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Elevating Your Pricing Strategy: A Maturity Model for Distributors

By David S. Bauders, CEO SPARXiQ

Every distributor is on a strategic pricing journey. The fundamental pricing challenge — thousands of SKUs, thousands of customers, and seller-negotiated pricing — is virtually endemic to distribution. Every day, quote by quote, decisions are made that determine the net profitability and organic growth rate of distributors. Everyone is working the same number of hours, but the value captured by each distributor depends on how this core business process is executed. Typically, distributors can capture 100 basis points or more from each stage progression, totaling 500 basis points or more.

Stage Zero: The Wild West Approach to Pricing

The default state for the vast majority of distributors is a “Wild West” approach to pricing. They often price using peanut-butter margins ending in 0s and 5s or gravitate towards the nifty Last Price Paid feature in their ERP system. Companies in this stage tend to adhere to the mantra of “Leave Them Alone and Let Them Sell,” assuming their sellers understand market pricing. This approach, lacking tools, training, and processes, leads companies to perform at the bottom of industry profitability and growth metrics. Until these companies move up the maturity ladder, they risk being acquired by others who have advanced further.

Stage 1: Random Pricing

The first stage in the pricing maturity model is Random Pricing, which really describes an inconsistent use of structured pricing. In this stage, someone has started to implement some pricing matrices to offer sellers a simpler, more consistent or superficially logical approach to pricing. Often built in home-grown Excel spreadsheets, these pricing matrices are oversimplified and heavily based on cost-plus approaches, as in the Wild West state. Here, pricing matrices at least attempt to relate margin levels with customer segment, size or geography, and often differentiate by vendor or product family. However, as these companies’ pricing recommendations stem from internally derived, anecdotal, cost-based assessments of appropriate margins – rather than the true drivers of market pricing and share-acquisition — the adoption of these matrices is predictably poor, as is their alignment with market-level pricing expectations. Pricing overrides to these primitive systems can account for 50 percent or more of transactions.