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Pricing excellence for distributors

by Stuart Wilson, Thursday 13 January 2011

Pricing is the most important profit lever for distributors. Despite this fact, many distributors do not professionally manage their prices. At next month’s DISTREE XXL, Dr. Clemens Oberhammer, a managing director at strategy and marketing consultancy Simon-Kucher & Partners, will host a Channel Academy workshop session entitled ‘Pricing Excellence for Distributors ― How to Boost Your Profits through Better Pricing’. This session will outline two approaches developed by Simon-Kucher & Partners that enable distributors to boost their profits through more effective price management.

DISTREE XXL is the largest independent channel event in EMEA. More than 800 delegates are set to attend next month’s DISTREE XXL in Monaco, which takes place from February 8-11th. The Channel Academy workshop sessions take place on the afternoon of Tuesday 8th February with Dr. Oberhammer’s session running from 13:45-14:45. Delegates for attending DISTREE XXL can pre-register for the workshop through their personal web account.

The pricing impact

Dr. Clemens Oberhammer: “In no other sector does pricing have such a strong impact on profits as it does in the distributor sector. A price improvement of only 0.5% has the potential of boosting a distributor’s profits by an average of 50%. In contrast to the automotive sector, the same price increase yields only a 15% profit improvement. When you factor in the distributor sector’s tendency toward high revenues and small margins, it is clear that pricing is the number one profit lever.

Yet most distributors lack professional price management, as we’ve observed in our work. Distributors have neither the pricing tools nor the resources (personnel, time) for professional price management. The result: many leave money on the table when it comes to pricing.

Distributors face various pricing challenges, but two are particularly critical:

1) List price calculation: How to set the optimal price for thousands of products, i.e. how to determine the optimal list price

2) Price implementation: How to determine the optimal price for each customer, product and transaction.

List price optimisation

Most distributors give their customers price lists. Depending on the product assortment, these lists are updated either on a daily, weekly or monthly basis. Determining these price lists is a very complex task. The reasons are numerous: the high number of products, heterogeneous customer segments and regional differences require different price lists; constantly changing factors, e.g. availability, purchase costs, etc. also exacerbate the situation.

As a result, most distributors focus on determining the optimal prices only for top-selling products. For slow-moving products, they apply a simplified pricing approach such as cost-plus. This can be a fatal error, as slow-moving products have the highest margin potential – if you price them intelligently.

Simon-Kucher & Partners has developed the SKP power pricing tool for distributors and retailers which allows them to set the optimal list prices for all their products. Once the tool is set up, it allows the distributor to ascertain the optimal price for all products within minutes. The approach considers all key factors such as price elasticity, competitive situation and purchase costs to determine the profit-optimal price.

To avoid optimising short-term profits at the cost of the long-term profits, the approach also factors in price image effects when determining the optimal price. Clients who have implemented the tool were able to increase their net margin by as much as 28%.

Price implementation

Another pricing challenge facing distributors is how to determine the optimal price for each customer. With most distributors, it is the sales rep’s job to determine and negotiate the price a customer has to pay. Our project experience shows that pricing quality varies greatly among sales reps. This is always a certain percentage of sales reps who achieve much higher prices than others, even when factors such as customer segment, turnover, region, etc. are the same.

Yet some sales reps give unnecessarily high discounts and fail to differentiate prices across customers and transactions. The main reasons for this sub-optimal behaviour are a lack of guidance and control as well as a misdirected focus on revenue instead of profit.

There are several ways to improve price implementation. One way is to introduce a stricter discount approval process. Furthermore, a company must offer its sales team better and more frequent support in pricing. Simon-Kucher & Partners has developed the peer pricing approach to give sales reps better support in pricing.

The basic idea of this approach is to provide sales reps with price benchmarks for each situation. In other words, the price achieved by top sales reps in a certain situation is their benchmark.

With the help of these price benchmarks, sales reps gain a better understanding of what is feasible and become more confident when negotiating prices with customers. Companies that have implemented the peer pricing approach were able to increase their net margin by as much as 10%.”


DISTREE XXL 2011

Top distributors, retailers and e-tailers from across the EMEA region are invited to attend DISTREE XXL 2011, the premier event for the regional ICT and CE channel, from February 8-11th in Monaco.

DISTREE XXL gathers 400-plus senior executives from EMEA’s Information Communications Technologies (ICT) & Consumer Electronics (CE) volume distribution channel.

During the course of the three-day event, delegates take part in thousands of pre-scheduled one-on-one meetings with hundreds of vendors. Each year, hundreds of new distribution agreements are struck across EMEA as a result of business relationships initiated at DISTREE XXL.

DISTREE XXL 2011 will also build on successful initiatives launched at last year’s sold out event including a regional awards ceremony. The ‘EMEA Channel Academy: 2011 Awards’ will include more than a dozen awards handed out to vendors and distributors from across the region. www.distree.com/xxl

Follow the build-up to DISTREE XXL 2011 www.twitter.com/distreexxl

For more information on attending DISTREE XXL 2011 please contact fhemraj@distree.com

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