A leading consulting firm believes activity-based pricing is the wave of the future.



If misery loves company, then it's hard to dodge Cupid's arrows. The problems facing our industry are not at all unique to the PHCP sphere of commerce.

That's one indelible lesson coming out of a day-long workshop I attended recently on "Channel Pricing Strategies," put on by Frank Lynn & Associates, a Chicago-based sales and marketing consultant specializing in supply chain issues. The session was packed with marketing heavy hitters, including a few from Fortune 500 companies, although nobody from the PHCP industry was present.

A central thesis of this program was that traditional pricing based on order quantity discounts is going the way of the dinosaurs. Replacing it are systems based on performing certain functions or desired activities. The workshop focused on functional/activity-based (F/A) pricing models devised by manufacturers dealing with distributors, but wholesalers may well mimic those models in selling to their customers.

According to the presenters, quantity discount programs are falling apart for a number of reasons, including:

• Special deals with selected business partners cause channel conflict. (Sound familiar?)

• Customers have incentive to "cherry-pick" lines.

• Volume deals encourage excessive forward buying, followed by subsequent price slashing to get rid of slow-moving goods.

• Large price spreads promote the development of extra distribution tiers.

• Inadequate margins encourage sales to unauthorized parties.

• Volume incentives fuel destructive channel conflict, such as companies not making enough to recoup costs of providing needed technical services.

A down side to F/A discount programs is they tend to be complicated, although this may simply be because they are unfamiliar to most businesses. Balanced against this is their major virtue of rewarding valued behavior. "Do what it takes to serve the customer (i.e., end user) and pay the channel that does the work," is Frank Lynn's credo.

With F/A pricing, discounts could be awarded based on factors such as inventory depth and breadth, sales effort, technical support, trained staff and more. Some degree of F/A pricing already exists within the PHCP industry. For instance, independent rep firms sometimes get offered variable commissions depending on whether or not they stock a line or provide other services.

One example given in the workshop was of an industrial goods vendor that set an end user price based on sales to national accounts. Distributors could earn up to 15% off that street price based on meeting desired levels of inventory, sales, order processing and technical support. Another manufacturer in the technology sector offered a 1.5% discount to distributors whose sales reps completed a training program, another 3% off for those distributors who achieved product specification goals, 2% to those who ordered in pallet quantities, 2% for providing point of sale (POS) information and another 1% discount for electronic ordering. A vast array of F/A pricing strategies are possible.

Although this workshop dealt with the manufacturer-to-distributor step of the channel, my mind's eye kept seeing how wholesalers could apply F/A pricing to their customers. One could envision, for example, different prices for pickups vs. delivery, for field service vs. telephone technical support, as well as passing along vendor discounts for POS information leading to a valuable marketing database.

Think of what it might mean to your margins if you were to bill your customers not only according to how much they buy, but how much it costs to service them. Much has been written about "firing" customers who are unprofitable. F/A pricing is a genteel way of doing so.

Wild thoughts arose of marketing "partnerships" actually worthy of the term. Some thoughts even veered toward the sacrilegious, such as doing away with across-the-board trade discounts. Why should trade discounts automatically be granted to people who haven't paid a bill on time in their entire life and may be a pain in the anatomy to deal with? Where's the channel value?

This, of course, is but a cursory review of a workshop about complex pricing structures as they relate to sales and marketing objectives, as well as surrounding legal issues. I may do a more detailed report on this program in the future. For now, it's enough to get all of you thinking that just because you've always done business a certain way doesn't mean you always have to do it that way. If volume discounts don't seem to be working for you and your business partners, alternatives do exist.

For more information, check out Frank Lynn & Associates online at www.franklynn.com.

Links

• Frank Lynn & Associates