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How to Utilize Non-Price Levers to Resolve Price Conflict
In our previous blog, The 4 Sources of Price Conflict, we introduced a company opening a new channel to market through big box retailers as part of its growth initiative. Throughout the blog, we identified four fundamental changes in the marketplace that often lead to price conflict. Now that you understand when price conflict is likely to occur, it’s important to discuss how to mitigate or resolve it. With regard to our example company above, the easy answer is to give into the price concessions demanded by the national and regional dealers, to get them to the same price levels as the big box retailers and allow them to maintain their margins—but we can do better. We can utilize non-price levers to resolve price conflict.
- The first lever seems simple enough, but it’s very important: communication. The dealers saw the big box retailers as a direct threat to their existing business, but the primary goal of selling through the retailers is to reach a new customer base that traditionally did not purchase from the dealers and therefore did not buy the supplier’s brand of equipment. The supplier can show the dealers that cross over of customers across the channels is limited. Another key element of communication is to demonstrate the different levels of value provided to different customers/channels to justify differences in pricing. In this case, the supplier would be providing almost no marketing or technical/aftermarket support to the retail channel, whereas they provide significant support to the dealers and this support is a key enabler of the dealer’s success.
- The second lever is to differentiate the offering. By differentiating the offering, direct price comparison and competition—and, therefore, conflict—can be avoided. The supplier can fully differentiate the offering by having different product lines for the different channels or through more nuanced approaches, such as only allowing the dealers, but not the big box retailers, to carry higher value and therefore higher margin offerings, or giving the dealers exclusivity on new models for a set amount of time. These levers are particularly effective in situations where one party considers the gains achieved to be high, for example the dealers getting exclusivity to higher margin new models, while the other party, the retailer who is focused more on selling higher volume established models, considers the losses to be low.
- The third lever is to expand the value-added services that you provide to your higher priced strategic accounts. These services span a wide range from marketing to logistics to innovation support. Which services you choose depends on whether the account is a channel partner or end customer, and, of course, what is most valuable to either. In the end, these services must enable additional revenue and profit streams for your strategic accounts or reduce their costs to be effective. For the dealers, the supplier ramped up its marketing support and introduced a new program to help them generate leads for highly lucrative aftermarket parts and sales.
- The fourth lever, which is the most powerful but also the most difficult to execute, is to enable alignment across the customers/channels that are in conflict. This involves looking for ways in which both parties can benefit from the new market dynamics, especially for the party that perceives it’s negatively impacted by the change. In this example, the dealers are less likely to focus on the price conflict if they can benefit in other ways from the opening of the retail channel. There are several programs that were deployed to reach this outcome. After a sale, the retailers would funnel the customer to a local dealer to perform the final set up services. The dealers would benefit from the additional services revenue but, more importantly, have the opportunity to sell high-margin accessories that the retailers didn’t offer. This also allowed them to establish a relationship with the customer to capture aftermarket parts and services revenue streams and potentially upsell them later into higher priced premium models, not available at the retailer. As part of the arrangement, the supplier gave the dealers exclusive rights to sell authorized parts and aftermarket services in their areas, protecting this revenue stream going forward.
Each of the non-price levers above, or a variation of them, was deployed to mitigate the price conflict that emerged in the example we provided earlier. In the end, a win-win-win scenario was established for all parties involved—the supplier had access to new customers, the retailers had a high-value brand to offer, and the distributors had new revenue/profit streams with limited disruption to their business.
Price conflict can be one of the most disruptive forces in managing strategic accounts. Not only does it threaten strategic account relationships, but if it’s not addressed properly it can lead to decisions, such as giving price concessions, that significantly and unnecessarily erode business performance, including maintaining price and margin levels.