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Recommended Reading: 3 Tips for Tackling Strategic Pricing

A strategic approach to pricing can have significant impact on profit margins.
jenel-white

Where do your sales reps get the prices they quote to customers? Do they rely on a strategic model that provides guidance or are they simply pulling some random number from the air with the hopes of just closing a deal? Pricing exceptions can have a significant impact on a distributor's profitability, but it is possible to rein in those exceptions by taking a more strategic approach.

Here are three tips from our archives that will help you get a better handle on the haphazard world of pricing.

1. Plug pricing leaks. As Steve Deist of Indian River Consulting writes in 3 Margin Levers of Customer Profitability Analytics, pricing exceptions can occur in many areas. The challenge is identifying those areas and developing a strategy to address them for the long term. Some common areas where price leaks occur are overly broad categories for customer discounts, reps focusing on "last price paid" and the placement of "mental margin caps" that are based on arbitrary markups. Uncovering these leaks and addressing them can result in broad margin gains overall.

2. Avoid underpricing small customers. Small customers often get lower prices for several reasons, even if there's no strategic reason for it, according to David Bauders in Making Money with Small customers: Defeating the Profit Drag. Research from Strategic Pricing Associates shows that 30 percent of small customers pay below-market prices, creating a drag on profit margins. Implement a process for tracking small customers to identify who the outliers are – and put a process in place for addressing them.

3. Allow sales reps flexibility, but within a framework. In the field, sales reps often rely on their instincts to determine the right price. But even if they don't think they're underpricing, the reality is they often are because they don't consider the cost to serve for the customer when pricing on the fly. Establishing a framework that starts with properly classifying customers and how much it costs to serve each category will help reps think more strategically about how they price a basket of products for a customer. Read more in Pricing for Profitability.

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