right customer.
Read more about the impact Grainger's web pricing initiative may continue to have on its bottom line in Grainger’s Pricing Initiative, pt 2: The Quest for Optimization.