PRI EDUCATION: HOW TO CREATE AN EFFECTIVE PRICING POLICY
It’s safe to say there is one race that none of us likes—the race to the bottom. After all, your company has invested millions into engineering, R&D, marketing, sales support, tech support, and more into bringing your product to market. Not only that, but you have poured your heart and soul into making incredible performance products for racers, only to see them devalued in the eyes of consumers.
Should you consider a pricing policy to protect your brand? If you think it’s too hard or too much to deal with…think again.
Following are a few tips on how to get started, or at least get you thinking about establishing a pricing policy for your product.
1. IDENTIFY THE PROBLEM
It is said that a well-defined problem is half solved! So first, identify if you have a pricing issue with your product in the market. Shop a handful of your top-selling products. If a reseller is selling your brand really cheap, then more than likely they are using your top sellers. Google Shop your product and identify the average percentage that your product is being discounted below Manufacturers Suggested Retail Price (MSRP).
2. STAGES OF IMPLEMENTATION
Now that you know the average percentage that your product is being discounted off MSRP, you are ready to figure out your stages of implementation. First, determine what is the lowest net price you want your product to ultimately sell for. What determines this price? You need to think about what the average gross margin is that a reseller of your product needs to make in order to offer the type of customer service, sales, and tech support their customers are accustomed to receiving.
Also, you should consider releasing different stages of pricing over a period of time so that you don’t create sticker shock for consumers. It doesn’t matter if it takes you three, five, or more years to get there. Only you will know when to implement these changes. Rome wasn’t built in a day, and your products’ devaluation did not happen overnight, either.
3. NO BOILERPLATES
You are going to need a policy. But do not go and find another company’s policy and copy it. There are no boilerplate policies. You need to have a policy written that works with your company’s infrastructure. What works for Sony or Nintendo might not be what you are looking for. Instead, seek out an attorney who specializes in brand protection. They are seasoned and experienced in this type of work, and they can ask you the right questions about your company in order to create a pricing policy that fits your specific needs. If you do choose to write your own policy, however, be sure to run it by your legal team before publishing it.
4. THE STING
Once you decide on a policy, it is critical that it contains a strong “sting” to the reseller(s) found to be non-compliant with your policy. However, be careful here: Whatever the penalty is to the reseller, you must imagine your best, number-one customer will violate your policy (because it can happen) and how that will affect your business. While the policy needs to have a “sting” to the violator, it cannot be so strong that you cripple your company when it comes time to enforce it. Some examples of the penalty phase could be:
Three Strikes Policy
First strike (violation) of your policy equals a warning. No harm no foul.
Second strike puts the reseller on a do not sell (DNS) list. This means they can’t buy any product from your company or any of your distributors for a period of time that you set.
A third strike puts the reseller on the DNS list for a longer period of time, which you determine.
All Advertising Funds Are Cut
Perhaps your co-op funds for advertising are very healthy for your product brand. Taking away these funds is another type of penalty for violating your policy.
Specific SKU Blocked from Reseller
This penalty blocks the reseller from being able to purchase only the specific SKU that they violated policy on. It leaves the balance of your products available. This works well for some manufacturers. Bear in mind that if you offer many SKUs, keeping track of them one by one, by violation, could be very difficult to manage.
No Product Warranty
Some companies choose to not offer product warranty on product that was purchased from an unauthorized reseller. Some manufacturers post these unauthorized resellers directly on their website to inform consumers.
Whatever you choose for the “sting,” make sure the reseller knows you mean business...but don’t cripple your company in the process. You might think several months on the DNS list is effective for a strike-two offense, but could you weather that kind of sales drought?
5. THE FOUR C’S
If you are going to utilize a pricing policy to protect your brand, you need to keep in mind a critical piece to the success of brand protection. It’s called the “Four C’s,” which are:
Confidence: Customers/resellers must feel confident that the manufacturer will enforce the pricing policy, and the manufacturer needs to have confidence that their customers or resellers can follow the policy.
Commitment: Do they want to do it? Are they consistent? Do they just want to sell whatever they can and not manage it? Anybody can sell on price. If a reseller doesn’t care, they never will, and they shouldn’t be an authorized reseller of your product. If they do not respect your brand, then find resellers that will. Contrary to popular belief, you do not want every reseller on the planet selling your products.
Controls: Do your customers/resellers have the controls in place to execute your policy? Do they have a way to not sell to resellers found on your DNS list, etc.?
Conduct: How do they do business? Are they honest about compliance or are they looking for ways to get around the system?
If these four criteria can be met, then the chances of your pricing policy being successful are highly likely.
By way of review, the resources you have invested in your company to get it where it is today are truly extraordinary. While it is the right of resellers to sell at whatever price they want, it is your right not to let your company be devalued in the eyes of consumers. Therefore, you have a say in who is, and who is not, an authorized reseller of your product/brand.
You may very well need to adopt a pricing policy to protect your brand from major price erosion in the marketplace. If you are going to do this, you must commit. You must execute your policy no matter the reseller. You must treat everyone the same…no favorites. It is a “yes” or “no” question, and nothing personal when it comes to customers. Are they compliant, yes or no? If you cannot do this, then do not move forward. The worst thing you can do to your company’s reputation is to say you have a policy and never enforce it.
The goal here is to get you thinking about potential strategies that will add value to your brand, and to your distributors as well.
Rich Barsamian is the Vice President of Sales and Marketing for Advanced Clutch Technology. He was the SEMA Person of the Year in 2014, and was recently inducted into the SEMA Hall of Fame Class of 2020.