A recurring theme at pricing conferences is to see keynote speakers comparing their discount scatter plots within B2B distribution to one of Damien Hirst’s spot paintings: A picture addictively calming for the submerged mind, but equally disorderly and not revealing any explicable structure. The dots cover the whole canvas, and the colours do not seem to organise themselves in any logical manner.
Discounts in wholesale distribution often share similar traits. They cover a full spectrum of values, often disregarding customer characteristics, deal size, or transaction profitability. Worse still, they are frequently recorded as long-term exception discounts or fixed net prices, causing the need to manage millions of pricing records.
In recent years, B2B distributors have been growing through acquisitions utilising operating leverage. With thinner margins and business integration taking a back seat, companies now need to manage several legacy ERP systems and unharmonised commercial terms. The rapid expansion does not allow pricing teams more than to set standard discount terms for high-level guidance, constraining more transparent and accurate sales pricing.
Furthermore, Sales often have absolute pricing authority and set exceptions for each client individually. These discounts and prices find their way into ERP systems without the control of validity dates. Reviews happen every few years. After a while, commercial teams struggle to remember the reasons for granting special price conditions or the person who set them has already left the company.
Every so often, it takes strenuous efforts and hefty consultancy fees to re-imagine sales pricing. After the clean-up, as pricing authority remains with Sales, so the cycle begins again. This behaviour of setting commercial terms in stone is a recipe for disastrous profit leakages, especially when cost pricing turns unfavourable.
5 Steps to a Solution
A solution to managing discounts in B2B distribution is available with a few comprehensive steps:
1. Utilise micro-segmentation to create more relevant discounting groups
Discounts aligned with willingness-to-pay reduce the need for exceptions. A good segmentation model should include all product and customer attributes relevant to deals. The challenge is to create a structure that does not take much effort to manage while providing sufficient granularity. In the modern world, AI-assisted algorithms generate segmentation and enable frequent validation of critical data that supports price differentiation.
As a starting point, think about defining a solid structure for article groups. Several distributors face the challenge of unharmonised product hierarchies or even selling items outside of their product catalogue. The simplest way to categorise unmanaged products is to inherit and optionally harmonise supplier product hierarchies. Next to article groups, customer type and size classifications are fundamental to delivering precision and pricing consistency.
2. Provide a discount range as guidance
Create empowerment by allowing for room to negotiate within a pricing envelope. Allow sales to capture the deal-specific context outside the standard discounting structure. For example, a competitor might be offering a promotion, and you need to improve the price to win the deal. Set stretch-target-floor levels to steer away from gut-feel pricing. Percentile-based pricing ranges within each segment ensures data-driven guidance captures the best practice peer-pricing for similar transactions.
Additionally, approval levels help to control exceptions. For distributors with frequently changing cost prices, setting validity dates for commercial terms should be mandatory, and any change outside of standard subject to approval.
3. Think trade-offs instead of long-term exceptions
Price negotiations often uncover additional context around the deal: does my customer need a product delivered urgently? Are they looking to purchase more of an item in the future? Start communicating trade-offs to customers as part of your discounting tactics. All parties must understand that an additional discount is related to bargains made against other commercial or service terms. Communicate the reciprocal concessions on value as a way to avoid recording a special discount as a permanent net price.
Trade-offs also provide a great way to phase in the new discounting structure. For example, discussing deal context with related customer service levels should facilitate the transition to updated pricing. When introducing new discounts to your customers, use the occasion to discuss their preferences towards commercial terms to understand their bargaining preferences.
4. Provide breakeven calculation and deal scoring
Sales will make better decisions when they can understand the business impact. How much volume is required to make up for an additional discount percentage? How should I price slow-movers on the deal if I’ve offered a fast runner product at a more competitive price? Best in class companies empower their commercial teams with calculators and suggestions built into their quoting solutions.
Stepping away from the practice of providing the last price paid will improve margins significantly. Displaying old prices that are not relevant anymore creates false anchoring. Just as Hirst’s paintings, they are often hypnotic and disorienting. Instead, change to the previous discount given or compare the deal with the last level of profitability. Sales will choose when to keep profits safe and when there is an opportunity for improvement.
5. Engage sales to plan bottom-up
Best-in-class companies engage their commercial teams to create business plans. Ask sales to deliver bottom-up aspirations and compare with top-down pricing assumptions to identify sources of margin improvement. Decomposing the aggregated output to a price-volume-mix effect offers a higher level of confidence for management.
Distributors need better capabilities to manage the complexity of sales pricing. When analysts plot discounts next time, they should have enough insight to explain how sales have made their pricing decisions.
To find out more about how distributors can raise their game in e-commerce channels, read our post on Digital Negotiations.