Over the last few years, traditional FMCG distributors have faced numerous challenges, such as unpredictable demand, massive supply chain disruption, and increased competition from new, digital players in the market, which has led to ever-shrinking margins. In addition, retailers and customers are beginning to expect the same speed and efficiency they are used to receiving in their personal lives. This has put a strain on distributors to become easier to do business with, offer additional services, and provide increased personalization levels, all potentially at the cost of their bottom line.
Wholesale distributors in emerging markets also face an added complexity as more competitors are entering the B2B space with a keen focus on disrupting the low end of the market with low-cost offerings, which further push margins down.
Developing advanced pricing capabilities is crucial for distributors to regain profit margins and increase profitability, as no other lever can do more to raise earnings. Studies show that distributors who embark on end-to-end pricing transformations can expand earnings by up to 50 percent with negligible impact on volume. However, most distributors are yet to realize this and take a “one-size-fits-all” approach rather than tailoring pricing to each customer and situation.
Price transformation is the best way to create value for distributors
Pricing is the most powerful way to improve overall margins and increase profits, as a 1 percent price increase across a product portfolio has more impact on bottom-line margins than a 1 percent reduction in SG&A costs or a 1 percent increase in volume sold. A McKinsey study also shows that a 1 percent increase in price would yield a massive 22 percent increase in EBITDA (earnings before interest, taxation, depreciation, and amortization) margins and increase a distributor’s overall company value by up to 20 percent.
Price is still a critical factor in driving sales of key value items (KVIs), which represent the top 20 percent of products a distributor carries, and 80 percent of a retailer’s purchases. However, it is a less critical factor for the other 80 percent of items that distributors carry, which is where distributors have the most opportunity to raise their margins.
Under the traditional pricing strategy, most sales reps focus on the handful of high-turn products they are familiar with and take a shorthand approach to the remaining SKUs, which can mean overpricing some items, and underpricing other items.
The way to create value, and win with pricing, is for distributors to identify pockets of strategic pricing opportunities and focus less on pricing thousands of items the same way. This would require a dynamic pricing system that harnesses digital tools and analytical benchmarks to give sales reps the market intelligence and customer insights they need to drive both volume and margins.
Data-driven pricing can be powered by Open Commerce
Most traditional distributors across emerging markets have little or no digital analytics capabilities and depend almost entirely on manual efforts by sales reps to reach retailers and distribute products. This distribution model provides zero visibility across the chain and, in many cases, forces sales reps to set prices based on personal experiences and gut feelings, which can lead to overpricing or underpricing.
Adopting digital analytics into their operations has long been a challenge for traditional distributors, as most of the digital commerce solutions available, like e-commerce, seek to eliminate traditional distributors. The few data analytics solutions available are often too costly and sophisticated to be a truly viable option for most distributors, as they often require retraining of sales reps and building sophisticated IT infrastructure.
What distributors need is Open Commerce.
Open Commerce is revolutionary technology changing how distributors in emerging markets buy, sell, and pay for FMCG goods. With Open Commerce, distributors gain complete visibility across the supply chain and can see in real-time where the demand is at a granular level.
RedCloud has built the world’s first Open Commerce platform, Red101 Market, where distributors across emerging markets can sell to retailers digitally and access real-time data at every single point of sale syndicated across the entire market. The Open Commerce platform has an in-built powerful marketing intelligence engine that analyzes the generated data to deliver actionable insights that sales teams can leverage to deliver dynamic pricing across the different product portfolios, customer segments, and geolocations.
Retailers can order stock from distributors via the app when they need it, ensuring product availability. In addition, the increased market visibility Open Commerce provides sales reps a deeper understanding of each retailer and allows distributors to offer personalized services, which can be more valuable to retailers than lower prices.
Schedule a demo today to see how RedCloud can help you deliver more value with data-driven pricing and increase your earnings.