Pricing in distribution is as critical and consequential as it is complex. It’s been a constant challenge for decades, and few have found the ideal strategy to make it simpler and more effective.
Let’s put it this way: When you are driving up a rocky hill, do you want to be in a 2005 2-Wheel-Drive (2WD) sedan with five-year-old tires? Or an All-Wheel-Drive (AWD) SUV with a turbocharged engine and brand new off-roading tires?
(Hint: You want the latter. And that is also the approach you need to take with your pricing strategy.)
Without an effective pricing strategy, you’re at a disadvantage when the economy falters. As a result, conversations will move directly toward price instead of the value you provide your customers through disruption and hardship, past and present.
With inflation on the rise and affecting most distribution verticals, those distributors that are more strategic and value-based in pricing can better manage shifts and disruptions – and leave less money on the table.
What does it mean to have a 2WD pricing vehicle?
There are countless hazards on the road that drivers need to be aware of, and the same goes for pricing. Pricing decisions could potentially involve upwards of 200 variables. If your strategy isn’t fully developed, your salespeople are probably “winging it.” They’re likely working with just a couple of management-defined variables they understand to be important to your business and others they choose at their own whim.
While on a call with a customer, there’s limited time to do a thorough analysis of their go-to variables. They may have control and guidance in the front two wheels, but the back two are at the mercy of the terrain – or the conversation, the dynamics of the current economy, the attitude of the customer, etc.
Here’s how a 2WD pricing program plays out:
A salesperson is on a call with a customer, and the customer asks about the price. This salesperson has the authority to make pricing decisions. In the blink of an eye and perhaps a “one moment please,” the salesperson evaluates the data they can readily access in their system and considers their primary variables. These might include competitor prices, the product’s popularity, their own potential sales incentives, the nature of this customer relationship, and recent pricing decisions they’ve made in similar situations.
This is familiar. This is sales. It’s an art, and we trust our salespeople to make significant decisions based on their experiences. However, these pricing decisions are rarely optimal, particularly in today’s more volatile economy. And it’s possible you aren’t providing the right insights in the best format through your CRM to help your salespeople make better decisions. More often than not, with art and feeling driving the conversation today, money is left on the table.
What does having an all-terrain, AWD pricing vehicle mean?
An all-terrain pricing vehicle is a value-based strategy. It’s focused on the most critical variables so salespeople can make optimal decisions around pricing. And it makes those variables easy to evaluate on the spot. Such a strategy and format helps salespeople shift customers’ perspectives from a fixation on price to an understanding of the value you provide them.
As long as you base pricing on value, you’ll maintain firm control over pricing drivers – even when faced with disruption, inflation, and other influential events. It’s a mindset change that incorporates what customers value, your actual costs, the margin you intend to capture, and what customers are willing to pay.
What critical variables should you include to develop a value-based pricing strategy?
- Customers’ value to your business, as determined by examining factors such as profitability and cost-to-serve.
- Suppliers’ value to your business, as determined by evaluating factors like profitability and performance.
- Products’ value to your business, as determined using factors such as profitability and volume.
- Item visibility, as in the value of a product to customers based on popularity metrics.
- Purchase value, as in the unit cost to acquire a product.
- Realized margin from the sale of a product.
These critical variables make up the six faces of our Value-Based Pricing Cube, which we developed while working with hundreds of distributors over the past decade-plus. Providing your salespeople with these six variables will help simplify and optimize your sales reps’ pricing decision-making by eliminating the “noise” associated with more subjective variables.
If you’re ready to let value and analytics drive your pricing strategy, get in touch with us at ActVantage. We’ll help you get into the pricing vehicle that will withstand any terrain.