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Three Common Causes of Pricing Conundrums
Across a number of business-to-business industries, pricing issues frequently arise that create conflict within a channel. These issues are particularly difficult to understand when there are complex customer chains with many steps between the manufacturer and end customer or there are multiple pathways through alternate channels to the end user. As a result, suppliers get caught up in a vicious cycle of price competition. When this occurs, many of our clients throw their hands up in frustration, and say, “It’s a conundrum.” But, it doesn’t have to be.
In a best-case scenario, manufacturers and channel partners are able to effectively collaborate to create value for customers and be mutually rewarded for their products and services. However, even best-case scenarios can go south when roles become unclear and the rewards are (or perceived to be) imbalanced between a supplier and its channel partners or between channel partners that provide essentially the same service. When the latter occurs, the first step is to identify the cause.
Identify the Cause
Through our involvement in numerous engagements, we have identified three common underlying causes of “pricing conundrums” along the customer chain:
- Market Pressures – These can include changes in the underlying marketplace, new competitors, or new channel entrants that disrupt the status quo.
- Flawed Channel Design – This results in over distribution (or too much channel intensity) or the opposite, channel convergence
- Poor Channel Management – These commonly include channel neglect, an evolved customer chain with misaligned policies and programs, or misunderstanding of later stage customer chain participants that become demotivated
When you first hear of complaints about perceived inequality over prices, look first to understand the market and the root cause of the dissatisfaction. Once the underlying cause is understood, active channel management that applies solutions and aligns channel performance, channel design, company policies and procedures will manage the channel and the pricing conundrum.
In next week’s blog, we will look at several leading indicators and actions that can be taken before price conflict and pricing conundrums occur.