Question

Topic: Strategy

Need Opinions On Quantity Discount Structure

Posted by ziczacxann21 on 9/7/2010 at 12:12 AM ET 125 Points
I am a wholesaler (distributor) of some consumer products and am planning a major change in my pricing strategy.
In the past, my pricing was as follows:

The retailer has to buy 15pcs to become an "official dealer". The price he has to pay is x and the profit he makes is about 45%. Along the way, the official dealer can order just 1 or 2pcs to replenish his showcase or in case his customer would like to order a particular item which the official dealer does not have in stock. The price is still the same at $x even if he orders 1pc.

I received some criticisms that this strategy isn't called "wholesale" because the official dealer tend to order only 1-2pcs, only when his consumer has a request. In such cases we spend unnecessary costs of printing extra invoices and cost of delivering just 1-2pcs.

So, I plan to make a change in the pricing strategy as follows:
Buy 12pcs get 30% discount; buy 24pcs get 40% discount.

Now my questions:
1) Is it really necessary that the retailer has to buy the same quantity in order to get the same discount everytime? Is this how a real "quantity discount" should function?

2) Does it make sense if I tell the retailer to order 24pcs for the first time to get 40% discount and for subsequent orders of 12pcs I will allow them to get the same 40% discount? Same for those who buy 12pcs on the first order and get 30%, subsequent orders he can order 6pcs to get the same 30% discount. Make sense?

3) Is it a bad strategy to decrease the retailer's profit margin now? They used to get 45% in the past...and my new plan is to give them a maximum of 40%. Frankly speaking I can still survive even if I give them 45% discount. But i know if I approach them with 45%, they will ask for more discount.

I have a delimma because some small retail shops cannot afford to invest on 24pcs at one time, yet they are sincere and it's nice doing business with them. Whereas the big retail chains may in the end demand for 45% discount (the same as what they've been getting before) regardless of the quantity they buy citing that they want to maintain the same costs always.

I welcome any opinions/suggestions. Thank you.

PS: The maximum, maximum, maximum discount I can offer is 45%. I cannot give more than that.
I found out that if I deliver 1pc of item, my cost of delivery for 1pc is 5% of the cost of this 1pc
(that means $0.05x). But if I deliver 2 or more pieces, my cost of delivery is still $0.05x.



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RESPONSES

  • Posted by ziczacxann21 on 9/7/2010 at 12:44 AM Author
    wanna upgrade this question
  • Posted by Frank Hurtte on 9/7/2010 at 6:45 AM Accepted
    The one point that you didnt mention was your goal for developing the new distribution plan.

    Who is your target retailer? The big guys or the little shops?

    What expansion plans do you have?

    It appears as though your real issue is controlling the number of onesy-twosey orders you send out the door.

    Most of our work is around wholesale distribution programs. We recommend some kind of commitment from the dealer in order to get the best price. Sometimes that commitment comes in signage. Other times it comes in shelf space. And finally it comes in order size.

    If you would like to talk specifics off line send me an email via my profile.
  • Posted by CarolBlaha on 9/7/2010 at 7:32 AM Accepted
    It is not unusual for a wholesaler to ask for a beginning opening order, as you have. After an initial order, most allow dealers to order as they want, some impose a minimum order limit.

    A plan to lower discount to a dealer is a stick not a carrot. It will not be an incentive to order more. They'll have the discussion "do we need this line". What part of this plan would they like?

    You should dig deeper and find out why your product is only be sold as special order and not part of everyday business.

    I would give them incentive (a carrot vs a stick) to order more. You could provide rebate at end of year. Do a spiff or sale contest. Pass thru part of those savings you say you will reap with larger orders to fund this.

    A 25% discount is not wholesale. Most dealers want to keystone their products-- and need a 50% discount. They're accepting your 45%. They also review sales per SF of retail space. Small stores can't invest floor space on a product only giving them 25% return.

  • Posted by ziczacxann21 on 9/7/2010 at 7:39 AM Author
    basically my goals are:
    1) to have more dealers around the country, because now my product is popular among end-users, but end-users are unable to find a dealer near to them.
    2) to ensure there's no price war among dealers
    3) to reduce the 1 or 2 pcs orders
    4) to sell more quantities
  • Posted by CarolBlaha on 9/7/2010 at 8:00 AM Accepted
    As a manufacturer rep, I repped a product that had huge potential but no dealers. I had to prove to the dealers this was a money maker. So, I'd pull thru sales. When I sold an end user on the product -- as you have, I'd ask "where would you prefer to buy this?" And then I'd make a warm cold call to that dealer. Of course then -- and only then, would they take on the product-- they had their first sale of it handed to them!

    You can do same to increase dealers.

    As far as price wars, dealers don't want price wars. There are those who's focus is discounting, just don't take them on as dealers. And don't place dealers on top of each other.

    To sell more, be more important to the dealer. Focus on that, focus on making your dealers successful. I am clear that as a rep, I have no value if I am not making money for my dealers. None. My line is in their store for one reason, to be a profit center. If everyone is asking for your product, and you have dealers, what happens to these sales?

    Reducing their margin will give them no incentive to buy from you. They'll be angry, no one wants something taken from them. Give them an incentive to buy more and you don't do that by penalizing them for buying from you.

  • Posted by Peter (henna gaijin) on 9/7/2010 at 1:45 PM Accepted
    You ask "is it really necessary..." - there are no rules or requirements, so it is up to you and what you think will be best for business.

    Is there a shipping charge for the product? If so, this would probably be incentive for dealers to buy less of the 1-2 orders.

    One retailer I work for has a lot of manufacturers who give them tier pricing - of they order x amount per year, they get at buy at the tier pricing for that quantity (no matter how many they are buying with the current order). Shipping is a significant adder to the order, so they do spend a lot of effort trying to optimize this (or get to a certain order level that allows them to get free shipping).

    You could give discounts based on individual order size, but this doesn't incentivize the dealer to buy lots over the year, just to optimize individual orders. If you make it more expensive for the smaller refill order, there is a chance that some dealers won't do the smaller refill orders but instead sell out over the year and then just re-order the next year/season/model comes out.
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