The prospect of new tariffs can be daunting and with good reason.
Many distributors lost margin in the first round of tariffs. A rapid increase in costs driven by tariff increases inevitably creates pricing pressures.
Limit your tariff risk and create profit opportunities. Patch these holes in your pricing bucket now.
Fixed Contract Pricing
There are times when you must use fixed price contracts. The key is to view these as a necessary evil to be minimized. There’s a direct correlation between your “tariff risk” and the portion of your business on fixed price contracts. Convert any fixed pricing you can to an “evergreen” margin or discount basis that moves with cost.
Dated Customer Contracts
Most distributors have a huge number of customer specific pricing contracts. Many of these contracts were set by an optimistic sales person at some indeterminate time in the past. Even if the Start Date of the contract appears current, it doesn’t mean the logic behind the pricing decision has been recently revisited.
You should quantify the performance of each contract now. Compare the sales vs. the margin. Delete or raise margins where you should. Push your organization to keep your contract file current.
Rolling Over Last Price Paid
When the order writer looks up last price paid to price an order it’s always costly. In a time of rapid cost increases it’s just dumb. In our practice we see it all the time. Tariffs or no tariffs, order writers who do this, continue to do so. You’ve got to identify those order writers and help them understand they are taking money out of your pocket every time they roll-over last price paid.
When we use the term “blanket pricing” we’re referring to when a sales person gives a customer the same margin on all items in a product group. Sometimes you must do this, for example when pricing a group of progressive-sized items.
More often, the sales person is setting the blanket pricing for convenience. Nothing is easier than setting up one record to price all items in a product group. The problem is when your sales person sets the margin, they set the margin to be competitive on a handful of key items in the product group.
These key items will be ones under the most pricing pressure in a time of rapidly increasing costs. You’ll have to respond to competitors who won’t always do the smart thing on these items. However, you don’t have to extend this misfortune to all items in the product group.
Here’s where there’s a profit opportunity…take apart these blanket pricing contracts. Price the limited number of key items using new customer-item pricing records at competitive margins. Then price the more incidental items at a higher margin by raising the margin on your existing pricing record. You’ll have more control on the pricing of key items, and you’ll make more on all the other items. Plus, the increase in costs will provide you the cover you need to increase pricing.
These 4 tariff pricing strategies share a common theme. The more control you have over your pricing system, the more likely you are to weather and profit from the any changes in your costs.
Will Roller, Client Services Manager