Pricing in Channels – Channel Partners Are Customers Too
The August box of the month for Pragmatic Institute is Channel (training and support). Pricing through a channel is critical to the success of your product and your company.
There are many types of channels, but for simplicity in this blog, let’s say a channel partner buys your product at a wholesale price and resells it at a retail price. Of course there can be multiple channel partners. For example sometimes distributors sell to resellers. What we will talk about today applies to every channel partner.
As we set our prices, the first price that matters is what to charge the end user. This end user price must be based on what they are willing to pay. Manufacturers often don’t get to dictate the end user price, but there are many techniques to influence it and in the end you need to predict what that price will be. This is not your list price but rather what is often referred to as street price. The price buyers typically pay.
Once you know your street price, next you have to decide the price to your channel partner. Sometimes you actually set a price, but most of the time you set a margin for what you expect your reseller to make. In the end it’s the same thing.
Here’s the important point. Your resellers get to decide whether to sell your products or your competitors products. They make that decision based on how easy the products are to sell and how much money they will make. In other words, you can often influence resellers to sell your products over your competitors by giving them a bigger margin. Think of your resellers as customers. They get to decide which to sell just like your customers decide which to buy. If both aren’t happy, you don’t make the sale.
A seemingly common attitude of executives at manufacturing companies is they think their resellers are making too much money. I’ve worked with many manufacturing companies whose executives want to squeeze the margin from their resellers. They forget that resellers have choices. Some big choices, like whether or not to carry your products, and little choices, like which product to push when a buyer is looking for a solution.
As a general rule, when you give more margin than a competitor to a reseller, that reseller will push your products more and vice versa. In fact, if you think of your retailer as a customer, each decision they make they are trading off their benefits vs. their costs, just like your end users.
Put yourself in the shoes of your channel partners and see what choice they would make. They may take less margin if your product has a great brand reputation and is easier to sell. It may require more margin if you’re trying to break into a market and want your resellers to actively push your products.
Suddenly an old adage comes to mind … You get what you pay for. If you don’t pay your channel partners well, they won’t work for you.
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