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Tip: Use Models, Not People, to Develop Pricing

April 9, 2014

Creating an effective pricing model can be difficult, with many variables to consider. Take subjectivity out of the process as much as possible by using models rather than salespeople to establish pricing structures, according to Lawrence Mohr, retired senior vice president of F.W. Webb, in Pricing for Profitability.

"The salespeople may feel that they are familiar with whether a customer is good or not, but when you have thousands of products and hundreds of customers, there is no human being that can integrate that information," Mohr says. "But the computer can calculate that in a split second."

Using models, such as the one developed by Texas A&M University and used by F.W. Webb, can remove subjectivity by classifying customers based on recorded behavior. For example, while many salespeople say they don't sell below cost, recorded behavior shows that they often do.

Focusing on recorded behavior allows distributors to better segment their customers and achieve higher margins.

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