We received a question from a subscriber recently that made us laugh:

Help! Our CEO insists that industry pricing is all that matters, and we should just try to stay in the middle to be competitive. We’re not running some kind of all-you-can-eat buffet line where our customer just load up regardless of profitability. How do I explain this to him without getting [expletives deleted] fired?

Industry pricing can be relevant for distributors, although we appreciate the above pricing manager’s insight that many other factors lead to profitable price setting far beyond industry norms.

We’re guessing that the CEO wants to use industry pricing to set baselines for goods and services that fit your markets and locations. That is not a terrible idea, although we would prefer to use it as a starting place rather than the end goal. It’s always a good idea to look at your industry pricing with factors like competitor prices, regional market conditions, local cost-of-living adjustments, production costs, and other data to determine the competitive price point for a given product or service. Certainly, industry-wide issues related to shortages, recalls, inflation, new product launches and more all have impact on your ability to price correctly.

The problem we have with only using industry pricing instead of analyzing your customer segments, buying behavior, demand pattern and other data-driven pricing strategies is that you will fail to maximize your profitability. You may be comfortable where you are in your markets with industry pricing, but you will leave money on the table. It can also lead to an overemphasis of your competitor’s prices. How do you know they have their pricing correct? How can you respond quickly to changes and customer needs by using such a broad brush? How do you maximize your success in niche markets? Remember, profitable pricing isn’t always about charging more, it’s about meeting your customers’ needs at a fair exchange of value.

There is a way forward for pioneering pricing managers who work for traditionalist industry-focused bosses.

Know The Competition

How often do you shop your competitors? If you want to really present a picture of what your industry is doing, you’re going to need to understand your competitors’ real prices. What are the really getting on the invoice, not what are they charging online or in ads. Making an argument for more sophisticated pricing must start with real street-level data.

Know Your Local Branches

Industry-pricing isn’t a nationwide standard. If you want to get to the heart of what your industry thinks is a pricing norm, you need to also consider things like regional adjustments, cost of living, transportation issues and more. Some of your branches can and should charge more for a variety of factors. Each location has a different set of trends, local businesses, infrastructure, they grow or decline at different rates and for different reasons. One branch might be benefitting from a local building boom while another is suffering from floods. Even with industry pricing, you still face a significant amount of complexity just in localizing your pricing strategies.

Understand Your Real Costs

Just because a competitor is priced at a certain level, it doesn’t mean you should. There are a whole bunch of reasons why your price may differ from your competitors (This article provides some tips on how to evaluate differences in competitive pricing). You must take all your own costs into account to stay profitable with industry pricing – replacement costs, costs to serve, labor, shipping and more.

Get Clear on a Profit Target

If your CEO is insisting on industry pricing, it could be that he or she feels they are in a totally commoditized market and it is hopeless to maximize profit beyond industry norms. Or it could also be they’ve just never thought about it. Help them set goals for better profitability and you might slowly bring them along. Help them see that their business isn’t just a passive price-taker, but it is their biggest investment in their portfolio. Why would they want to grow it bit by bit with better data?

Share Anecdotes

Often executives are a little bit removed from the actual customers to understand what customer needs are and what they can mean to your profitability. Rather than shoving a bunch of data at someone, it can be helpful to share customer stories that illustrate how different needs and expectations can drive different pricing. At the end of the day, pricing is about both sides getting good value. If one customer prefers your locations because of convenience, they’re getting more value and are willing to pay a little more than your competitors. Customer feedback should be an important aspect to your industry pricing. And if your CEO really wants to be informed about what the distribution industry is doing with pricing, you can also share some of our articles about how distributors are using advanced technology to drive price optimization. Or share our distribution pricing optimization solutions guide to get a flavor for the solutions we feel comfortable recommending.

Experiment and Track Discounts and Promotions

If you are only using industry pricing, then what happens to strategies like discounts and promotions? Most distributors use discount regardless of their pricing strategy. Tracking and analyzing the data from these promotions give you an opening to discuss further how various pricing strategies can impact profitability. This is an area where your CEO is probably comfortable with varying from industry norms so use it as a data set. Any place you are changing your price points over time for any reason is an opening to discuss how better analysis of pricing could lead to enhanced profitability.

We certainly don’t envy the subscriber’s dilemma presented in their question. Talking about pricing to an experienced distribution CEO is never easy, and it gets harder if they are married to a particular idea about how pricing should work. So, keep at it, emphasize the importance of regional differences, cost structures and unique customer situations. Ultimately, the more experience people have with a new strategy, the more likely they will support and expand it in the future.