3 Strategies for Determining a Pricing Structure for a Particular Partner, Channel, and/or Market Segment
Designing a successful channel pricing structure continues to be one of the most complex and ambiguous processes in a business.
Each distribution channel a supplier sells through mandates careful examination into the end customer’s market segment, and the value that is attained by purchasing through that channel. Needless to say, implementing the right pricing structure requires time and patience; suppliers will most likely have to endure a trial and error-based philosophy to determine the most profitable and least risk system for setting out pricing.
The rise of electronic commerce and third-party logistics providers has added a further layer of ambiguity regarding channel pricing. Unlike traditional methods of distribution, manufacturers have more flexibility to lower their dependence on discounting, rebates and other incentives with channel partners instead of selling directly to end customers. However, traditional distribution channels, of course, still very much remain a prevalent and effective method of vending.
Given these complexities, in conjunction with the unique value proposition that each channel and partner possesses, it should come as no surprise that suppliers are often left scratching their heads in frustration—helplessly trying to identify the best channel pricing structure to attain the maximum gross margin. But unlike traditional pricing structures—where implementation relies on market demand and competitive pricing—channel pricing is determined via the entire sales process and customer experience as well as the level of brand leadership/influence and value proposition the supplier displays.
Ultimately, it is a mistake for suppliers to blindly determine pricing around the success [revenue generated] of sales and marketing programs or volume incentive discounts.
Channel pricing should be strategically aligned to:
- Leveraging a partner’s strengths
- Managing channel conflict
- Utilizing partners’ post-sale services and functions with customers
- Reducing supply chain costs
- Motivating behavior
- Increasing market share
Suppliers with little experience in dealing with the complexity of channel pricing economics put themselves at a major disadvantage with their partners, who can easily exploit their naivety during price-structure negotiations to fit their agenda. Ultimately, vendors must identify the best means of acquiring the maximum gross margin for their business: selling directly, or, selling through the channel.
3 strategies for determining the channel pricing structure
1.) Compartmentalizing Discounts-Functional Discounts
Functional discounts embody the new infrastructure into how the channel pricing structure is determined.
When distribution chains existed in a simpler era, only one entity would perform the operations, functions, and logistics that go into selling via the indirect sales funnel. In today’s corporate landscape, however, there are typically multiple partners participating in one transaction—with each company specializing in a particular function or duty (e.g., managing inventory, delivery/logistics, sales, order processing, technical support, etc.). Instead of implementing a fixed or equally distributed cost reduction to all channel partners, functional discounts segment compensation based on value and operational importance of partners’ duties. As a result, suppliers are left with more flexibility to determine the structure of cost.
2.) Activity-Based Discounts
Instead of focusing on value-based services to determine partner compensation, activity-based discounts rely on behavior (or activity) for lowered pricing. For example, one of the most common examples of activity-based discounts is prompt payments. This is a type of payment where a supplier rewards its partners for purchasing before a set period of time. Manufacturers encourage the behavior of ‘faster purchases’ because it mitigates the cost of finances.
Other examples of activity-based discounts are:
- Participating in product training
- Generating market demand via promotional allowances (e.g., Co-op/MDF).
- Opportunity follow-up
- Customer installation
- Volume-based discounts
3.) Results-Based Discounts
When determining channel pricing structure via channel programs—discounts are usually configured in two distinct categories: activity-based or results-based.
Results-based discounts are typically interpreted as the less-risk-higher-reward alternative. The reason behind this is because partners have less flexibility or leverage into the discounts they acquire. Suppliers are able to design results-based discounts in direct correlation to fulfill their personal agenda, bottom line, and internal goals than the previous.
If a channel partner is unable to successfully qualify for the results-based discount, the supplier is not obligated to repay their efforts. Consequently, partners’ inability to achieve the results-based program implies that the supplier wasn’t able to achieve its goal as well. Therefore, the discount works as a double-edged sword in this context.