How setup pricing rules for distributors and wholesalers

How setup pricing rules for distributors and wholesalers

One of the most critical issues of a distributor or wholesaler is the definition of the price of their products. Every inventory item has a base cost and a base selling price. However, you may require different prices for specific items to address market needs or align with your market strategy. This is done by defining price levels or pricing rules. In this article, I will talk about pricing, price strategy, and how to define them as price levels and pricing rules in your Warehouse Management System or ERP.

What is pricing?

Pricing is the process by which a distributor or wholesaler sets the price at which they will sell their products, and is one of the 4 elements of the business’s marketing plan. Normally, the distribution companies set a base price based on the cost of acquiring or manufacturing the products, multiplied by a factor. There are two ways distributors set the base price:

• Method 1: PRICE = COST x (1+ MARGIN).

For example: if the cost of an item is $10 and I want a 30% margin, then:

PRICE = $10 x (1+30%) = $13. In this case the gross profit is $3

• Method 2: PRICE = COST / (1 – MARGIN)

Example: PRICE = $10 / (1-30%) = $14.28. In this case the gross profit is $4.28

The MARGIN (4.28) / COST (10) ratio is called MARKUP (42.8% in this case)

Most distributors use the latter method because it is the only way you can make financial projections, since all variables refer to revenue and not cost of sales.

What are pricing rules?

There are many instances in which the distributor might want to create different prices for a product or set of products in response to specific market conditions. This is done by setting pricing rules.

Pricing rules are used to make price adjustments to items in an order that will be applied only if certain conditions are met. A pricing rule has conditions and effects. When a condition related to a pricing rule is met, the corresponding effect is applied to the price of the item in the order.

Criteria for defining pricing rules

There are many strategies a distributor can use to increase sales by changing the base price of a product. These are some of the most common.

• Set volume discounts so customers can get a price break when buying in larger quantities.
• Give a special discount to a particular customer or group of customers.
• Temporarily adjust pricing in response to market conditions, e.g. product shortage, product close to expiration, excess inventory, etc.
• Special seasonal promotions on products or groups of products.
• Set add-on prices, allowing customers to purchase accessories or related items at a discount as part of a combo of products.
• Introduction of a new product.

How to apply pricing rules

There are five commonly used rules covered by most warehouse management systems:

• Item Discount. Under this rule, a discount is applied to the base price of all items or to specific products or product category, for a customer or customer type. 
• Customer Item Price. It is a price list of all items for a specific customer. This rule allows more flexibility than Customer Discount, as a specific price can be set for each item for a customer with the created price level.
• Customer Item by percentage. This rule applies a discount percentage to all or specific items in a customer or group of customers. This rule allows more flexibility because you can specify a positive or negative percentage.
• Volume Discount.  With this rule, a discount is applied to a subset of items in the company’s inventory based on the quantity sold. This is an example.

• Customer Pricing Group. An item in a customer’s order may be subject to different price rules. When this happens, the Customer Pricing Group rule defines the criteria for selecting the price. It can be based on which is the lowest, which is the highest, or the last found in the order of the price levels in the group.

I hope this article has been helpful to you. I will continue to post information related to warehouse management, distribution practices and trends, and the economy in general. If you are interested in this article or want to learn more about Laceup Solutions, please subscribe to stay updated on future articles.

There is a lot of relevant information on our channel. Check out this video on how to create price levels in QuickBooks Pro & QuickBooks Online!