Channel Pricing Strategy Channel pricing can be challenging, especially if you also sell direct. You have a number of major goals that can completely conflict with each other. A main focus of your pricing strategy is to minimize pricing conflicts. If you use multiple channels, carefully map out the price for each step in your channel and include a fair profit for each type of partner. Then compare the price that the end-‐user will pay; if a customer can buy from one channel at a lower price than another, your partners will rightfully have concerns. Pricing conflict is common but it can jeopardize your entire strategy, so do your best to map out the price at each step and develop the best solution possible.
Summary EXERCISE SUMMARY
When to Address
Who Should Participate
Where to Use the Results
If you’re setting up a channel, create your pricing strategy after you’ve created your basic channel structure. Business leaders: company founders, owners, presidents and vice presidents Marketing and sales leaders Channel managers Product managers Share your pricing strategy as you’re selling to potential partners.
Distribution pricing can be tricky. You need to provide partners enough incentive to focus their efforts on selling your product, while also minimizing channel pricing Why it’s Important conflict and ensuring that you’re profitable. Most channel conflict issues result from pricing strategy. What Builds Upon it 30 minutes to 2 hours, depending on your situation
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Timeframe to Completion Potential Business Impact
Medium. Channel pricing conflict can create headaches and cut into profit margins.
Deliverable
You’ll create your channel pricing strategy, determine channel markups and decide upon your final channel pricing.
Next Steps
After you create your channel pricing strategy, you’ll want to create your channel support plan.
Target Completion Date
PARTICIPANTS TASKS
PERSON RESPONSIBLE
DUE DATE
Notes
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Channel Pricing Strategy
What to Complete
1. CREATE CHANNEL PRICING STRATEGY 2. DETERMINE CHANNEL MARKUPS 3. SET CHANNEL PRICING
Where it Fits in Distribution Channels Determine if a New Distribution Channel is Right for You Establish Distribution Goals Select Channel Type Project Channel Revenue Design Channel Create Channel Partner Sales Plan Create Channel Partner Management Plan Create Channel Pricing Strategy Determine Channel Markups Set Channel Pricing Determine Channel Support Design Channel Marketing Campaigns Create Channel Management Plan Measure Channel ROI Resolve Channel Conflicts
1. CREATE CHANNEL PRICING STRATEGY
Your other channels (direct and indirect) affect how you approach your channel pricing strategy. How are you approaching the market? APPLICABLE? MARKET PENETRATION TYPE OF CHANNELS Targeting Same You are 1) selling directly to customers and 2) Using
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MARKET PENETRATION
TYPE OF CHANNELS
Customer Group Selling Direct and also with a Channel Keeping Direct and Indirect Channels Targeting Separate Customer Groups
a channel that’s selling the same product to the same group of customers. You are using an indirect channel (i.e. distributor, VAR, consultant, etc.) in addition to or instead of your own direct channel?
APPLICABLE?
Each company in your channel needs to earn an acceptable profit margin in order to continue participating in the chain. You sell to another company and they need to mark up your price; the more steps in the process, the more the product is marked up and the more the end-‐user will pay. Remember, your channel partners are investing valuable time and energy into offering your product. If the channel is an important revenue stream for you, then try to make it work for all parties. Consider the following market penetration methods and the inherent challenges: MARKET CONSIDER? PENETRATION CHALLENGE POTENTIAL SOLUTIONS METHOD If you sell the same product a. Stop competing with your Targeting Same to the same end-‐users at a channel for that product and Customer Group lower p rice t han y our c hannel customer segment; focus your Selling Direct and partners, you’re putting your efforts elsewhere. also with a Channel entire channel strategy at risk. It might work in the b. If you sell directly, sell at the short term, but this scenario same price. If the channel rarely works for the long term. offers substantially more Your partners will: value, you may be able to Mistrust you for offer the product at a slight undercutting their price discount to their end price. Lose revenue as their However, it’s wise to talk customers eventually about that strategy with your learn that they can get a partners – if the channel is better price from you worth having, then it’s worth Probably fight you on the it to avoid this issue. issue, then defect. c. If the channel’s price is simply too high, look at the profit margins and markups each company in the chain is earning. Each company deserves a fair profit for the
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MARKET PENETRATION METHOD
CONSIDER? CHALLENGE
POTENTIAL SOLUTIONS value they provide; it’s possible that too many middlemen are forcing the price too high. 1. Consider lowering the price at which you sell to your channel. It may be worth it to lower your profit margins for that revenue stream in order to keep the revenue flowing. 2. You may need to try to use fewer steps in your channel. 3. You may need to more forcefully establish a “recommended retail price” and promote it heavily to your entire channel. The pressure to meet that price could help you convince them to lower their prices throughout the chain. However, you’ll need to make a strong case that by doing so, they will sell more volume and increase their total revenue.
MARKET PENETRATION METHOD
CONSIDER? CHALLENGE
POTENTIAL SOLUTIONS
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MARKET PENETRATION METHOD Keeping Direct and Indirect Channels Targeting Separate Customer Groups
CONSIDER? CHALLENGE When you create a channel instead of selling directly to the end user, you lose control over the final price of your product /service. For example, if you’re a manufacturer and sell at a wholesale price to a wholesaler, who then sells to a distributor who then sells to a value-‐added reseller (VAR), that VAR will typically set the end use price. The problem arises when the seller at the end of your channel uses a pricing strategy that’s inconsistent with your value proposition and brand promise. In a quest for short-‐term revenue, they may offer discounts and promotions that undermine your long-‐term strategy.
POTENTIAL SOLUTIONS 1. You may need to more forcefully establish a “recommended retail price” and promote it heavily to your entire channel. The pressure to meet that price could help you convince them to lower their prices throughout the chain. However, you’ll need to make a strong case that by doing so, they will sell more volume and increase their total revenue. 2. Work with your channel – provide training, marketing materials, campaigns and justification to ensure that they understand your value proposition and why your recommended pricing is best for the long term. 3. They may be using these tactics because they’re not selling enough volume at the price you recommend. You may need to take a hard look at your pricing strategy. [Pricing can help]
What’s your market penetration method? Next, list your potential challenges from above and your possible solutions:
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POTENTIAL CHALLENGES
POSSIBLE SOLUTIONS
NOTES
2. DETERMINE CHANNEL MARKUPS You can use 45-‐D to review prices and markups at each step to see what happens to the price for the end user. Remember to tie your price to your value proposition, evaluate the market and your competitors’ prices, and determine out your price floor. [Pricing can help] Information you’ll need: WHO SELLS TO WHOM MARKUP NOTES (START WITH YOU)
3. SET CHANNEL PRICING Now use 45-‐E to finalize your inputs to determine your channel pricing structure. Data you’ll need: Cost of Goods
Desired Profit Margin
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If you also sell direct, enter in different suggested retail prices to see if you’re undercutting any of your suggested channel prices. What is the result? Suggested channel price
Print Exercise 45-‐E for your report.
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