Selling a Price Increase: A Supplier – Distributor Perspective

With the dawn of more advanced technologies and the focus on transforming organizations to manage analytics and pricing, there is no shortage of advisors and in-house experts helping to design advanced pricing strategies. Despite this, suppliers still struggle to build the capabilities to execute these strategies in the field and weave it into a shared vision of growth, success and partnerships with channel partners. Hence skillfully implementing price increases for suppliers is not just inevitable but vital for capturing value.

In this article, we won’t discuss if the price strategy is right or consumer-centric enough; we’ll take this as a given. Instead we’ll focus on something that is still inherently a human-driven endeavor once the consultants have left the building, i.e. actually selling a price increase through the value chain, with a focus on distributors.?

To address this, today’s newsletter edition will look at:

1. Understanding The Distributor Profile, including their complex business model, and why it’s important for effective pricing conversations
2. Why businesses increase prices in the first place. This is an important input into the selling process and negotiations
3. How to craft a compelling “value narrative” that offers a winning Value Proposition for distributors

We’ll then leverage our “Selling the Price Increase” canvas, a tool you and your team can use to bring the above together.

Before we start however, a note on the power of pricing as its often under-communicated to frontline professionals in charge of actually selling the price increase.

The Power of Pricing

Appreciating the impact pricing can have, strengthens the case for it and in my experience helps sales and marketing professionals stand stronger in pricing conversations. There are a host of areas where pricing has a significant impact, but here we’ll briefly focus on the large financial impact potential of pricing.?

Pricing is by far the most powerful value creation lever for manufacturers and even more so distributors. It is the fastest and most effective way to increase profits. This is because the impact from price changes, different from volume or cost optimizations, have a direct equal impact on the bottom-line. This also cuts the other way however, i.e. decreasing prices or designing the wrong promotions, can have a serious impact on sales and the bottom line. Ranges vary, but the power of pricing is clear; it has a significant impact and much beyond any volume or cost changes.

McKinsey, for example, estimates for S&P 500 companies, a 1% price increase, if volumes remain stable, would generate an 8 percent increase in operating profits. A Harvard Business Review article quotes a study which states a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%. The impact for distributors is even larger given the thin profit margins inherent in the business model (see next section), where McKinsey estimates for distributors a 1% price increase would yield 22 percent increase in EBITDA, a 25 percent uplift in stock price and an increase of up to 20 percent on a distributor’s enterprise value. Imagine a P/E ratio of 25 for a FMCG company, not an exaggeration by any means. The impact of pricing on Net Profit would bring a potential upside in Market Cap no cost optimization or volume-driven initiative will be able to accomplish in the timeframe pricing does. This also explains why execs like resorting to price to shore up financials.

Pricing is by far the most powerful value creation lever for manufacturers and even more so distributors

1. MAP YOUR DISTRIBUTOR’S PROFILE

For a supplier to make their case as relevant as possible, a distributor’s profile should inform and shape their approach to price increase conversations. The starting point is to understand the distributor business model, which in my experience is a lesson highly undervalued in practice.

The Distributor Business Model

A business model is how a company creates, delivers and captures value. Basically, describing how a business makes money from its activities. Below a few key elements to use as inputs for a price increase value narrative discussed later in this article:

• Thin profit margins: the critical thing to understand is that for distributors gross profit is a very small number between two very big numbers, i.e. the price they pay for the goods (cost of goods sold) and the price it gets for them (their sales). It’s essentially a high-volume, low-margin business and hence requires carefully managing elements of profitability, asset efficiency, productivity and blended margin
• Capital Intensive: from this thin gross profit comparably significant overheads and financing costs need to get paid. The model is capital intensive, driven by the need to hold large amounts of inventory as well as finance credit to their customers and terms they receive from suppliers. Too little capital and the distributor runs out of inventory (not desirable when shoppers are looking for your products) or cannot pay the supplier, while waiting for their customers to pay. Too much capital and the cost of capital required drags down fast their profitability.
• Stakeholder management, operations & executional capabilities: as the middleperson in the value chain, maintaining relations both upstream (e.g. suppliers) and downstream (e.g. retailers, other channel partners) is critical to success. Their ability to break-bulk, master brand management, secure in-store fundamentals and executions, manage credit, drive distribution, manage inventory (incl. stock-overloading pressures from suppliers) and handle logistics, all require strong relationship management and serious efforts in building operational and executional capabilities

Hence managing and financing each element of their margins, working capital (inventory, accounts receivables and accounts payable) and cash flow becomes a survival imperative.

Moreover, power dynamics play a significant role in pricing conversations and negotiations. Understanding the other party’s pain points and value of the partnership allows each party to understand their leverage in pricing negotiations. A supplier needs to consider for example how dependent their success is on the distributor, how influential they are in the market, if they have strong competitor brands in their portfolio and how strong their top-to-top relations are.

2. UNDERSTAND THE REASONS FOR A PRICE INCREASE

Suppliers increase prices because they need to, they want to or because they can. They have a host of external and internal challenges and opportunities to consider. Understanding these will allow for evidence-based conversations to justify a price hike. Note that these factors rarely stand alone; they are usually interdependent and can occur simultaneously.

External Factors:

• Cost-push inflation: a primary reason quoted in recent years, is the price increase driven by an increase in the cost of production (e.g. raw materials, energy, labor) and cost-to-serve (e.g. supply & logistics)
• Demand-Pull inflation: the law of supply and demand at work; if everyone wants it, you’ll deliver...at a higher price
• Macro-factors: think exchange rates impacting imports, financial reporting and hedging costs; higher interest rates adversely affecting financing operations and investments; higher inflation and unemployment expectations; and economic growth rates impacting scale advantages
• Government policy & regulation:?this could be for example new/higher taxes on raw materials; stricter regulations; introducing costly environmental and social policies and higher import tariffs

Internal Factors:

• Strategic & Tactical Objectives: think addressing low/negative profitability and margin-squeeze; deliberate strategies to premiumize and enhance product features and a lack of strong competition allowing for price increases
• Consumer insights driven pricing:?value-based pricing purists would say this is the key, if not only, consideration. End-consumer prices should be based on the perceived value they offer to shoppers/consumers and their willingness to pay, rather than on the cost of production (cost-plus approach) or historical prices
• Funding Technological Advancements: think price increases to fund major R&D and tech infrastructure investments as well as tech-driven new features/quality enhancements justifying price increases. Though this can work in reverse as new/better technologies can increase efficiencies and reduce long-term costs and prices (e.g. Moore’s Law)

A further important consideration is the actual impact price changes to your distributors will have throughout the entire value chain. The “pass-through” of price increases might be less or more than what the supplier imagined or expected. Neglecting this can lead to serious channel conflicts, customer attrition, hurting of strategic relations, market share loss and an often-undervalued concept in practice of the “double-marginalization” problem, which can lead to inefficiencies with even higher prices for consumers and lower profits and volumes across the value chain.

3. Build your Value Narrative

Armed with the insights from the topics discussed till now, you’ll be able to start developing a “Value Narrative”; a structured, compelling and customer relevant story that clearly articulates the value proposition of the price increase and addresses your distributor’s needs, pain points, and aspirations. It answers the "Why should I care?" question and has the following elements to consider:

• The Case for a Price Increase: studies show by providing a clear reason, we significantly increase the chances of someone accepting our asks. Once you identify the primary reasons for your price increase, give the assumptions and calculations that led to the increase, e.g. crop diseases impacted production costs by 35%, to maintain quality a price increase of 15% effective in 60 days becomes inevitable. Be transparent to maintain trust and integrity and reassure how you will approach the monitoring and adjustment process in case of market or shopper backlashes
• Negotiation Tradeable Items: in negotiations, tradeable items are elements that can be offered, adjusted, or conceded to reach an agreement. Make sure you’re clear on your non-negotiables and adjusting the price should be on that list. Many other items, however, can be discussed and keep in mind that value is relative. For example, at Procter & Gamble we used to calculate the cost of temporarily adjusting credit terms and it nearly always cost us less than it gained the distributor
• Your Unique Selling Points: what distinctive benefit or feature of your product, service, or brand sets you apart from competitors??This strengthens your narrative and increases the chance of acceptance. Knowing the distributors’ portfolio of other suppliers and brands helps, as the risk of shifting their support to these brands is real
• Blockers & Enablers: what could potentially hinder or facilitate success?; Is the top-to-top relationship strong?; any contract limitations to consider?; are you giving significant advance notice; and are there any cultural sensitivities which can derail, or if handled right, enable conversations?
• What’s in it for the Distributor?: knowing the challenging business model, their pain points and KPIs, can you articulate what potential benefits your distributors actually can gain or minimize loss from a price increase?
• What are their best viable alternatives?: similar to the BATNA concept in negotiations, knowing what alternatives your partner has can help you assess the power dynamics in the conversation and hence anticipate any risks

As you go through this exercise, you might have different scenarios and hence different Value Narratives. The aim is to prepare for the potential challenges ahead and be clear on what potential objections could come your way and craft strategies and tactics to handle these. It’s important to focus on maintaining trust and integrity, as challenging market conditions and strategic partnerships will remain a constant well beyond any price increase conversation.

Selling The Price Increase Canvas

I’ve added below our “Selling the Price Increase” canvas, which brings all of the topics discussed in this article together. I’ve added an example of how this can be leveraged for a Consumer Goods supplier and its distributor partner, but it can be applied to any industry. It is divided into 3 sections, following the same structure of this article (i.e. “Map your Distributor’s Profile”, “Understand the Reasons for the Price Increase” and “Build your Value Narrative”). Don’t hesitate to comment or connect for a soft copy or a Miro board to try it for yourself or workshop it with your team as we do with clients.

SELLING AND A GROWTH MINDSET

Before we close, we need to briefly address something which is too often overlooked, forgotten or ignored.

Nobody likes selling a price increase, I for sure didn’t when I needed to the first time many years ago. It triggers many basic human fear patterns and latent insecurities (more on this in future articles), endless reasons to procrastinate having difficult customer conversations (that desk really needed cleaning again today) and convincing yourself not to ignore the perfectly logical business reasons there are for a price increase.

?????????????Most salaried frontline professionals, unlike business owners, will feel like they are doing something TO their customer instead of FOR their company. Their prefrontal cortex (the “rational” front lobe of the brain) tells them, “yes, this makes sense, it is the logical thing to do for me and our company”, but their ancient Limbic system screams “why are you doing this, you know the challenges they have. My carefully built relationship will be ruined...this is betrayal”.

?????????????In future articles, we’ll discuss how a growth mindset can radically shift the limiting beliefs for frontline employees and get them to success, but for our purposes today just remember that this won’t be resolved by a peptalk by an Exec or a YouTube motivational video. It needs to be coached and trained more sustainably to change deeper core beliefs.?

Understanding and conveying the value of a price increase is both an art and a science. Suppliers and their channel partners are not merely in the realm of transactions, but in the business of forging powerful, sustainable partnerships aimed at serving end-consumers better and continually redefining excellence in their industry. Equipped with insight and intent, we don't just sell a price increase; we champion a shared vision of growth, innovation, and mutual success. For Commercial Champions the future is not just profitable, it’s limitless.

Thanks for reading.

Bulent Kotan

The Commercial Champion is a newsletter dedicated to enhancing your strategic commercial acumen, develop some serious sales, marketing and product skills and transform the way your mind operates.?

#commercialexcellence?#pricing?#salesandmarketing?#distributormanagement?#sellingapriceincrease

References

• Jeff Robinson -?Price for Growth, A revolutionary step-by-step approach to massively increase the value of your company by leveraging focused pricing strategies?(book)
• Power of Pricing reference articles:

-https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/pricing-distributors-most-powerful-value-creation-lever

-https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/the-power-of-pricing?

-https://hbr.org/1992/09/managing-price-gaining-profit