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Six Questions Regarding Your Distributor Pricing Calculation

By: Greg Seminara, Export Solutions
Topics: Distributor Pricing

Pricing is a critical element of our marketing strategy. The "calculation" defines all pricing inputs from a designated port to the retail store shelves. Brand owners and distributors invest significant energy developing a pricing model during initial negotiations. My experience reveals that the calculation tends to drift  over time, fluctuating from the original guidelines. This is natural, given changes in cost to serve inputs. However, the calculation represents a fundamental ingredient to brand success. Brand owners should review current models to ensure an understanding of pricing for each country.

1. Do you posses your  current pricing calculation from each market ?
Many brand owners do not have current price calculations. In some cases, distributors are reluctant to share them. The price calculation, with suggested retail price, should be matched with a retail price survey. This will allow you to compare ( not control !) the official model with "retail reality".

2. What inputs are included in the price calculation ? Any extra costs ?
There are no standard price calculation models, even within the same country.
All distributors employ unique methodologies. The key is understand what is included and what inputs are not included. You will also need to request definitions for some line items. For example, financing in one model could be based upon Bill of Lading date in one scenario and delivery date in another.

3. What services are included in the Distributor Margin ?
A financially healthy distributor is a good partner. Distributors are entitled to fair compensation for their work on your brand. Its critical to understand what services are included in a distributor margin. For example, in some scenario's, a distributor offers a flat, "all inclusive" margin. In others, they may offer a lower margin, but add an "admin" fee or profit allocation in addition to the distributor margin. Are Distributor margins the same for all products in your portfolio? Does the distributor margin change if you double or triple your sales ?

4. Who pays for  Trade Discounts and Promotions ?
In many cases, the manufacturer covers 100 % of these brands specific investments. In other models, the costs are covered by the distributor or split. The key is to understand who is responsible and what is the planned investment. There is a big difference in a distributor funding 1-2 small promotions per year and funding monthly, high value , deep discount promotions.

5.  How are price increases managed ?
Price increases are a common activity in our business. Manufacturers need to adjust prices to reflect fluctuations in raw material costs, promotional  support, and competitive activity. Manufacturer's should understand that some distributors act as "single vendors" to a retailer. In some cases, distributors can only implement pricing actions once per year. In other cases, distributors may apply price increases ( or decreases) against all the brands in their portfolio.

6. How do you handle Currency Fluctuation ?
This represents a critical point in certain countries and at times emerges as a problem with worldwide implications.For example, the euro- dollar exchange rate has fluctuated from .83 to 1.60, settling around 1.37 as of today.