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Is the Price Always Right?

I'm always amazed at the variety of pricing strategies used by distributors. Cost plus, list less, fixed pricing, and the old stand-by, gut-feel - they all have their strengths and weaknesses. But the ultimate goal is finding the “right” price. So what is Is the Price Always Right the right price?

The exact dollar amount of the right price is different depending on the perspective. For the customer, the right price is the lowest price. For the distributors, the right price is the highest price. Therein lies the problem: balancing the price the customer wants to pay with the price the distributor needs to charge. Finding this balance gets you to the optimal gross margin-the highest margin you can obtain while retaining the customer's business.

Best way to improve your bottom line
Let's start by looking at why finding the optimal margin is so important. Hands down, the biggest impact you can have on your business is by increasing your gross margin and the resulting customer price. Let's consider several ways distributors can improve their bottom line including growing sales, reducing cost of goods sold, reducing operating expense, or increasing price. Of these, increasing price will have the largest impact on your bottom line. If we look at a simple example, let's assume a distributor with $10,000,000 in sales, with 25% GM, and 22% Operating Expense.

Best way to improve your bottom line.jpg

Best strategy to get the optimal margin

Determining the price that achieves the optimal margin depends on multiple factors, including the amount of business you do with a customer annually, to the type of customer, to the particular item being ordered. The problem for many distributors is that the pricing decision is solely in the hands of the sales rep. Clearly the sales rep needs to be involved, but industry best practice is to have a pricing committee - that meets on a regular basis - to analyze pricing from the customer, vendor, product line, and item level. The goal being to identify opportunities where there is still margin on the table and gradually increase price to get to the optimal level. For many distributors, the pricing structure is set up initially and never changed. Since your customers and items are always changing, the pricing structure should be changing with it - requiring the pricing committee to meet on a regular basis.

The difficult part can be the analysis and the resulting changes to the pricing structure. Typically the analysis involves classifying customers by type and by size, then analyzing items by velocity code. Using that information the committee would look for less price-sensitive items (B, C, or D velocity items) as potential for price increases. This can be a formidable task just to identify the potential items, and depending on your current pricing structure, entering the changes can be equally if not more challenging.

Luckily there is an option to automate this process. Developed through an agreement with Strategic Pricing Associates Inc, Epicor Strategic Pricing uses the SPA model to simplify the task. The Strategic Pricing module analyzes your database for customer and order information and then classifies customers by type and size. It then exports your customer data to SPA, which sends back recommendations for pricing items by customer and product. These recommendations can be imported into either Eclipse or Prophet 21, providing easy updating and maintenance of your pricing structures.

So whether you do it the old fashioned way or use Epicor Strategic Pricing, determining the right price - with the optimal margin - can have a huge impact on your bottom line.

Tony Corley is a Sr. Product Marketing Manager at Epicor. Connect with him on LinkedIn.


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