Distributors with thousands of SKUs in their catalogs consistently face the daunting task of accurately setting prices for the products they sell to ensure they are appealing to customers while meeting the business’s financial goals for each item.
Despite the significant amounts of data they generate through the buying and selling of products and services, many distributors continue to rely merely on their intuition or collective wisdom when making pricing decisions. Modern AI-powered price optimization tools can help distributors apply data-driven pricing strategies across their entire catalog and significantly increase gross margins. However, the distributor first has to pick a pricing model and move away from legacy models.
Below is a quick look at three pricing models available to distributors: the cost-plus model, the price-on-demand model, and the competitive model.
The cost-plus pricing model
The Cost-Plus model is the one typically used by manufacturers. They calculate the cost of materials, research/development, facilities, marketing, and other expenditures. Accounting practices help apportion the costs to different products. They then add their desired profit margin to set the preferred price and make agreements with distributors to sell and deliver their products
Distributors that also want to leverage the cost-plus model would then carry the manufacturers' pricing forward, with the price paid to acquire the product becoming the distributor's cost. The distributor then adds business costs such as shipping and receiving, sales and marketing, employee compensation and benefits, and facility maintenance. After that, they would add their own anticipated profit margin to set the final price.
Given all of these details, it takes a sophisticated system to accurately price thousands and tens of thousands of units to meet the market and sustain the desired profit margin. To be successful with the cost-plus model, distributors must leverage their data to produce consistent, sound, and profitable pricing.
The price-on-demand model
The Price-on-Demand model focuses on nailing the preferred price customers are willing to pay based on the value they perceive in the product. This approach starts with a study of customers' responsiveness to various price levels.
Prices need to be compared with competitors and aligned with current market pricing. Then researchers study the customer response. However, consumer behavior varies over time, sometimes radically. The changes reflect any number of customer whims, but inflation will reduce the willingness to pay. This demand elasticity creates inconsistent pricing and makes predicting market behavior difficult.
While demand-based pricing may lead to lower prices, it can also reduce supply and may discourage the production of better goods.
The competitor-based pricing model
The Competitor-based model pursues successful pricing by matching competitor prices. It can also set prices slightly below or above the public information on the competition, but it has little to do with value and works best where providers have saturated the market.
Competitor-based pricing not only risks duplicating the competitor's pricing errors, it also ignores quality and discourages opportunities for quality improvement. With little price differentiation in the market, other factors will motivate the buyer.
Outro/Call to Action
Which pricing model you choose will depend on your business model, the products you sell, and the customers you serve. Selecting one and moving away from intuition- or collective wisdom-based pricing is a critical first step in your price optimization journey.
Once you have a pricing model in place, you will be able to take advantage of AI and machine learning technologies to leverage the data available to you to optimize your prices, strengthen your market position, and drive sustainable growth.
To see a real-world example of price optimization's impact on a distributor’s financial performance, read our case study with Motor City Industrial, which saw a gross margin lift of over $500,000 after adopting Intuilize.
Optimize Your Pricing with Confidence
Deciding on a pricing model is a crucial step that aims to balance customer appeal and profitability. Our whitepaper, Thriving in an Age of Disruption: Transforming Distribution with Inventory and Price Optimization, provides key insights into effective pricing strategies, including:
- Pricing Insights: Gain clarity on selecting and implementing the most effective pricing model for your business needs.
- Data-Driven Decision Making: Discover how to utilize AI for more accurate and dynamic pricing adjustments.
- Market Adaptation Techniques: Explore how to rapidly adapt pricing strategies in response to changing market conditions and consumer demands.
Download now to transform your approach to pricing and drive your business forward.
