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The 4 Sources of Price Conflict
Your company has put in place a bold new plan for growth. The plan involves opening a new channel to market, selling through big box retailers. This new channel has the potential to allow the company to access new customers and significantly boost revenue. Everyone in your organization is excited, but guess who’s not excited? The strategic accounts that you manage, the national and regional dealers who have been your core channel to market for decades. In fact, they are extremely unhappy with you. The prices that the big box retailers are offering in the marketplace are significantly below what the dealers are presenting. After a few weeks of launching in the new channel, your strategic accounts have flooded your voicemail and inbox demanding price concessions.
This is an example of price conflict. Price conflict is a significant misalignment of pricing or pricing expectations in the marketplace. It goes beyond the common pricing challenges that occur when competitors in the market make price adjustments, either up or down, or from the constant pressure by customers on suppliers to reduce price. Price conflict emerges when there’s a fundamental change in how the market operates, and therefore in pricing dynamics. These situations can be very disruptive to strategic account relationships.
It’s important to understand when price conflict is likely to occur so that strategic account managers, and their colleagues, can recognize the signs and prepare accordingly. Price conflict can result from a company’s own decisions, or due to changes in the marketplace beyond its control. Our experience has shown that there are four fundamental changes in the marketplace that often lead to price conflict:
- Alternative Channels. Adding alternative channels or shifting focus from one channel to another, whether you’re the company doing so or it’s one of your competitors, can be a source of price conflict. This is especially true if the economics (e.g. low-cost vs. high-cost) or business model (e.g. product vs. service driven) of the channels are different. This is the case in our example above, where the margin targets for the big box retailers on the supplier’s equipment is significantly lower than for dealers. Price conflict is becoming more prevalent in the business-to-business (B2B) arena due to alternative channels as more and more B2B companies go down the path of eCommerce, whether they choose to do so direct or through third parties. eCommerce channel economics are very different than traditional brick and mortar economics, and moving online also dramatically increases price transparency. Even if a company only endeavors to establish a small online presence, the increase in price transparency—not only to customers but other channel partners—can lead to price conflict headaches among existing strategic accounts.
- New Entrants. New entrants are always disruptive, but in this case low priced new entrants are of the greatest concern as they are a sure source of price conflict. They challenge the status quo of pricing expectations and can be even more difficult to deal with if they have a different go-to-market approach than traditional suppliers in the market, which gives them a different cost structure than existing suppliers. One of our clients in the industrial back-up power market recently faced this challenge. Commercial back-up power suppliers began to enter the market and attack specific applications where requirements were not as rigorous, with products that were 1/2 to 1/3 the cost of traditional equipment. Their model was different, with designs for quick repair and shorter replacement cycles, as opposed to highly robust units designed for long lifecycles. These competitors changed the pricing expectations in the marketplace.
- Consolidation. Price conflict due to consolidation can culminate at all levels across a market, among competitors, within channel partners, or across customers. Eliminating a competitor from the market changes pricing leverage dynamics. Larger channel partners with greater market power will demand better pricing. Customers who combine organizations or sites will expect consistent pricing, often the lowest price they’re receiving across their different entities. A recent example of this dynamic can be found in the health care market as health systems have merged or acquired ambulatory care, long-term care, and/or physician offices. What was once four or five different customers for a supplier, all likely with different pricing, is now one customer.
- Changing/Converging Roles. As roles change across the supplier (you), your channel partners, and end customers, alignment between value created and value captured can become distorted. Changes in the end customer’s operating model or in channel partners’ obligations can mean that current prices don’t accurately reflect the value each party is delivering. This will often lead to price conflict. These changes in roles can occur in multiple ways. For example, as a supplier introduces new offerings into the marketplace, in particular, new offerings that are more complicated or move from simple products to solutions, the amount of effort that its channel partners need to put in to sell and support those offerings will increase as well. If the channel partner is not rewarded with higher margins for their effort you can expect price conflict. This can work the other way as well. As products move through the lifecycle and mature, the effort needed to sell and support these products typically decreases, but channel partners will resist margin compression, which again will lead to price conflict.
Strategic account managers need to be aware of these changes occurring in their markets or the potential of them occurring. Most importantly, if it’s a change that is initiated by their firm they should be actively involved in identifying the risk of price conflict among their strategic accounts and putting plans in place to mitigate or resolve such conflict.