Putting it All Together: Use Modeling Tools and Pricing Research to Make Effective Channel Pricing Decisions in the Building Products Value Chain

Overview

Pricing in the construction industry continues to tighten as the housing sector slows, imports gain share and customer consolidation continues. In light of these changes, building product manufacturers must update their channel pricing strategies, including prices, discounts, rebates, promotions, terms, conditions and programs to optimize sales and profit margins.

The key to effective channel price decision-making is to understand the value in the channel between the manufacturer, distributor, contractor, builder and customer. Determining this value, and the impact of program changes, can be difficult due to the complexity of multiple product lines, channels, customer segments, programs and competitors. It is necessary to build sophisticated models based on fresh competitive research in order to make profitable decisions.

Pricing Pressures

Most manufacturers in the construction industry are under tremendous pressure to meet their business objectives in the face of increasingly difficult obstacles. Competition is getting sharper, the market is softening and margins are eroding due to competition from low price imports.

Raw material costs increased significantly and many companies have had spotty results increasing their price. Customers at the retail and builder levels continue to consolidate and demand back end rebates that seem to be getting out of control.

The availability of pricing over the Internet causes dealers to question whether to continue to support the traditional brands. Dealers complain that products are available online at prices lower than their cost. This pricing conflict leads dealers to find lower profile product lines on which they can earn higher margins.

These factors cause the field sales force to cut pricing deals to maintain their level of business. The complexity of multiple product categories, channels, prices, rebate, and promotional activity makes it seem impossible to effectively manage the situation. Many companies feel as if they are driving blind without accurate competitive or channel pricing information and that their pricing situation is out of control.

The Building Products Value Chain

An accurate assessment of value is required at multiple levels and layers within each level in order to develop profitable channel pricing systems. First, the supplier must determine how customers value its products relative to competition. This valuation includes an assessment of customer choices at different prices at the consumer, builder and contractor levels.
The supplier must then assess the value provided by its channel in support of the customer, and in support of the manufacturer’s own needs. This channel valuation identifies appropriate margin levels for each channel serving the customer. A further assessment, based on the relative degree of influence at the corporate, branch or sales person level, determines the degree to which channel margins should be paid in the form of discounts, back end rebates or other programs.

Finally, the manufacturer must assess its own value - what it brings to the table in order to differentiate itself from the competition to its customers and channel partners. Each of these valuations differs depending on the class of product class and the customer segment.
This evaluation helps manufacturers understand the choices that customers have in choosing among competing products at different price points and the choices that channel partners have in supporting competing brands under different margin scenarios.

The Channel Pricing Model

Pricing through multiple distribution channels is complex. The complexity is intensified when selling multiple product lines. Some products may be commodities while others may be highly differentiated. In order to effectively quantify the value in order to make effective pricing decisions, it necessary to construct a financial model that includes the key factors: value by product, customer and channel; and pricing, promotions, terms, discounts, allowances, channels, rebates and programs.
The financial model enables the supplier to predict the impact on profitability under multiple scenarios in a competitive environment.

For example, what is the likely behavior and profit impact if the manufacturer were to:
• Reduce the rebates paid to a particular channel?
• Increase the price on a certain product line?
• Change the criteria that distributors must meet in order to gain access to certain discounts?
• Reduce discounts on certain products to selected channels?
• Lock in pricing to selected accounts?

All of these options may be on the table. The goal is to determine the choices that will optimize price, margins and revenue in the face of competition and to most accurately predict the results of change.

A Model Built on Research

Sometimes we get locked into traditional ways of thinking after the market has changed. Companies must continually update their understanding of value in competitive markets. A channel pricing model will only be effective if the input data is current and accurate. In order to make effective channel pricing and value decisions it is necessary to get the most up to-date facts:
• What choices do your channel partners and customers have to select among competing products and channels?
• What is the current market price by customer and channel segment relative to competition?
• How much differentiation exists among your distribution channels and what is the appropriate level of margin?
• How do customers value your products relative to competition?

Putting it all Together

An effective channel pricing model, built on an understanding of the building products value chain, based on up to date market facts, can help manufacturers make the difficult decisions required to optimize financial results. This means making the right choices about when to raise prices, on what products, whether to alter rebate programs or adjust channel margins through the discount structure.

An effective channel pricing model will enable the manufacturer to establish programs and pricing that will motivate distributors, pay the channel for the value that it adds and to win or maintain the business at the right price.