ECON 101 calls it “price sensitivity.” In a perfect economy, distributors can set prices where supply and demand meet and produce the most revenue. Price sensitivity measures how high a company can price its product without upsetting that balance.
Pricing delays can significantly damage potential profits. Distributors must understand their role in revenue and adopt data-driven strategies and dynamic pricing models to respond quickly to market conditions.
6 Pressures Forging This Volatile Economy
Navigating the challenging waters of fluctuating economic conditions compels distributors to adapt, innovate, and recalibrate with precision. These dynamic pressures demand agile strategies to meet market realities, ensuring operational resilience and profitability.
- Inflation: At the time of this writing, inflation remains a global issue. The cost of raw materials, labor, and logistics affects every link in the supply chain.
- Supply Chain Disruptions: Trade union actions, resource shortages, tariff wars, and unpredictable events increase prices along the pricing chain.
- Talent Shortages: Distributors must recruit and retain talent while facing rising wages, competitive options, and labor force expectations.
- Geopolitical Instability: Political tensions and violence disrupt the delivery of raw resources and finished products, increasing costs and prices.
- Market Movement: Suppliers, distributors, and customers feel fluctuations in demand for each SKU, challenging owners to set stable prices.
- Media Power: In a world of “smart” media, customers have easy access to information about products, providers, and prices. The access drives customer demand, regardless of the media’s credibility.
Distributors have a lot on their plates, from dealing with regional or product line shortages and disruptions to competitor price undercutting and unpredictable customer demand. Unless you adopt adaptive, agile, and data-driven dynamic pricing, you leave money on the table.
5 Things in the Way of Pricing Optimization
There’s not much an individual wholesale distributor can do about a volatile economy. Economic conditions always act erratically, but these influences seem acutely active recently. However, you can price products where supply meets demand and protect your profit margins if you effectively update prices and capitalize on fleeting market opportunities without hesitation.
- Eliminate Manual Processes: Paper transactions and spreadsheets are inefficient and outdated. They are prone to errors, which can negatively impact profitability. Research by Raymond Panko at the University of Hawaii shows that while spreadsheets can reduce errors by 80-90%, even a 1% error rate can be detrimental to profits. When this error rate is multiplied by the number of users and SKUs, the challenges of manual pricing become clear. In today's digital age, manual recordkeeping is simply unnecessary.
- System Disintegration: Seamless system integration is the cornerstone of efficient operations and robust pricing strategies that adapt to market changes. However, static forecasting, data entry, and inventory management will deteriorate. They add little value, increase inefficiencies, and waste labor.
- Inadequate Forecasting: Distributors can achieve a sustainable competitive advantage by making informed decisions using insights from a dynamic forecasting framework. The Institute for Supply Management notes, “Forecasts need to be regularly reviewed and updated to reflect new data and changing market conditions.”
- Cross-functional Communication: Breakdowns in communication between functional silos and collaboration in vendor interests create delays and inaccuracies in customer delivery and service. Solid cross-functional communication minimizes errors and aligns everyone to achieve pricing objectives efficiently.}
- Pricing Delays: Inadequate forecasting disrupts a distributor’s supply chain. Your operation is the link between the supplier and the buyer. In the industrial sector, that buyer is another buyer’s source. Your failure to price SKUs at the customer’s demand point only upsets the serial transactions.
It takes positive moves to prevent loss. You must act before the pricing trend hits the market. Reactive, knee-jerk responsive pricing will not help. Our research at Intuilize found:
- 90% of companies experience negative margin impact because of weak execution.
- 60% suffer additional losses from delayed implementation.
- The average distributor sees 17.7% of annual revenue affected by delayed or poorly executed price updates.
- The most heavily impacted companies had up to 35% of their revenue at risk.
These minor delays risk revenue loss when customers turn to resources with current competitive pricing. They lead to operational inefficiencies with inventory mismatches, excess stock, and stockouts. And, they risk damaging the brand and losing customer loyalty.
What’s a distributor to do?
Understanding costs and profit margins is crucial for distributors to maximize revenue. Distributors need to calculate their base cost accurately and add a strategically chosen profit margin. Pricing products to maximize profit without leaving money on the table is a delicate balancing act in this volatile economy.
- Understand Your Costs: Fixed costs, such as rent and equipment, do not change with production volume. Variable costs like labor and materials fluctuate. Adding these costs produces a base cost to which you add a profit margin.
- Measure Your Market: The customers’ value perception determines their willingness to buy at a given price. Sellers need data that shows what customers value. Buyers will pay for reputation, quality, and features. Different customer segments may have different price sensitivities and value perceptions.
- Timely Pricing: Distributors must study the competitors’ pricing strategies. They might lead or follow the market. You must adjust prices based on real-time factors like season, production cycle, segmented demand, and historical transaction data.
- Test and Experiment: You can try different price points, testing which performs best. Allow time to track the results, solicit customer feedback, and review and adjust pricing accordingly.
Distributor pricing strategies need clean and current data to work. Without the power of advanced technologies, price optimization depends on individual employees. However, manual data entry across thousands of SKUs inevitably leads to mistakes. Updates that should take days stretch into weeks or months, and customers buy elsewhere. Delays in data entry, purging errors, technology investment, and pricing leave money on the table.
Distributors must embrace world-class technologies and dynamic strategies to mitigate pricing delays and capitalize on market opportunities. They may use legacy pricing strategies, but future-built companies will leverage emerging technologies to craft responsive and effective pricing models that align with market volatility.
Distributors can learn how to safeguard their profit margins in the face of fluctuating costs by downloading the Intuilize research report "How Distributors Protect Margins During Cost Volatility: A Benchmark Analysis for Distributors." This report offers dynamic pricing solutions to combat pricing delays.