Pricing for International Distribution Channels


A student sent in this question:

Hi Mark, my name is …, and I took your Pragmatic Pricing course in August of 2014. I have a question about pricing that I was hoping you could help me out with.

I currently manage an international sales team and distributor network that we sell our software products through outside of the US. I held an international sales team summit this week with the goal of invigorating some stalled international sales performance. We had a discussion around establishing regional pricing for our distributors. The idea was that there are models for channel selling that set different prices for a specific region based on the value of our products that that region will bear. Do you have any guidance on establishing specialized list pricing for distributors based on any past experience you have?

Does it always just simply fall back on value-based pricing – i.e. we should price our products based on the perceived differential value that that our customers IN A SPECIFIC REGION have?


You pretty much have it nailed!  In a region, start by figuring out the end customer price.  Who are your competitors in that market?  They often change based on region.  How much are those competitors charging their customers?  How much better are you? What is that worth?  Once you’ve used Value Based Pricing to determine the end user price in that region, then determine how much margin that distributor needs to be motivated to sell your product.  There tend to be industry norms that also vary by region, as I’m sure you know.  You need the margin in the region to make sure they will push your product over your competitors.  With those two pieces of information, you can now back into what your price per region should be.
If only it was that simple though.  That’s the theory, but now you have to worry about currency exchange rates.  How many different price lists must you have?  The more price lists you have the more complex it is to manage both for you and for your accounting/finance team.  Is arbitrage possible, meaning can some customers or distributors buy in one region and resell in another?
Regardless, your thinking is spot on.

Evaluating Harvard Business’s Price Increase Announcement


A friend forwarded to me this notification by Harvard Business Publishing announcing an upcoming price increase.  Here is the text of the mailing.

“To assist you in planning, we are writing about upcoming changes to the price of HBP course materials, effective July 2016. We know that the cost of course materials affects your institution and is of particular concern to students. For this reason, we increase our prices infrequently and proceed with great care when we do enact a change.

“On July 1, 2016, the price of case studies, articles, and book chapters will increase by 7.5%.Because we recognize the high cost of education and are committed to keeping the price of HBP content affordable, we have not raised the price of these materials since 2011.

“As a part of this increase we will introduce mechanisms that allow you to manage the cost of HBP materials either at the course level and/or for your institution overall. These options will include customized coursepacks, institutional reporting tools, and payment based on student enrollment.

“These options will be available on a trial basis in early 2016, with the opportunity to subscribe to selected services/tools for the 2016-2017 academic year. In January, we will send you detailed information about the new services and tools mentioned above. Until then, please let us know if we can address any questions by contacting …”

Overall this is a well done announcement.  They build empathy by acknowledging the pain of price increases.  They demonstrate it is a difficult decision for them by saying they haven’t done this since 2011 (5 years ago).  They sound as if they truly care and try hard to not raise prices.  (Maybe they do really care.  There is no way to know.)

Another thing they do well, almost surreptitiously, is point out that it really doesn’t effect the educator, the person to whom the notice was sent, who is also the person who decides what material the students must purchase.  Notice the first paragraph emphasizes it hurts the student and the institution, but omits any pain to the educator.

Although I’m impressed with this announcement, I could offer them one suggestion for improvement.  When they do this again (in 5 years?) they should emphasize that their costs went up.  The announcement didn’t say why they are raising prices.  They could have changed the last sentence in the second paragraph to read something like this:

“Because we recognize the high cost of education and are committed to keeping the price of HBP content affordable, we have not raised the price of these materials since 2011, even though the cost of producing them (materials and labor) has gone up year after year.”

The only explanation for a price increase that people accept is that costs went up.  Surely over the last 5 years some of their costs have gone up.  It is not a lie.

What have you learned from this blog?  Hopefully, it’s when (if) you increase your prices, you should try very hard to sound empathetic, reluctant, and blame your increasing costs.

Do You Need a Pricing Department?

Pied Piper

Pricing departments are becoming more common in large companies. Is it any wonder given how powerful pricing is? We’ve all seen the math showing how for a company with 10% gross margin, a 1% improvement in pricing leads to a 10% improvement in profits. That’s huge. Every company should be determining how they find multiple 1%’s.

Is a pricing department a good way to find those 1%’s?

To really answer that we need to discuss what a pricing department can do well and what it can’t do well.

First, people in a pricing department are NOT experts on your products or on your competition. They have no idea how much your customers are willing to pay. Hence, when it comes to actually setting prices they are probably not the right people for the job.

Also, pricing people don’t have P&L responsibility, so they should not be the ones making decisions about accepting large strategic deals at deep discounts. That belongs with someone in the product line.

Pricing departments are rarely involved in price execution.

However, pricing departments should be fantastic at understanding and communicating how to make great pricing decisions. They should be able to monitor and/or audit pricing practices and find areas for improvement, ideally the lowest hanging fruit. They should be able to identify the huge strategic opportunities and get executive level buy-in to pursue them. These people must be true leaders, getting other departments to participate in their own change without having any real authority.

Should your company have a pricing department? It probably depends on how big your company is. Startups don’t need a separate department, but they should have some pricing expertise. Maybe they could hire a pricing consultant once in a while to help them find their low hanging fruit. (I don’t consult any more but feel free to ask me for a referral.)

Large companies probably should have pricing departments. The most effective ones I’ve seen act as internal consultants. For example, Google’s pricing department consists of some very talented pricing people, led by an ex-consultant. They are “hired” by different departments for pricing projects. Like any consultant, once the analysis and implementation are completed, they go on to the next project and leave the ongoing execution to the organization that hired them. Many large companies use a similar approach to their pricing departments.

Mid-sized companies should consider hiring a single pricing leader. Someone with fantastic leadership skills who can build rapport with all of the departments in the company who have an interest in pricing. Ideally, this pricing leader has good relationship with and the backing of the CEO, not that he or she relies on that authority to make change happen.

Whether or not you should have a pricing department depends on your size and complexity. Regardless, you should regularly audit your pricing practices, monitor your pricing results, and capture more 1%’s by fixing bad pricing. This is best done with the help of someone with pricing expertise, whether an employee or consultant.

What about your company? Are you ignoring pricing or do you treat it as a critical strategic decision?  Are you finding and capturing more 1%’s?

Pricing in Silos – Bundling Across Profit Centers


A problem that students in our pricing class often articulate is they can’t bundle products together that are managed by different organizations or divisions.  This is a problem in most big companies and even many smaller companies.

Imagine you have profit and loss (P&L) responsibility for product A, which normally sells for $50 with 90% profit margin.  A colleague has P&L responsibility for product B which normally sells for $100 with 20% margin.  You have identified a market segment who needs both A and B, but the market segment is more price sensitive than your normal customers.  What do you do?

The easy answer is create a bundle.  Sell both A and B at a discounted bundled price.  For the sake of the example let’s say $120.  This is 20% less than buying both individually.  Turns out there are even more customers from this new market segment than you expected and products are flying off the shelf.  Furthermore, you’re convinced these are people who would not have purchased your products individually.  This is a big incremental win for the company.

So far, there’s no problem.  This is exactly what a company should do.  The problem arises when finance does their internal accounting and allocates the revenue to you and your colleague.  After all you are each responsible for your own P&L and you each contributed to winning the revenue.

Finance starts by simply taking 20% off each of your normal prices.  You get $40 and your colleague gets $80.  But your colleague though complains loudly (and rightly so), “How can you do this to me?  I only have 20% margin so you can’t take all my profit!  I wouldn’t do this deal if I knew that.”

So finance listens and decides your product has the margin to absorb the full discount.  So you take the $30 discount leaving you $20 per sale which drives your margins down toward 50%.  Of course you will now miss your margin goals.  You complain, “That’s not fair!  My product has the best value and is most important in the sale.  Why do I have to give all the discount?”

So what most companies do is … nothing.  Companies rarely bundle across product lines because it is so hard to allocate the revenue to the right business unit.  This is sad.  Companies miss out on opportunities because they can’t manage who gets the credit.  Essentially each department optimizes its own profitability, but the company’s profitability suffers.  There are many opportunities with our largest and most strategic customers to sell a variety of our products.  We may be able to leverage a huge discount in one product to win massive sales in another product line.

What can you do about this?  Here is one place where if you have a strong pricing organization, or better yet a pricing council in your company, you may be able to push through polices and processes that help the company take advantage of these opportunities.  If pricing doesn’t do this, then the only way this happens is if the VP of Sales meets with the CEO and pushes through each individual deal.  Of course only the largest deals get looked at this way.  Some times you can persuade the CFO to tackle this problem, but it’s rare.

My advice, if you’re in a big company and want to be a driver for change, take the next opportunity of a big cross-divisional sale to bring up the conversation on how to handle these.  It won’t be resolved immediately, but you can get the company thinking that way.  Like any big change in a company, you need to be a leader, think through everyone’s personal positions and figure out how to help them win.  Then you will be able to enact change.  This change isn’t that big, but because it requires so much cooperation it will be challenging.

How have you seen companies handle this?

Photo by Doc Searls

Pricing in Channels – Channel Partners Are Customers Too


The August box of the month for Pragmatic Marketing 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.

A Reader Question – Pricing for Altruism vs. Profit.

An email from a reader:
Hi Mark!
Challenger Health ( is a very early stage, non-medicinal consumer healthcare products startup; our core customers are physicians (Orthopaedic primarily) and physical therapy professionals. The most effective pricing model is something we have discussed at length, more specifically, if it makes sense strategically to price our products differently depending on whether the customer (doctor, in most cases) intends to resell to his/her patients or provide the products at no cost, wherein the former is charged more than the latter.
Thanks for your time Mark,
Patrick Grams
Thank you for the question Patrick.  Although it’s hard for me to give you a definitive answer, I’m leaning heavily toward YES! you should charge different prices based on how the doctors will use your product.
The most important rule for setting prices is charge what your customers are willing to pay.  It seems very likely to me that those who are making profit are willing to pay more than those who are giving it away.  Doctors who give it away are absorbing the cost themselves.  Those who are reselling it are passing those costs, plus a profit, on to their customers.
As to how to do this, consider setting your list prices at the highest price, the price you will sell to a doctor who is using this to make money.  Then, you can put together “Good Samaritan” pricing levels, for anyone willing to offer your product for free to their clients.  (Feel free to choose a better name.)  That establishes the value at the higher price and justifies the lower price.  Never lead with Good Samaritan pricing though.
You will then need to monitor your customers buying at Good Samaritan prices for compliance.  Hopefully there is a way.  One method might be to monitor the number of units they use per period.  It is likely that people giving it away go through many more than those selling it.
All that under consideration, it seems unlikely that Good Samaritans will buy your product and give it away unless you can demonstrate how it helps them make or save money.  Call me cynical, but people do things when it helps themselves.  If you can’t clearly articulate how this helps the Good Samaritans, you can’t charge much or you won’t sell much to this segment.
Hope that helps.  Feel free to post further clarification or questions in the comments and I’ll do my best to answer them.
Good luck

Money or Time – It’s Pervasive in Pricing


I recently took up paragliding.  Awesome sport!  Once you’re good at paragliding, it’s pretty easy.  You fly a kite, take a few steps, take off, sit down in your harness and fly.  Awesome!!!  However, while you’re learning, it’s a lot of running, schlepping gear, untangling lines, oh, and a lot of waiting.

While running, schlepping, untangling and waiting, I would often think of a quote from Patricia Fripp, a world class speaker coach, that went something like this:  “When you’re early in your career, you have more time than money.  Later in your career you will have more money than time.”

As a 54 year old sweating, panting, exhausted man who has more money than time (or energy), I kept wondering why my instructor didn’t have an “elite” training package.  I would have paid more to have a program with less schlepping and waiting (the running I had to do and the untangling I had to learn.)  My instructor could have segmented his market.  (Of course I don’t know how big the market is for out of shape old people who want to learn paragliding.)

The more I obsessed on this, the more I realized this concept of money vs. time is pervasive in pricing.  People with little money and lots of time are very price sensitive.  They spend time searching for the best prices, the best values.  They check different distribution channels.  They use coupons if available.  They wait for sales.  They search the Internet for tips on how to buy at the best price.

People with more money than time don’t do any of this.  They decide what they want then buy it.  Of course they want to pay a lower price but they aren’t willing to put in very much time or energy to make this happen.

This same concept holds true during negotiations.  As a general rule of negotiations, the most patient person wins.  People with more time can be more patient.  People with less time (or patience) tend to pay more.

In B2B businesses, when your customers have “use it or lose it” budgets, they are time sensitive, impatient.  They may not want to pay more, but they will.  They should be paying more.

Think about your customers.  It’s very likely some have plenty of time without much money, others likely have plenty of money with little time.  You should think hard about how to charge one group more than the other.


Photo by Thomas S

Pricing Crossfit for Visitors

Here is a fun pricing situation shared with us from a colleague.

I do CrossFit for exercise and often drop in to CrossFit gyms (boxes they are called) when I travel. It’s a common practice in the CF community. Some boxes charge $0 for drop ins (but expect you to buy something like a logo t-shirt). Some charge something, up to $30. It’s understandable they would charge something to cover their costs.

The box I go to when in Boston is in the building next to the building where I work. It was recently bought out by a large operation and they have instituted a new drop in fee schedule. If you drop in it’s $30/visit. But if you get a t-shirt it’s $25/visit. Wait. Normally you pay extra for a t-shirt. I spoke to the GM and he explained they are trying to build a following and get the word out. So they decided to give the t-shirt away and charge less. It’s a no-brainer. I have two new t-shirts. LOL.


Thanks D for the description of this unusual pricing situation.  These details give us an opportunity to talk about two pricing lessons.

First, although costs don’t drive pricing, many of us have that so ingrained in our heads we can’t let go of it.  D wrote “It’s understandable they would charge something to cover their costs.”  I would say, “It’s understandable that they would charge something because their clients are willing to pay for the service.”  I’m not an expert on their business, but it seems unlikely that their incremental costs to serve one visitor is anywhere near $30.

Second, we have a rule at Pragmatic Marketing in the Price course, “Always START with Value Based Pricing.”  Meaning, figure out what your market is willing to pay, but then for strategic reasons you may want to alter it.  This GM has put together a strategy, and clearly articulated that strategy to D, that says they are willing to charge lower prices to gain exposure with the intent of growing their business.  This is a fine strategy.

One thing good about their implementation is they aren’t lowering price.  In fact, they have set a high price to establish the value of their service, which will impact buyers future expectations of what they will need to pay.  Yet at the same time offered a special deal that will hopefully bring in more trial.  I wonder if they advertise this special in the community (which would make sense) or if they are relying on people wearing t-shirts to build their clientele.

D, thanks for sharing the story and keep buying t-shirts.  These pricing stories are fun to read and analyze for me and the readers.


Photo by Arctic Warrior

Pricing and Demos?


Pragmatic Marketing’s box of the month for July is Demo’s. How can that possibly relate to pricing?  After thinking hard, I came up with one direct relationship and several ways they are similar.

First the direct relationship.  Obviously, the better the demo, the more your customer is willing to pay, the more you can charge.  This just makes sense and happens to be true with everything that is in the value creation category.  The more value you create in your buyer’s mind, the more you can charge.  Lesson: learn to give great demos to maximize the price you can achieve.

Now, for the similarities –

Timing – You must be careful with your timing on both when you give a demo and when you deliver pricing.  Bad timing on either and you can lose the deal altogether.  You want to give your demo AFTER you have created rapport with the buyers.  Something typically goes awry during a demo, or we show them the ugly admin screen.  Having rapport will help you overcome these mishaps.  You want to deliver pricing AFTER you have built up value in the buyer’s mind.  If you give it too soon, you could lose the deal because the buyer thinks the price is too high without full information.  It’s tough to overcome that once they’ve written you off.

Best done face to face – Demos over the web are hard.  You lose the ability to read your audience.  You can’t see what excites them and what bores them.  You get so much more information and may increase your rapport with the buyers during a face to face demo.  The same is true for pricing.  Delivering the price is the initial round in the upcoming negotiations.  Seeing the buyers face when you deliver it can give you valuable information about whether your price is too high or not.  Unless you are making a Take it or leave it (TIOLI) offer, you should be face to face when delivering price.

Negotiable – Both are negotiable.  Obviously prices are negotiated all the time.  How often, during a demo, does the buyer say “Can you make it do this?”  And then that becomes part of the contract.  The specials … ugh.  What’s funny is in both demos and pricing, we’d prefer they be non negotiable.

Scripted – Demos should be scripted.  The person demoing should know ahead of time exactly what they are going to do.  It may be slightly customized to match the problems of the buyer, but it shouldn’t be a random walk through the software.  Similarly, delivering prices should be scripted.  You must be sure to explain where the price came from and how it is far lower than the value the buyer will receive.  If you just drop off the price, it is more likely to appear too high and you lose without even knowing why.

Neither can win the deal, either can lose it –  I believe it is more likely you will lose the deal due to a poorly delivered demo rather than the price.  On the other hand, neither pricing nor demos are powerful enough by themselves to win the deal.  It takes many things done well to win a large deal.

Hopefully you found this constructive, comparing pricing and demos.  I sure did as I was writing it.  If you think of any other similarities or even contrasts, please feel free to share them with me and or the reader community.

The Second Biggest Impediment to Price Segmentation – Data


A few weeks ago Pragmatic Pricing talked about having the quoting and invoicing systems necessary to execute price segmentation strategies.  Another fundamental capability you need is systematically collecting the right data.  In this era of “big data” this shouldn’t come as a surprise, but unless someone has consciously sat down to determine what data to collect, it’s very difficult to use this information for price segmentation.

Each of the four techniques for price segmentation requires a different set of data.

Customer characteristics – In order to charge different customers different prices, you need to know the customer types.  This information is best collected in whatever sales automation tool you are using and stored with your customer master.  The types of data you want to collect are things like region (geography), size of company, industry(ies) they serve, and type (commercial, government, non-profit, educational).  This is certainly not an exhaustive list.  You want to gather data for any characteristics of your customers that you think may indicate their willingness to pay.

Transaction characteristics – We can charge different customers different prices based on what we know at the time of the transaction.  Of course we can only do this and analyze it if we systematically collect the information.  The best place to gather this information is in your quoting and/or order entry system since you need to capture this for every transaction.  The types of data you want to collect are things like requested lead time, season, weather, budget cycle and many more.  Anything you can think of that may help indicate how much your customer is willing to pay you should collect.

Behaviors – This type of price segmentation is when you put a hurdle in place to force people to show you they are price sensitive. The typical method is a coupon, but you can consider periodic short term price discounts, or discounts for other reasons where your buyers may expect them to happen in the future.  The data you need to collect is the performance of the pricing tactic.  For example, if you are using coupons, did sales spike?  Can you determine if the customers who used the coupons were new customers or existing ones that likely would have paid full price?  The better you can decipher what happened the better decisions you can make in the future.  Can you learn how individual buyers made their decisions?

Products – Of course we can use products to drive price segmentation.  The classic technique is good, better, best.  The data you should be collecting is what are the customer and transaction characteristics of those that purchase good and best.  What you may find is there are some market segments who purchase best more than the rest of your customers.  This likely indicates the need to create a new set of products targeted at and priced for that specific market segment.

Once you have data, you can analyze it to help determine which attributes indicate how much different buyers are willing to pay.  You can then use these attributes to drive your pricing models.  However, if you don’t have the data, you’re just guessing.  In today’s world of “big data” does it really make sense to guess?


Photo by Ron Mader