LAS VEGAS — It's known that product pricing can sound the death knell for some distributors, but when used properly, it can also give a company the competitive edge it needs to be successful.
Tom Frey, senior product manager for the Automotive Distribution Network, offered attendees of the program group's Fusion '07 conference some creative and mathematical ways to stay on top of the pricing game.
"If manufacturers don't set the pricing, who does?" asks Frey, who spoke to an audience mainly comprising distributors. "We do."
Parts Plus and Independent Auto Parts of America (IAPA), the ADN membership base, establishes suggested national prices for private brands, as well as national brands that discontinue publishing resale prices, according to Frey.
Additionally, many warehouse distributors make price sheets for regional marketplaces, he adds.
Pricing can be a tricky game, considering parts are being sold to repair shops at "jobber" prices and WDs are discounting prices and placing pressure on the manufacturers, says Frey, who adds that big box retailers are creating their own pricing strategies, which negatively reflect on jobber prices. And amid all this, there has been pressure on manufacturers to stop setting industry prices through published price sheets.
Frey suggests developing a marketing strategy to fix pricing, as pricing is a component of marketing; businesses need to properly communicate pricing to their customers. Also, he says, a business owner should set an income goal and then determine what gross profit is needed to reach that goal.
Calculating costs, determining the benefits and services to the customer, finding out the "threshold" that a customer is willing to pay and a host of other factors should be considered when setting product costs.
A business owner can formulate gross margin by subtracting the cost from the selling price, then dividing this number by the selling price, says Frey. For example, a part that sells for $15 but costs $10 to make will yield a 33.3 percent gross margin (15-10/15).
Playing with pennies
Frey also offers a number of pricing strategies that can fatten a company's bottom line. First, he suggests "playing with pennies," or rounding up prices to 49-cent and 99-cent price points, which can add up to substantial amounts but are not conspicuous to the customer.
"We sell a lot of low-dollar SKUs," he says. "Playing with the pennies will make an impact."
Referring to a method called "matrix pricing," the gross margin changes by part number, depending on the value of the part.
Raising the prices of lower-cost items and lowering the price of higher-cost items can give a store the appearance of being a lower-cost provider.
"Customers are more likely to price-shop higher end items and less likely to price-shop the lower end items," says Frey.
"Velocity pricing," adds Frey, is marked by the appearance of being less expensive without losing gross margin. Some say this is characterized by marking up slower moving items.
There's also a psychological element to pricing products, according to materials Frey supplied during his presentation.
For example, you must decide if you want to be a low-cost leader or offer high quality — each choice requires a drastically different price point approach. There are also certain points in which a customer becomes more willing to buy a product, like under $100 or under $20.
Furthermore, business owners should determine what their customers consider fair pricing and not go above that.
