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Optimize Your Pricing Strategy: Understanding Allowances and Discounts

Optimize Your Pricing Strategy: Understanding Allowances and Discounts


Optimize Your Pricing Strategy: Understanding Allowances and Discounts

16 Nov 2021

Ken Weygand
Women reviewing laptop in warehouse

When you’re a consumer goods distributor, you have to accept that your large retailers, like Walmart, are going to demand certain discounts and allowances. It’s part of the whole, convoluted system. But you can integrate these allowances into your pricing structure—and still maintain a healthy profit margin. In this article, we are going to examine how to maximize your pricing strategy without losing your mind.

Setting your pricing is the key to staying competitive in the consumer goods distribution business. The manufacturer has their MSRP (Manufacturer’s Suggested Retail Price), which is determined mainly by production costs. Your pricing to your retailers directly affects your profit margins, so you have to figure out a price that will land you the sale without destroying your bottom line.

Establishing prices isn’t just a matter of marking it up based on the margins you want—distributors also must account for customer demand and production costs, as well as transportation costs, landed costs, import duties and fees and storage fees.

This is where price strategy comes into play.

You know that margins are the difference between the amount you pay for a product and the amount for which you can sell it. Without the correct margins, you wouldn’t make a profit—and you are in business to turn a profit. Retailers also want to make a profit, which is understandable; but you need to ensure that they don’t make a profit at your expense.

That is the main focus of an intelligent price strategy—you need to keep your retail customers happy by offering competitive pricing, but you also need to increase your profits. An ERP tailored for distributors can help you achieve just that. Below we’ve listed some actionable items you can implement to get the most out of your price strategy.

Do a Margin Analysis

Company-wide pricing transparency is critical, which is why an honest evaluation of your pricing strategy will help. You need to consider your current pricing optimization strategy. Analyze historical sales data from the last year. Are the discounts and allowances up-to-date? Are there any that were one-offs or are no longer valid? Get a report of special deals, discounts built into existing customer contracts and any manual overrides.

If you had an exorbitant number of price overrides, your current processes need a serious upgrade. Think about it in terms of sheer man-hours. With the constraints of a legacy ERP, someone on your team has to review each order and do a manual price override to honor that customer’s price. Over time, this process increases the potential for human error and decreases employee productivity.

In addition, there could be discounts in place that no longer apply. Let’s say that you work with several large retailers. They have been hitting you for years with an advertising allowance in their pricing to cover the costs of printing a weekly sales ad, but they no longer send them out via paper—only through email. Obviously, that allowance no longer applies to those retailers, so talk with the retailers. See if you can get that allowance renegotiated, lowered and updated in the pricing schedule.

It also means days, even weeks, of work for your financial team as they must manually compute and accrue for discounts and allowances if your pricing structure doesn’t reflect real-time data. Let’s look at a typical scenario with a legacy system. You have a list price change, but it didn’t get entered into the system automatically. Your financial team now has to back-calculate the cost change to align to the net price incurred by the discounts—a backbreaking process. Only then can you upload those discounts into the ERP.

It all comes down to your pricing processes. If you’re using a legacy ERP or manual processes, you could miss important opportunities. You’re also much more likely to encounter inconsistencies and errors in the pricing structure.

An industry-specific distribution ERP has real-time pricing functions built right in from day one. You can effectively manage your discount thresholds and ensure accurate invoicing for every customer. This means that the system reflects accurate margins without hours of manual work by your finance team.

Get Your Sales Team on Board

If, like many consumer goods distributors, you have a massive product catalog, it’s imperative that you focus on constant education for your sales reps. Expecting your sales team to have encyclopedic knowledge of thousands of SKUs is unreasonable. Instead, make sure that they have access to a full library of product documents to increase their knowledge of all the products available to them. Make sure these documents have updated pricing structures, including customer discounts and allowances.

Your sales team needs to sell your products to your retail customers—that is their main job. But they also need to be fully cognizant of any price changes, market trends, and possible supply chain issues. If you’re still using a legacy ERP or manual processes, your sales team cannot do their job effectively. After all, if they have to look up prices and wait to get quotes approved before finalizing a sale, you can bet that your retailers will start to look elsewhere.

Since a distribution ERP has pricing discounts built into the system, there is immediate price transparency company wide. Your sales team will have the tools they need to give accurate quotes to all their accounts. They’ll be able to see customer history and understand the unique attributes of each client. This enables them to build longstanding relationships with their customers. In addition, Aptean’s Distribution ERP has a profitability scorecard built into the system, so you can determine how profitable each relationship actually is by dissecting each customer’s profitability, with no manual reporting.

Leverage a Distribution ERP

You can’t manage what you don’t measure. If you are using a legacy ERP, you just cannot get accurate visibility into your margins which means you cannot create a profitable pricing strategy. However, if you harness the power of a distribution ERP, you’ll have the tools you need to effectively manage pricing strategy, down to the smallest seasonal discount.

What an industry-specific ERP—like Aptean’s—gives you is real-time information into above-the-line and below-the-line costs. This includes freight, allowances, royalties, commissions, chargebacks and any other retail-specific allowances you input into the pricing matrix. Then you can amend and improve those relationships based on the analytics and insights the tool provides. Integrated retailer compliance functionality allows you to actively track and manage chargebacks. The system automates customer accruals.

Tired of second-guessing your pricing strategy because you don’t know your margins? Reclaim control over your profit margins with our purpose-built distribution ERP, Aptean Distribution ERP. Find out how, now.

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