A 2022 Firstguide report states that at least 70% of businesses worldwide migrated online in 2021, disrupting the balance in prevalent pricing and distribution strategies. This has resulted in Internet-only retailers being able to sell their products at much lower prices than their store counterparts. As businesses face severe competition across domains and transportation costs continue to rise, it’s time to rethink pricing strategies and protect revenue channels. Let’s learn how to approach this.
How to Determine Product Pricing and Distribution
Here are the four primary steps to consider while setting up pricing and distribution strategies for products:
1. Fix a Specific MSRP
Manufacturer’s Suggested Retail Price (MSRP) is a price that the manufacturer recommends to retailers for each product after adding selling and manufacturing costs. MSRPs ensure stability in the market for both retailers and consumers and offer a steady pricing paradigm for business owners.
2. Find Out the Hidden Costs
Distributors increase the geographical area of a venture, ensuring that the products reach target consumers. However, there are many latent costs associated with distribution that range from the transportation of goods to storage costs. Even before the finished products exit the hands of distributors, these costs can shrink your profit margins. Hence it is important to be aware of all the hidden costs.
3. Note Each Step of the Distribution Ladder
There are many layers in the distribution chain such as producers, vendors, transportation companies, retailers—each of whom will carve out their own profits, thus adding to the hidden costs of distribution channels. Moreover, rising inflation determines the markups of each stakeholder in the distribution channels and these can vary drastically.
To have a crystal clear idea of all hidden costs, one should include the overhead costs of all offline and online participants of the distribution process and strike a balance along the distribution chain.
4. Data-Driven Analysis
Data-informed pricing softwares will help you correctly gauge the net profit from each product after subtracting the unstable costs of fuel, and the granular costs of different distribution networks.
Types of Pricing and Distribution Strategies & What is Right for Your Business
Here are some different pricing and distribution strategies you can deploy for your business:
Also known as ‘Manufacturer-aligned pricing strategy’, this method sets the price of a product at the same level as quoted by competitors. Companies switch to competitive pricing when a product has been in the market for a long time and its pricing has already reached an equilibrium. New companies also use this strategy to de-risk their pricing decisions at the onset of the business.
This strategy comes into play when a fixed percentage or amount is added on top of the competitors’ price, giving you the selling price of a product or service. It is also called ‘mark-up pricing’.
This strategy places the onus of pricing on how consumers value a product or service rather than on the cost of developing it. Customer-centric pricing can be found in businesses such as designer-apparel companies. The build cost of designer clothes is almost the same as their non-designer counterparts. However, the perceived brand reputation of the designer shoots up the prices.
The decision to sell products or services at zero or minimum profit allows you to sell as many units as possible. Since this type of strategic pricing depends on the volume of products being sold, it is used to gain a large market share. However, it also requires significant financial backing to absorb the losses due to this pricing and distribution strategy.
When a company offers a new product at a very low price to gain significant market share or to garner consumer attention, it is called penetration-based pricing. Even new firms use this tactic to build brand awareness—the underlying goal being aggressive marketing to push a major market share along the sales funnel.
What is Right for Your Business?
The post-pandemic online retail boom has deeply influenced the pricing and distribution strategies of companies. Diverse consumer demands, rising inflation, and economic uncertainty make it challenging to optimize a master plan that ticks all the boxes of long-term business goals. Thus, a data-driven mix of pricing decisions is your best chance to stand out amid intense competition.
Pricing and Distribution Strategy: How Can You Improve Your Pricing
Here are some tips to make your pricing and distribution strategies robust in a climate of rapid technological shifts and innovative business models:
- Break down the pricing strategy according to your business model and goals
- Let market research and strong data analysis guide every step of pricing
- Make pricing directly proportional to product value
- Develop a strong understanding of the different market segments to help you remove the discrepancies between perceived value and actual product value
- Align pricing with the ideas of the sales and marketing teams as they have authentic knowledge of your diversified consumer base
- Deploy services such as delivery, additional information on products, and installation instructions, among others, that add value to the buy
Why Should Distributors Strategically Reposition Their Price List
Over the years, the market has evolved and so has the consumer. Powered by the internet and a variety of choices, consumers now have the ability to make informed buying decisions. With the dominance of value-based pricing strategies, distributors have to reposition their price lists and strong brand portfolios to dictate business profitability. Repositioning prices is more useful in e-commerce businesses as it helps avoid price wars with competitors which, in turn, hinders sales.
Pricing and Distribution Strategies Examples
Pricing Strategy Examples
1. Geographical Pricing
Businesses customize pricing according to the demand and operational costs of products in different states. Steel and gasoline companies favor geographic pricing to accommodate transportation and fuel costs. In online shopping, the final rate of products varies depending on the geographical proximity of the customer’s address from the closest distribution warehouse.
2. Psychological Pricing
In this strategy, businesses tweak the language about pricing to grab the reader’s attention. For instance, ‘Buy one, get one free’ works better than ‘50% off on two items’. Moreover, the persuasive power of the number ‘9’ in pricing strategies has manufacturers pegging costs at $999 as opposed to its closest rounded-off figure of $1,000.
Distribution Strategy Examples
1. Daily Livelihood Products: A Toothpaste Manufacturer
For regular household products, the aim is to deploy intensive distribution so that the product reaches as many customers as possible. Ranging from e-commerce websites to departmental stores to supermarkets, a toothpaste manufacturer will utilize all the distribution channels as a means to boost brand loyalty among consumers.
2. Exclusive Products: A Luxury Brand Watch Manufacturer
Any manufacturer of a high-end exclusive brand, such as a luxury watch, will limit the number of distribution outlets as a tactical strategy. Preserving its rarity as a brand will enable more control over all its pricing and distribution channels.
Matching product features with consumer needs is important in shaping the effectiveness of customer-centric sales. Do check out Emeritus’ extensive courses on sales and marketing in order to learn how to align your pricing and distribution strategies with the continuously evolving market conditions.
By Bishwadeep Mitra
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