The wholesale / distribution model operates in tandem with many other channels to market. OEM manufacturers use distributors to gain local presences where they don’t have the scale or profitability to open up a dedicated office themselves.
In recent years, many OEMs have attempted to go direct and bypass the distributor function or have not managed the natural channel conflict well, leading to reductions in total product profitability as one channel battles against another channel for the same customer dollar.
Wholesalers operate on razor thin margins and need economies of scale to make their operations profitable. When other channels such as major accounts undertake discounting tactics to win market share, this impacts the profitability of the wholesaler / distributor.
With EBIT margins of less than 5%, a 2 % price reduction can reduce profits by up to 40%. Sales reps under pressure to meet revenue targets have been known to offer well intended but ill-advised discounts to customers.
Alternatively, the product range and sales mix is not optimal, leading to substandard margins and reduced profitability despite revenues and volumes holding steady or growing.
One distributor client we assisted had over 150 sales reps each making their own pricing tactics decisions and setting price levels to customers. The net result was inconsistent pricing, conflicted sales teams and customers who were able to negotiate prices based on the sales personality, not the product or service value.
Highly profitable distributors do three things well.
They need to:
- Focus on specific products and markets
- Ensure highly efficient logistics service levels
- Cut operating expenses to the absolute minimum.
Within these three pillars of distribution profitability, pricing impacts the first two.
Many distributors we see set prices using broad category mark ups on cost provided by the OEM. Often these costs are inflated so that the distributor’s procurement function can collect rebates and protect margins.
This model whilst workable, needs to be changed. List price and discount structures need to be realistic and aligned to market and value. This avoids the danger of over inflated list prices leading to highly leveraged discount conventions of 60-70% just to obtain a realistic market net price. Optimised list price and discount structures need to be developed and implemented. Prices need to be optimised by line item product or SKU.
This optimisation can be done using algorithmic pricing methods. Pricing Insight have pioneered a new and innovative approach to pricing that will optimise your product portfolio to maximise margins.
Further margin gains can be realised through customer price optimisation. By analysing customer value drivers and applying these value drivers to a new customer discount structure, customer price levels can be optimised. In many cases, distributors are using 5 levels of customer discounts, where almost all customers are set to Levels 4-5 and no one is on levels 1 or 2 (the lowest discounts).
Pricing Insight’s experience with wholesale distributors spans many different industry verticals working with Fortune 500’s and ASX listed companies. We have been able to help a number of distributors with thousands of products generating margin expansion without loss of volume.
Areas where we can help your business include:
- Pricing strategy diagnostics
- Algorithmic price optimisation for products and customers
- Pricing strategy workshops
- Customer value driver discovery
- Contract negotiations
- Pricing fundamentals training for your sales force
You may be wanting to develop a strategic pricing capability and move from a cost-plus culture to a sophisticated value based methodology. Pricing Insight can work closely with you at both a strategic and operational level to improve earnings and profitability.