How to fight price erosion – selective distribution strategy
Some types of tasks in the work of a brand manager cannot be avoided and sooner or later will have to be faced. Everyone knows well how time-consuming some activities are, for example, preparing a quarterly report or creating a price strategy recommendation. Of course, both examples are under your complete control. With the right knowledge, workflow, and support of analytical tools, you can meet these tasks with little effort. What if, however, you face a problem in which many entities are involved, and which is an “explosive mix” of various sales strategies? A good example of such circumstances is the progressive fall in the value of the brand’s product prices at individual retailers. The number of market cases suggests that sooner or later you will definitely have to face this challenge. We will try to make this article prepare you for this situation.
Is price erosion really an unavoidable fact that you have to reckon with when launching a given product? How to counteract it effectively? Where to start and where to look for factors that can slow down this process? Let’s start by understanding what price erosion really is. Next, we will introduce a basic, yet effective strategy called the selective distribution method.
Each product has a specific “life span”. It is inscribed in the strategy of brand activity/development. The longer the product is on the market, the demand for it decreases. This situation means that the market is becoming more saturated and competition among your customers is growing. Considering the problem from this perspective, price erosion is a natural consequence of a product launch. It is a process in which the prices of the model/service begin to fall beyond the brand’s control. There can be many reasons for this, although the most common is the customer pricing policy. Unfortunately, the actions of one retailer usually find their answer quickly in the movements of its competition. In extreme cases, this results in a self-winding spiral of reductions called price erosion or a price war.
Perhaps you have already observed this problem in your organisation? If you haven’t named it yet, you can do so thanks to the short definition above. However, instead of accepting that the portfolio of your products brings smaller and smaller profits, you can act. Start with prevention – implementing a selective distribution strategy.
What is selective distribution?
Brands usually choose one of three ways:
- Deploy its products exclusively within its own sales network or the network of an exclusive retailer – in this case, we are dealing with exclusive distribution.
- Being aware of the high product rotation and competitiveness in the segment, they bring the product to as many retailers as possible – in this case, we are dealing with intensive distribution.
- To limit competition among distributors, brands choose key customers who are offered the opportunity to sell a given product – this strategy is called selective distribution.
The mentioned method is a successful and secure compromise between the first two strategies. Thanks to the tools enabling automatic pricing and availability data collection, it is possible to effectively estimate the potential of specific Key Accounts with which the brand already has a common history. Their calculated potential can be an important indicator in product sales forecasts that you would like to introduce to a specific shelf at a specific retailer.
“Only at selected sales points”
The slogan above sounds familiar, right? It is the quintessence of the strategy that is the subject of this article and proof of the effectiveness and popularity of its use on the market. It is also a clear message that builds the prestige of a given product in the eyes of both the consumer and the retailer, who must “deserve” its trade offer to be enriched with this particular product.
By practicing selective distribution you can hope that the dealer will have only one product in a given category on the shelf and that it will be your product. It is more likely, however, that the coffee machine model you introduced in the XY store will compete with your competitor’s coffee machine model. This competition is quite a different problem and we will not deal with it in this text, but what you should remember is that according to the strategy discussed, the dealer has full right to display other brands in the same category.
There is a pattern according to which prices erode in proportion to the number of retailers. On this basis, it can be concluded that prudent selection of key accounts and selective introduction of the available range in a limited region can significantly reduce the competitiveness between brands in a given store and between dealers offering similar shelves.
Although this strategy is suitable for many products and can certainly bring great benefits to the manufacturer, its use is in accordance with applicable law (in the EU), if:
the specificity of the product requires such a distribution model to preserve its quality and ensure proper use; simultaneously the decision to choose specific distributors cannot go beyond these two key factors;
the distributor meets certain quality criteria, the most important of which are its technical qualifications, qualified personnel, and premises parameters;
the selection criteria are objective and include all available distributors without discriminating against any of them.
Pros and cons of using selective distribution strategies
- Selective distribution gives a much greater market coverage compared to exclusive distribution. The brand can count on lower costs compared to intensive distribution. You will reduce the cost of service, you will not have to pay so much attention to maintaining relations, while billing and delivery to a retailer who sells 300 pcs/month will most likely be the same as to the one who sells 30,000 pcs.
You will gain control because it is easier to monitor fewer retailers.
You will gain additional arguments in the negotiation process. The fact that the product will be available at certain points builds the value of your offer.
There is of course also the other side of the coin. While intensive and exclusive distribution has low dynamics, selective distribution will require significantly more involvement from you. The key point is to observe and monitor sales channels, both your own and your competition’s.
This is not impossible and you will be helped by platforms that will do most of the work for you, but the conclusions and decisions are already the domain of a talented brand manager – you!