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In this blog series, MDM will periodically mine its archives to bring you insights from some of our most popular Premium articles.
W.W. Grainger is recognized as a leader in distribution e-commerce, but in 2017 the company realized that its traditional list price model might be deterring potential customers. In one of MDM’s most popular Premium articles of last year, Lee Nyari, managing partner of The Innovative Pricing Group, a consultancy offering strategic price management solutions for distributors, reported on Grainger’s new pricing strategy for all 1.5 million SKUs on its website.
Grainger launched the strategy in an attempt to reverse unfavorable market share trends it experienced in certain market segments, particularly mid-sized customers in recent years, but the company saw significant post-launch declines in profitability. Although the company announced at the time that this trend was expected to reverse by 2019, it was criticized by many analysts, as well as Nyari, who wrote that the new strategy could be sub-optimal. So far, 2018 financial results have been positive, and several analysts are now saying the company is seeing volume leverage from those cuts as well as regaining mid-sized customers.
What can distributors learn from Grainger’s pricing strategy? Nyari broke it down into three lessons for midsize distributors.
Review your price structure and segmentation schemes (not just price points) periodically
As business models and sales channels in your markets evolve, your price structures and segmentation schemes should as well. Efforts to set optimal price points are unlikely to succeed when rigid and outdated price structures and segmentation schemes are not aligned with changed, substantially more complex marketplace realities. Although you may be limited in what your systems and capabilities can support without substantial investment, moves toward even slightly more sophisticated price structures and segmentation schemes can yield significantly stronger returns.
Strategically align your pricing strategy with your business strategies
New business strategies may call for new pricing approaches. Price structures and segmentation schemes that work well for your established book of business may be less than ideal if they are applied to support growth efforts in other markets that represent new territory for your business. The deeper your understanding of these markets, the better prepared you will be to develop pricing approaches and segmentation strategies that can effectively support growth in your target areas.
Target and manage price hikes and drops
Nyari advises avoiding blanket price changes, up or down. Grainger’s price drops across its non-contracted business may seem targeted at first glance because they cover only a defined subset of its product portfolio, affect only selling situations where contracted discounts do not apply, and are implemented in a controlled, seemingly managed fashion. However, the drops indicate an implementation methodology that does not adequately vary by customer type and selling situation. Targeted price drops, says Nyari, should involve proper segmentation that considers all relevant attributes, not just product attributes, to best identify the customer/item combinations with the most potential for volume pickup. If possible, distributors should consider implementing price drops gradually and carefully monitor the results so they can adjust course based on observed levels of volume response.