The Issue of Pricing

Dec 2, 2009

Pricing is the end-all-be-all issue in this ever changing performance parts industry. Every time you look online, talk to an old-schooler in the industry or get into a discussion with a manufacturer, the topic of pricing or discounts comes up.

As discussed in pervious articles, price control is very important, but that starts out at the manufacturer level. How do you set pricing? How do you ensure profitability for retailers? How do you enforce pricing? These are the issues to be discussed here. As each person takes part in the process, the structure and vertical growth of our industry will continue.

Long Term

Having dabbled in the manufacturing sector of the performance industry with my company www.agency-power.com, there is plenty of money to be made, but you have to think of the long-term goal. To build a part for $100 and sell it direct to the public for $125 is great for you the individual. But how many people can one individual really reach?

Nobody here has the iPod of performance parts that I know of. Even if you did, why not create a structure to allow others to sell your product and expand your reach? To gain the best traction for your product and brand recognition, you need to have a proper distribution network. Distribution involves people, products and marketing, but pricing and profitability is how to expand. So how do you establish pricing?

The first goal is to figure out what the market value of your product is. If your competitors have a product that is priced at $300 but use inferior material, do you price your product at $300 but promote the quality? Do you price the product at $500 to show your brand is a premium value?

You need to figure out what your brand should stand for. Do you want to be another “me too” company, or an innovator and originator? Once the product retail price is set, you need to then figure out how much margin your company needs to make to its deepest distributors. If you have a formula in place that your company makes 50% profit from its in-the-box cost, then your $100 product and dealer price needs to be set accordingly. If your goal is to have three levels of dealers, pricing needs to be set properly to distribute the products.

Supply Chain Pricing

Let’s say the retail price is $300. Your wholesale distributors get 40% off, distributors get 25% off, and jobber dealers buy at 15% off. These three tiers are set up to get your product into the correct hands to move in a logistical channel which is profitable for everyone. At 40% off, wholesale distributors buy that product for $180. So with your companies profit formula at 50%, you have made and surpassed this number. With a strategically priced product, enough profitability for dealers, and plenty of profit to continue manufacturing new products, you are set to continue a well planned out business structure.

Now how do you ensure that your dealers, the retailers and distributors, will be able to stay profitable with your product line?

Dealers need to have incentives to carry stock of your items, push sales and invest their company name into carrying your product. I won’t be the first to say this, but I don’t get out of bed to make 15%, sometimes not even 20%. After I pay the sales guys, the accounting people and the shipping kid, what am I left with? Oh yeah, and I had to price match some fly-by-night Internet shop. Give me the deepest deal! Putting product on the shelf, adding products to the company website and training employees requires time, and time is money. By having enough profit built into the discount structure, dealers can successfully continue to inventory and push the product line.

MAP

Your pricing is now established. You are functionally profitable, and your dealers have the potential to be profitable through distribution. How do you protect your brand and dealers from the infamous industry price prostitution?

Minimum Advertised Pricing (MAP) is being established by manufacturers across the board. MAP has been the new buzz of the industry since the Supreme Court ruling making changes to the previous anti-trust laws. MAP pricing not only protects the dealers investing in the product line, it keeps brand equity.

We have all seen those super low deals on eBay that are literally just $5 over cost. As ridiculous as it sounds, sometimes those deals are for less than cost. Well, those are to be no more as manufacturers can shut down the retailers or distributors who are not enforcing MAP policies. And you know what, they should.

Most of us have established businesses with overhead, product on the shelf and employees whose livelihood depends on us. Why should some enthusiast wannabe business owner get a dealer account because he has a business license from his family’s gym?

If they are not committed to running a strong business by the policies established from manufacturers, they should not be allowed to play. MAP is in the beginning stages of making changes to our industry. As the economy changes, you will see the bottom feeders being weeded out and MAP policies begin to take the true businesses further. If someone asks you how business is and your answer is slow, take a look at your position in the pricing field.

Protect Your Business Interests

With an appropriate distributor infrastructure, proper marketing and branding and a solid leader, your past and new products will take on a new face. Our biggest challenge as professional people is to continually ensure we protect our business interests.

With all of the manufacturers taking a new look at who they sell to and who that company sells to, we will be able to keep the products moving. Policing is difficult, but no matter what some kid types on a forum, it does not cost $10 to make a carbon fiber hood and I sure would not sell for $15 even if it did!