Effective pricing solutions capitalize on best practices that address common distributor pricing challenges. However, no two distributors are fully alike in the characteristics of their businesses and their pricing environments. These differences make it hard to predict whether a particular off-the-shelf distributor pricing solution will fit, even when reasonably configured for the distributor. Implementing custom-built, one-of-a-kind pricing systems can help ensure fit, but doing so typically requires external distribution pricing specialists who understand the process of designing pricing systems and who can bring applicable best practices/pricing science to the table.
Common Themes in Price Management
Many pricing challenges are common in distribution. These include complex product and customer portfolios, increasing price transparency due to e-commerce, frequent product acquisition cost changes, changing tariffs, and so forth. Depending on the distributor’s particular vertical industry focus, pricing also needs to make sense across interchangeable items, and there is often a need to fend off margin compression due to generic or private label competition.
Few distributors have the pricing science skills in-house to effectively address their complex pricing challenges. For this reason, many distributors consider buying an off-the-shelf distribution pricing system.
The core of these off-the-shelf pricing solutions is typically an “industry best practice” pricing cube or pricing matrix. The basic design of the underlying pricing cubes/matrices capitalizes on the commonalities in segmentation dimensions across distributors. This makes some sense: many distributors’ price structures incorporate certain common-sense price segmentation dimensions, such as account size, industry/application, geography, product cost range, and SKU velocity.
These off-the-shelf pricing systems can be configured (at least to some extent) to the particulars of each distribution business where they are deployed. Additionally, they often incorporate pricing science techniques that are proven effective in distribution. Finally, these systems can often be deployed with relative ease/speed across many IT platforms.
Certain execution challenges are also common across distributors. They include the need to manage price leaks (such as unnecessary price overrides due to cost- or margin-driven mental price caps), and the need for consistency in price management across sales channels, including e-commerce.
Differences in Distributor Pricing Environments
For many distributors, buying a pricing solution is a bit a like buying a pair of shoes online. At first glance, the shoes seem to be of the right size. The advertised descriptions suggest that the shoes should fit comfortably, and that they should stand wear. However, user reviews often reveal a different story. It turns out that the shoes do not fit everyone as comfortably as advertised. Also, some have found that they quickly fall apart when subjected to real-life use. This can be expected: two people may have the same shoe size, but they may have different feet, and they may use the shoes in different environments. So, the shoes will fit and work great for some, but not for others. Without the ability to try them on and wear them for a while, it is hard to tell if the shoes will really fit well.
Similar to peoples’ feet and environments, distributors’ businesses and markets differ as well, even across distributors within the same vertical industry. Many of these differences are meaningful to price management. Some distributors have seasoned sales reps whose market knowledge drive pricing decisions. Others rely on product managers or analysts to set prices, and their customer service reps are essentially order takers who are less involved in price setting. Some distributors carry the historical baggage of a past pricing initiative that underperformed expectations. Some have more flexible IT/execution systems than others. Some have robust, rich datasets (at times, even including competitive pricing data), while others have only more basic transactional, customer- and product master data. Some have built reasonably elaborate price structures and segmentation schemes, while others have less evolved price management practices. These are just some of the differences that can impact whether a particular “off the shelf” pricing solution will truly help improve pricing at a particular distributor.
Typically, configuration changes to off the shelf pricing systems are practically available to only a limited extent. Unfortunately, if a pricing solution does not adequately fit the particulars of the business, its implementation can require a lot of change management. In such situations the business may be expected to change to make the shoe fit, rather than the other way around. Too many distributors, like online shoe reviewers, can attest to having purchased a pricing solution that did not end up fitting their business.
Implications for Choosing a Distributor Pricing Solution
So how can a distributor tell which pair of shoes – or which pricing solution – is best fit for their particular business? There is no easy answer. Distributors are well advised to invest into researching pricing solutions before making large commitments. Sometimes, vetting a particular off-the-shelf solution helps confirm that a particular system should be a strong fit with the distributor’s particular business. When substantial doubts remain, distributors may consider a lesson from fitting shoes.
Nowadays, as consumers we are invited to try on shoes we may like, until we find and buy a pair that fits our feet well. Of course, we would not suggest that distributors take a similar “let’s try them all” approach to selecting a pricing system. Let’s consider instead how shoes were made in the good old days. Back a few hundred years ago, shoemakers carefully measured their clients’ feet. They selected and used those applicable shoe materials (for the sole, etc.) that accounted for their client’s particular taste, and intended uses. Even today, shoes worn by top athletes (soccer players, etc.) are often custom-made, reflecting measurements taken using state-of-the-art digital methods and molds. What was true in the old days still holds true today: one-of-a-kind shoes designed by highly trained specialists who are knowledgeable about the shoe making process are most likely to fit the individual’s feet, and meet their intended purpose.
Similarly, one frequently overlooked opportunity for distributors is to leverage external pricing science experts to design and implement a truly custom-built, internally-owned pricing solution that best aligns with the particulars of the business. The process of designing of a custom pricing system can help achieve “fit” in many ways, including the following:
- It can consider any and all relevant data the distributor has, or can get, with relative ease. Its focus is not on collecting a set of commonly available data fields, as pre-defined by a pre-existing pricing cube/matrix template. For example, most pricing templates presume that a robust competitive pricing dataset is unlikely to be available. A distributor with such a dataset was able to leverage their data asset in their price management in their custom-built pricing system.
- It seeks to create a segmentation scheme, starting from a blank slate, that reflects the pricing strategies the business has historically pursued (including through overrides), and wishes to pursue in the future. It is not looking to tailor a pre-existing segmentation scheme pre-defined by a pricing tool or template. New “best practice” pricing strategies/segmentation dimensions are added only if they are deemed relevant to the business. For example, velocity-based segmentation/pricing strategies have been deemed less relevant by some distributors. As segmentation is customized, the resulting pricing recommendation tend to align with/reinforce past pricing strategies and judgment (at least, where past judgment was informed by sound pricing strategies) – and this can make change management a much easier task in implementation.
- It seeks alignment between pricing strategies and execution systems. The process of designing custom-built pricing solutions involves a review of the ERP, to help confirm/assess how it can support (possibly, with only reasonable modifications), the execution of selected pricing strategies. For example, one distributor found that their less robust ERP could, in fact, execute pricing strategies it previously thought impossible to put through their systems. Another distributor was able to leverage the extreme flexibility of its internally-developed ERP to execute a value-based pricing strategy in some parts of its business, while deploying a more traditional cost-based approach in others.
The process of developing and implementing one-of-a-kind, custom-built pricing systems requires a specific skillset, including pricing science expertise to deploy state-of-the-art pricing techniques. Similar to top athletes wearing custom-built shoes, distributors who chose to implement such custom-built pricing systems have found that these systems are virtually always a perfect fit.
Lee Nyari is Managing Partner of The Innovative Pricing Group, a consultancy offering strategic price management solutions for distributors (www.pricinginnovation.com). Lee 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. Lee is a Certified Pricing Professional, a Certified Public Accountant, and he holds a full-time MBA in Marketing Strategy from Kellogg School of Management.