How Well Are You Managing Your Customer Pricing Contracts?

Do you offer special pricing contracts for some of your customers?

Many distributors create a special pricing contract for a customer to offer them more competitive prices than what is generally available in the market. This could help the customer gain a competitive edge while also ensuring that the distributor can still earn a fair profit. Additionally, offering custom pricing contracts helps build trust between the distributor and their customers, fostering stronger relationships and long-term loyalty.

There are all kinds of scenarios that prompt a customer pricing contract, including:

• A very large volume end-customer may require additional services and the distributor wants to lock them into a price to keep their business.
• Distributors must be able to hold a product-line position against competing new players, ensuring their products remain competitive in the market.
• To enter a new market, distributors need to have a strong pricing structure and terms for customers – a pricing contract might lure a customer away from an existing competitor.
• Distributors must also bear in mind any competitive pressure from other distributors when creating pricing contracts, so a pricing contract might be created to prevent encroachment.
• When acquiring another company, the acquiring distributor may help maintain an end-customer’s business by providing more options or special pricing arrangements.

Customer Pricing Contracts Are Full of Complexity

Any time you leave your price matrix – even when your strategy warrants it – you add complexity to your system. Variance from your pricing matrix creates many opportunities for lost profits. Some of these complexities include:

• Scope: One of the elements to consider when constructing a customer contract is understanding the scope, or extent, of the agreement. Companies must carefully evaluate if they want their contract to encompass all of their products, a certain line or if it should be limited to one product. Depending on the specifics of the contract, this can have an impact on both the cost and length of time that it remains in effect. As such, businesses must consider how much flexibility they require before writing out any agreements.
• Lack of data: Sales representatives may attempt to suggest a contract price in order to secure a deal, but oftentimes they lack the supporting data that is necessary to confirm the suggested pricing. This can be true even when it comes to understanding the competitive pressure of the market, which is an important factor in ensuring that customers are being offered appropriately priced products and services. As such, businesses should take care not to accept any pricing suggestions without independently verifying their accuracy first.
• Expiration: One of the common oversights in managing customer contracts is failing to remain aware of expiry dates or any changes that may be made to the supplier’s requirements. This can lead to contracts that remain in effect far beyond what was initially intended, or agreements that are no longer relevant due to circumstances outside of the company’s control. As such, companies should make sure to regularly review their contracts and update them accordingly in order to stay in compliance with new pricing, inflation or changing strategies.
• No database: Many Enterprise Resource Planning (ERP) systems lack the capacity to efficiently manage pricing contracts that go beyond a set matrix. As a result, businesses are put in a tricky situation of having to manually keep track of specific contractual agreements with each customer and supplier, a task that can quickly become overwhelming.

All these complexities can lead to lost profit:

• Confusion over the scope of each contract could lead sales reps to discount all products for a customer well below market standards. One of the dangers of misunderstanding the scope of a contract is that sales representatives might offer discounts to customers that are well below the market rate. This could have a significant negative impact on the company’s bottom line and hurt its relationships with other suppliers. To avoid this, it is crucial that all employees who are involved in creating or reviewing contracts have a clear understanding of the agreement’s terms and conditions.
• Without access to the right data, it is possible for a pricing contract to be set too low, potentially reducing profitability and in some cases, even falling below replacement cost in volatile markets. This highlights the importance of having the right resources in place when negotiating contracts – such as data analytics and market research – to ensure that deals are profitable and fair on both sides.
• Expired pricing contracts should be opportunities to work with your customers in new ways, but if they aren’t managed you may simply be carrying on discounted pricing that is no longer needed. Expired pricing contracts should be seen as chances to re-negotiate or develop new arrangements with customers, as continuing old, discounted pricing might not always be necessary. To ensure that this process is well managed, it is important to keep track of expiry dates and regularly review and update contracting agreements when needed.

Getting Proactive About Your Pricing Contracts

Many distributors simply react to problems with their pricing contracts when a problem arises. You wouldn’t do this with the inventory in your warehouse. Imagine if you only responded to inventory level when you found out about unexpected shrinkage or misplaced items. Instead, you would put regular systems in place and conduct regular inventory physicals. You should manage your inventory of pricing contracts in a similar fashion.

At the very least, you can create your own database of pricing contracts. Even using a spreadsheet to track is better than nothing. Be sure to include customer names and numbers, type of discounts provided, creation dates, expiration dates and the scope of the contract with named products and lines. In this way, you can at least review your contracts weekly for expiration and margin impact. And when a vendor sends you a price increase, you can quickly identify which customers are impacted.

But if you’re using a distribution-specific price optimization solution that tracks pricing contracts, you can manage your pricing profitability much more effectively.

According to Barrett Thompson, Zilliant General Manager of Commercial Excellence, distributors lack the resources to employ analytical methods and optimization approaches to maximize their contract profitability, leaving them stuck with manual methods. “Most distributors exhaust all their resources just keeping up with the overwhelming, manual mechanics of contract management and have nothing left for analytical methods and optimization approaches – when it comes to contract profitability, they’re treading water at best,” says Thompson.

Zilliant offers an agreement management solution – Deal Manager™ – that enables proactive management of customer-specific contracts and agreements. The centralized system allows pricing teams to see how many agreements exist within their business and the respective profitability of each, while removing cumbersome manual tasks from the sales team’s plate when contract prices or terms need to move. It’s a great example of the power of technology over manual processes.

“Recent breakthroughs in pricing software automation make it possible to radically decrease the time spent in contract mechanics, while simultaneously layering on analytics and optimization to surface powerful insights which have been lurking undetected for years,” says Thompson. “This transforms the idea of increased contract profitability from a dream into a reality.”

The complexity and potential for profit loss underscores the importance of using consulting and technology to optimize your pricing strategy across all your inventory. Please visit our solution guide of price optimization solutions to learn more.