Distributors are laser-focused on pricing because implementing successful pricing strategies is critical for their success. Accordingly, most distributors have heard plenty about one of the most vaunted pricing methods in the modern business world — value-based pricing. The idea is that by setting prices based on the customer’s perceived value of the product, a company can optimize pricing to capture higher margins.
So what is the main obstacle for distributors in implementing value-based pricing? Value-based pricing depends heavily on retained consultants to perform detailed customer studies and surveys. This research is product and customer-segment-specific, and it requires a significant investment of time and resources. With the sheer volume of products a typical distributor deals with, it is simply not practical — in terms of either money or time — to pursue this approach. The bottom line is that true value-based pricing is not scalable for distributors.
Distributors can however achieve pricing excellence with a related strategy known as attribute-based pricing. Attribute-based pricing (ABP) is a cousin of value-based pricing that is actually scalable. This approach uses characteristics of the product — product attributes — as a proxy for value. When implemented successfully, ABP enables distributors to capture higher profit margins across their entire product portfolio.
ABP is heavily reliant on product data. To differentiate pricing based on product attributes, distributors will need to manage attribute data for a vast array of products from a diverse list of suppliers. Since this cannot be accomplished with manual processes, data work automation is critical for effective ABP. The payoff will be rational pricing differentiation across the catalog that aligns with customer-perceived value, maximizing margins while protecting market share.
Value-Based Pricing: Great Concept, Difficult to Scale
Value-based pricing is an excellent concept in theory. Unlike other forms of pricing, such as cost-plus or market-based, value-based pricing (VBP) aligns prices with the unique value of a company's products and services. In effect, VBP identifies latent profit opportunities in consumer segments with above-average surpluses.
For the typical approach to VBP, you must determine the next best alternative for your customer compared to your product. Then you determine the unique features of your product that differentiate it from your competitor’s product. The last step is to estimate the dollar value of the differentiated features, also known as the “differentiated worth.”
It is easy to see the difficulties of implementing VBP for most distributors. A typical distributor could have hundreds of suppliers sending product content and pricing for tens of thousands of items. Due to these high levels of volume and complexity, processing supplier data files manually is not a viable option for distributors. VBP simply cannot be implemented at the scale required by industrial companies with large numbers of products.
Product Attributes are a Readily Available Proxy for Differentiated Customer Value
Attribute-based pricing is a method where pricing is differentiated based on different product attributes that are valued by customers. ABP is already widely used in the hotel industry, where hotel rooms can be price-differentiated based on various attributes — room location, view, bed size, and amenities such as room service and late checkout. For distributors selling into multiple verticals, product attributes such as features, quality of materials used, performance, and application represent opportunities to differentiate.
Consider a power tool distributor that sells a product with two variants — one with a paddle switch, the other with a trigger switch. Paddle switches are longer-lasting and considered better quality, which means they are highly correlated with professional use. This allows the distributor to set higher profit margins for paddle-switch tools than for trigger-switch tools.
Another example is products containing valves that can be made of different materials, such as stainless steel or brass. Stainless steel is a higher-quality material that will tend to be used for high-end applications, such as activities with corrosive chemicals, healthcare, or food service. Brass valves, on the other hand, are used for more common industrial applications. Accordingly, stainless-steel-valve products justify higher profit margins than brass-valve products.
Both these examples demonstrate how, with ABP, product attributes can serve as a proxy for research-based value insights. Given the availability of attributes typically found in supplier content, ABP can function as a streamlined form of value-based pricing.
Attribute-Based Pricing Requires Product Data Wrangling
To implement attribute-based pricing, a distributor needs to have product attribute data represented properly in its pricing tools. Unfortunately, while distributors likely have the necessary attribute data, normalizing the data into the required structure and semantics can be a huge obstacle.
Why the challenge? A distributor is likely dealing with tens to hundreds of thousands of SKUs, many with variants. The format of raw inbound product data can vary widely by supplier and product category. For example, one supplier might refer to their valves as “stainless steel” and use imperial measures for sizes, while another might use the notation “s/s” and metric units. This information must be standardized before stainless steel valves and dimensions can be used as product attributes in your pricing system.
Using manual processes to extract, normalize, and restructure data work is simply untenable. Manual data work involves a high number of workers wrestling with spreadsheets, converting the attribute data into usable form by hand. Not only is this work tedious and repetitive, but the process cannot keep up with the flow of incoming product information.
In short, manually wrangling supplier data is like trying to catch a firehose of content with a teaspoon. This is where automated data work can come to the rescue.
What Does it Take to Implement Scalable Attribute-Based Pricing?
While attribute-based pricing can be an effective form of value-based pricing for distributors, you will need certain elements in place to make it work.
Rich, Reliable Product Data
By definition, attribute-based pricing requires rich, reliable product data loaded into your pricing tools. If “paddle switch” or “stainless steel valve” aren’t included in your system, or measurements have inconsistent units, you will not be able to utilize these features for price differentiation. As explained above, manual processes are inadequate to extract and normalize product data at the scale distributors require. The same is true for preparing product data for eCommerce.
Cloud-based automation software can fill this gap by cleaning and enriching your product content — “wrangling” your data — at a scale not possible with manual data work. Automated data wrangling can ensure accurate product attributes for the entirety of your product catalog are easily incorporated into your pricing rules.
Pricing Technology
ABP can be implemented in any tool, including Excel and ERPs. However, specialized pricing software is much more adept at managing and applying attribute-based rules. In fact, pricing software applications such as Pricefx, PROS, and Zilliant enable you to combine ABP with other price-setting approaches, including price optimization. Pricing software can also help with price execution (e.g. quoting) and analytics.
While the upfront cost of pricing technology can be significant, you should evaluate the potential return on investment based on your current capabilities and longer-term goals.
Analytics & Agility
Keeping the pricing aligned with market dynamics and business strategies is the cornerstone of pricing excellence. The market can change rapidly due to product shortages, inflation, and other factors. And in the digital age, agility is key to implementing dynamic pricing strategies. So companies that can assess and act faster are most likely to capture higher margins and greater market share.
Achieve Scalable Attribute-Based Pricing with the Right Tools
With the right data, technology and insights, attribute-based pricing can help maximize your company’s profits. It all starts with rich, reliable product attribute data that supports successful price differentiation. Automated data wrangling and pricing tools can give your team the ability to implement ABP, the practical and scalable form of value-based pricing for distributors.
