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 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:
-
Distributor: A company
who resells your equipment.
-
Restocking Distributor:
Is a company who not only resells your equipment, but also keeps a stock.
This is an advantage especially if product delivery or lead times are
important.
-
VAR: Value Added
Reseller who takes your product and enhances its value by incorporating it
into a larger system sale.
-
Integrators: This is a
company who not only buys from you, but also from other manufacturers and then
bids, and hopefully wins, large system sales. An integrator in most cases
will install the end-to-end solution for a company.
-
OEM: Other Equipment
Manufacturer is a company that buys your equipment and re-labels it under
their own brand name.
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!
Victor
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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