1. Work on coordinating pricing strategy with product management: Product rationalization is important and it is often the case that a distributor has too many vendors for the same type products (instead of having 3 vendors: good/better/best they might have 5 vendors). As we have seen many times, the distributor’s pricing effectiveness weakens because the purchasing costs per product sold is higher than it should be, as the purchased orders gets diluted across 5 vendors instead of 3. This is particularly true if the demand for the 2 discontinued product lines can be transferred to the ones left. Big data can help major distributors understand product substitutability. Product rationalization can give a competitive advantage to a distributor, as it strengthens its ability to compete with a cost advantage due to relatively higher volumes by consolidating demand to few vendors. An example could be to use a cost competitive vendor (commodity), a trending vendor (rising star) and finally a high end established vendor with a recognizable brand.
3. Do not agree on contracts and exception prices that are too broad and not well enough defined: Contracts are important decisions because they often set the prices for products for a relatively long period of time. They should be carefully evaluated and include incentives for the buyers to purchase more (purchased quantity discount based on actual sales. If the buyer purchases more than $x of a given product line he gets %y discount on the future purchases for the year) and do not give an overall discount across all product lines assuming that the customer will purchase. It is often the case, particularly for distributors, not to review exception prices (or contract) often enough. It creates confusion for the sales force as these prices stay in the system, in addition to risks of pricing dilution when these prices are misused. Furthermore, contract pricing has the risk of being disconnected with the market reality and the balance between supply and demand.
5. Do not price your relatively slow moving part at bargain prices: If you are a big player in your industry, your in-stock slow moving parts should be priced at a premium because you provide a real value to the potential customers as, most likely, the competition do not have this slow moving product group. Furthermore, there is even more value if the product has been discontinued by the manufacturer and the only option would be to request a make-to-order, which would take time and be much more expensive than the in stock inventory.
6. Do not base your prices on estimating price demand elasticity: In B2B pricing, price elasticities is not reliable and might lead to the wrong decisions particularly if market segmentation is not reliable. Unlike B2C where prices are visible by the market, in B2B they are often known only by the buyer and the seller. Therefore, there is no way to promote a lower price and expect a higher demand through a promotion campaign. In B2B pricing, it is better to look at real value attributes and differentiators to differentiate pricing, like product advantages, service offered to the customer (credit, product availability at POS, etc.) as well as market dynamics to understand product and service positioning.
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Director, Analytics & Pricing at Arrow Electronics