Pricing Design: A Possible Solution to Reducing Your Number of Price Records

Companies who sell products in multiple containers have two options for pricing these materials. (Like most companies we define “material” as a product in a package type.) Option #1 is called material-level pricing, where each customer has a separate base price for each package type. For example, a customer might pay $2.00 per kg when ordering product in bulk tank trucks, but $2.50 per kg when ordering drums of the same product.

Material-level pricing can create two main problems for organizations. First, it often leads to an exorbitant number of pricing records, as pricing administrators need to update each material price every time prices change. Second, companies need to constantly make sure that added pricing for packaged costs cover added expenses. The same situation is often multiplied when pricing different customer ship-to locations, as companies that include shipping costs in price need to charge more for customer locations 500 miles from a plant than a customer location just down the road. For example, if an organization had 500 customers buying five products with two different packaging types and three different ship-to locations each on average, the organization would need to maintain a minimum of 15,000 pricing records (500 x 5 x 2 x 3). If the organization decides to raise price by $.02 across the board, price administrators would need to update 15,000 rows of data, often one by one or just a few at a time.

One solution often floated to address this problem is the employment of product -level pricing with surcharging. Under this system, customers pay the same base price for a product regardless of package type or location, but are surcharged depending on package type or ship-to location. In this case, the organization would have just 2,500 pricing records to maintain, and would have a much easier time processing price changes as surcharges can remain constant over time.

One possible downside to this approach is the potential for negative reaction from customers who feel like they might be getting nickel-and-dimed when they view these surcharges on their invoices or hear about them in negotiations. (Think about the feeling you had last time you actually read your cable bill in detail.) The added logistical, freight, packaging, inventory, and labor costs involved with serving customers in packaged goods vs. bulk is often quite high – even if you pass these costs on to customers at cost there could be some sticker shock that causes customers to either dispute the charges or look elsewhere for their raw materials.

Choosing whether to employ material or product-level pricing is just one of many decisions an organization faces regarding pricing design. For more information on how to reduce your administrative costs by reducing your number pricing records please contact us anytime.