Distribution Pricing in Marketing Strategy
A manufacturing company that uses wholesale distributors to sell products to retailers must develop a distributor (or wholesale) price. The distribution pricing will be the basis for all dealings with the wholesale distributor. As part of the marketing strategy, distribution pricing affects pricing strategy, promotion plans and sales potential.
Distribution pricing should be considered in the pricing strategy section of the marketing strategy because it affects the final retail sales cost. Manufacturers regularly determine the wholesale price by adding together costs of materials, overhead, labor and delivery. The wholesaler marks up the price again before selling it to the retailer. Convention calls for the final retail price to be twice the wholesale price.
The internal and external promotional plan will directly influence distribution price. Promotions can include special purchase allowances, referral bonuses and depletion allowances. Special purchase allowances give distributors a temporary decrease in price over a set amount of time. Referral bonuses are a specific amount for referring new distributors. Depletion allowances offer a credit or money back for stock sold within a specific amount of time. The base distribution price should be low enough to allow for these incentives.
Sales potential can be affected by distribution price. Total projected sales amount can be determined by multiplying the total of expected distributors by the average expected revenue per customer. After recording a few months of actual sales, manufacturers can refer to these sales potential estimates to verify the appropriateness of their distribution price. A distribution price that is too high can impede sales to wholesalers, who must either decrease their mark-ups or expect the retailers to do the same.
While the marketing strategy offers manufacturers a good estimate for starting their business, nothing compares to actual sales data. All marketing factors that affect or are affected by distribution pricing should be reanalyzed after sales totals have been recorded. As business continues, distribution price should be monitored and managed for efficacy and efficiency.
According to Gregory R. Passewitz of The Ohio State University, many businesses owners believe a decent product will always sell regardless of cost, but an incorrect price can lead to business failure. Commonly, business owners fail to analyze what their customers will pay, the break-even point, profit margin and competitor prices. Final distribution price should consider demand, competition, market environment and distributor profits