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The Four Most Basic Factors in Distribution Pricing

Distribution pricing is determined by a variety of factors, but some are more important than others. While many companies may choose to focus exclusively on cost plus margin, others will take other factors into account. The following are four of the most basic factors that affect distribution pricing.

Your distribution pricing strategy should consider the following factors:

  1. The type of product or service being offered
  2. The target market for the product or service
  3. The competition in the market
  4. The costs associated with distributing the product or service

Product and Service Level Pricing

Product pricing is generally determined by the type of product or service being offered. Brand names and important commodities often dictate a higher price point, while more generic products are priced lower. Product lines also play a role in how products are priced; for example, a vendor known for industry leading engineering can command higher prices for their tools and equipment that a more budget-friendly manufacturer.

When it comes to value added services, pricing is often determined by the scope of the project, or the amount of time required. For example, a one-time consultation will be priced differently than an on-going service, OEM programs, vendor managed inventory agreements, job shipping, specialized kitting or supply level guarantees.

How Markets and Customer Segmentation Affect Pricing

When pricing items, it’s important to consider the market that is being served and the customer segments that are present. Different customer segments are willing to pay different prices for the same items, so it’s important to tailor your prices accordingly.

Additionally, geographic location can play a role in pricing; certain areas may be willing to pay more for an item than others. Finally, demand and urgency can also affect pricing; if an item is in high demand or needed urgently, you may be able to charge a higher price.

By taking all these factors into account, you can ensure that you are providing the best possible prices for your products or services.

Competitive Pricing

Competition in the market affects pricing in a few ways. First, when there is more competition, companies are forced to lower their prices to stay competitive. This can be good news for consumers, who can get the same items at a lower price. However, it can also be bad news for companies, which may end up losing money if they don’t raise their prices back up to a level that covers their costs. Additionally, when there is competition, companies may feel pressured to offer discounts or other promotions to attract customers. This can lead to lower profits for companies and reduced prices for consumers.

Pricing Can Be Influenced by Associated Costs

There are many costs associated with distributing a product or providing a value-added service. These costs can affect the pricing of the product or service.

One cost associated with distribution is replacement cost. If a product has become expensive to replace due to a shortage or increase in demand, you should adjust your pricing accordingly regardless of what it cost to originally purchase that item. If a product is defective or needs to be replaced, the company may need to reimburse the customer. This can increase the cost of doing business and may be reflected in the price of the product.

Another cost associated with distribution is cost to serve. This includes the cost of labor, materials, and other expenses necessary to provide the product or service. If these costs increase, the company may need to raise prices to maintain profitability.

Finally, transportation, storage and shipping costs can also affect pricing. If the cost of shipping increases, the company may need to raise prices to cover these additional expenses.

Pricing strategies can vary from business to business, but it’s important to consider these four most basic factors before determining a final price point. After all, the goal is to generate revenue while still providing value to the customer.

Campbell Frazier has been involved in distribution technology for over 25 years including close work with many leading distributors on pricing, price optimization, profit analysis and more. As editor-in-chief of distribution-pricing.com, Campbell is bringing the latest in price optimization news, solutions and consulting to literally thousands of distributors across the globe.

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