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For distributors, the biggest challenge is running your business on low operating profit margins.

In its most basic form, distribution is all about the "spread," or profit margin, between what you bought the product for and what you sold it for. The bigger the spread, the bigger the profits.

The price you charge for your products is important because it is your income source and, unlike the other elements of the marketing mix, isn't a cost. It is also important because it determines how much profit you make. Your challenge is setting the right price for your products and ensuring that your pricing strategy doesn't turn customers way.

Distributors could use the following formula when it comes to markup: if it costs the manufacturer £5 to produce the product and they have a 100% markup, then you (the distributor) will buy it for £10. Following the same formula, the wholesaler would double the cost and sell it for £20. Thus, there is a 400% markup from manufactured price to the wholesaler's customer.

Distribution companies should take the following factors into account when pricing their products:

Fixed and variable costs
Competition
Your business objectives
Your proposed positioning strategies
Your target group and willingness to pay

The pricing decisions you make can have a significant effect on the success or failure of your distribution company. Setting your prices too high could mean your customers look elsewhere. At the same time, setting the prices for your products too low could make a business relationship not worthwhile especially because it's difficult to increase the price later after setting those initial terms.

Let's consider 5 pricing strategies best suited for distribution companies.

Competition Pricing/Price Matching

Competitive pricing is setting the price of a product based on what the competition is charging. This pricing method is implemented most often by distribution companies selling similar products and is generally used once a price for a product has reached a level of equilibrium, which occurs when it has been on the market for a long time and there are many substitutes.

A distribution company will have three options when setting the price for goods: set it below the competition, at the competition or above the competition. Above the competition pricing requires the distribution business to create an environment that warrants the premium, such as generous payment terms or extra features.

A business may set the price below the market and potentially take a loss if they believe that the customer will purchase additional products from them once the customer is exposed to the other offerings.

When a distributor is unable to anticipate competitor price changes or is not equipped to make corresponding changes in a timely fashion, they may offer to match advertised competitor prices.

Cost Based Pricing

This pricing strategy is similar to cost plus pricing in that it takes all your business costs into account but it will consider other factors such as market conditions when setting prices. Cost based pricing can be useful for distribution companies that operate in an industry where prices change regularly but still want to base their price on costs.

The floor and the ceiling prices are the minimum and maximum prices that a distributor will demand from their buyer for a product. They serve as the available price range. Depending on the company and market situation, the price is then determined.

This is a straight-forward pricing strategy and ensures that all overhead costs are covered before profits are calculated and ensures a steady and consistent rate of profit generation. It could lead to under-priced products.

Psychological Pricing

Your psychological pricing strategy should aim to strike a thrifty note with a bargain or stir up feelings of prestige with a higher-priced item.

You could try one of the following psychological techniques:

Use an odd pricing strategy and price your products just below the whole pound amount. As an example, charge £4.99 for a product instead of £5.00. Even seasoned customers still read prices from left to right and will associate the price closer to £4 than £5. Similar strategies can also be used for larger amounts, to convey better value

Encourage impulse buys: these are generally tempting, attractive and seasonal, as well as being psychologically priced.

Try "bundling" to reduce purchasing pain. Throw in more products and offer a slight discount on the unit price in return. Your customer will feel they've bagged a bargain.

Try a 'flash sale' or temporary discounts to attract customers who will feel they should buy now to take advantage because next week might be too late. It engenders a sense of urgency.

Have a published ceiling price. Your customers will feel more comfortable knowing about the upper limit and realise that they are not going to have a heart attack on learning the price!

Implement a price lining strategy involving distinct lines of products, each in a distinct price range, such as budget, mid-range and high-end. Adding enhancements on your most expensive lines doesn't typically cost much but allows you to increase the price significantly – and appeals psychologically to customers who aspire to purchasing a high-end product. Conversely, the budget and mid-range lines appeal to your more price sensitive customers.

Your customers will feel they've got a good deal on a product they normally buy anyway if you offer 'buy one, get one free', colloquially known as BOGOF. Or, it might tempt them to try a newer, normally more expensive item.

Without making significant changes to your products you can change customer perception. This can make your products suddenly seem like a great bargain or elevate luxury products to the top of the available options.

When effectively applied, psychological pricing should contribute to increased sales volume – and a decided improvement to your bottom line.

Value-based Pricing

Determines how much money or value your product or service will generate for your customer, which could originate from factors such as increased efficiency, convenience, time saving, happiness or stability; this value-based pricing will, in turn, be passed on to their own customers.

It provides real "willingness to pay" data that points you towards a profit generating price within your pricing strategy and allows you to implement price segmentation to capture a greater portion of the market

Value-based pricing is the most recommended pricing technique by consultants and academics. Distributors selling technology products, medicines, and beauty products are likely to use this pricing strategy.

Penetration Pricing

Penetration pricing sets a relatively low initial introductory price, lower than the intended future price, in order to attract new customers. This should encourage word-of-mouth recommendation because of the attractive pricing.

In the short term, penetration pricing is likely to result in lower profits than would be the case if prices were set higher - but with the hope of significant profitability benefits and market share in the future.

This pricing strategy is often used at the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.

You'll realise that implementing this pricing strategy does have its drawbacks:

It can create an expectation of permanently low prices
It may simply attract customers who are looking for a bargain, rather than customers who will become loyal to your business
It might result in retaliation from established competitors

Conclusion

Good price management can promote your distribution business to the next level. If you are pricing smart then you'll keep an eye on your customer's maximum willingness to pay and the differential value to those customers of your products.

You should also keep a close eye on the competition and price according to what is acceptable in current market conditions.