Pricing Strategy: Selling Through Distribution Channels
Subject: Sales, Distribution, OEM, VAR, Integrators, Discount levels, Inventory, Selling, Decision Making
One of the problems I come across frequently is that of trying to establish pricing for different types of sales channels. In a manufacturing business for example you can have several distribution categories:
Note: All five are considered “distribution channels”
As you can see, each type of business brings a certain value to your company. The question is how to determine pricing to each these groups. Do you give:
a) Them all the same level of discount?
b) The discount levels based on years of service?
c) Them based on annual sales?
d) A better discount if they restock?
e) A better discount if they integrate or OEM your product?
These are some of the tough questions a sales manager or company head would have to answer.
Another thing that you need to keep in mind is that these entities talk to each other and will eventually find out what others are getting in terms of discounts. This will definitely be an issue when competing distribution channels go after the same bid. So you have to be very careful how you set your discount pricing strategy.
Here’s an outline of a strategy I employed:
Level 1 - Distributors: 20%
Level 2 - Stocking Distributors, VARs and Integrators: 25%
Level 3 - OEM: 30%
Level 4 - Any Channel Selling over $500K: 35%
You’ll note that for Level 2 I increased the discount level based on the company’s ability to add value to a sale. Each one of the 3 entities in Level 2 adds that value by either being able to delivery quickly from products out of their stock or by offering installation services.
The importance of defining these levels is critical in managing distribution channels. Again, word will get out and competitors will find out what others are getting. You need to put yourself in a position where 1) you can defend the discounts levels and 2) show that you value “added value” in your discount structure.
By establishing a level playing field for all distribution channels to compete, you then avoid any criticism in the long-run of playing favoritism to any one company.
Final notes: Never give an unknown customer who decides to buy direct from your company a better discount than you do your distributors. Nothing will drive off distributors faster then knowing they aren’t getting a fair deal (i.e., getting undercut) from the manufacturer.
Hope this was helpful!
Please feel free to forward this article to a friend or colleague.
Victor Antonio G., one of America's top business motivational speaker and author of “The LOGIC of Success”.
Copyright © 2005 by Victor Antonio G. All rights reserved. This article MAY be reproduced in any form or by any means, electronic or mechanical, including photocopying, as long as the author’s name, website and email address are included as part of the article’s body. All inquiries, including information on electronic licensing, should be directed to Victor Antonio G.
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