Ask most distributors how they price and the answer is the same: landed cost, a markup per category, a discount per customer level. It is how the ERP was set up. It is rarely how anyone decided to price.
Cost-plus by price level has real strengths. It is simple, every rep understands it, and when a supplier raises prices the selling price follows. For thousands of slow items that sell twice a year, it is the right answer. The cost-plus guide covers the method in detail.
The trouble is that most businesses never moved past it. The setup chosen during an ERP implementation, often years ago, quietly became the pricing strategy for the whole catalogue.
What a price level cannot see
A price level answers one question: what kind of customer is this? Everything else that should move a price is invisible to it.
| Price level sees | The deal has | |
|---|---|---|
| Customer | Contractor | Buys 300 a month, pays in 30 days |
| Stock | Not shown | Last 80 units in the region |
| Market | Not shown | Rival quoting $14.90 |
| Order | Not shown | 400 units, a full carton run |
Two contractors at the same level get the same price, whether one buys ten bearings a year and the other ten thousand. A scarce item and an overstocked one carry the same markup. A commodity that every rival stocks is priced like a part only you hold.
Where the margin goes
The price list cannot see those differences, so reps fill the gap by hand. On almost every quote they apply a discount from the level price, using their judgement, and the judgement is usually generous, because a rep is measured on winning the deal.
That is how a business can show a 31% margin on its price list and 24% in its accounts. Nobody decided to give away seven points. They went one quote line at a time, in discounts that each looked reasonable.
“The price list sets the starting point. The discounts decide the margin.”
From default to strategy
Keeping cost-plus as the base is fine. What turns it into a strategy is deciding, in writing, what moves a price away from it and by how much:
- Keep cost-plus as the floor
Landed cost and a minimum margin that no line goes below.
- Name the signals
Customer history, order size, stock position, competitor price.
- Size each one
A few margin points each, with limits, applied the same way for everyone.
- Show the reasons
So a rep can see why a price moved and explain it.
The result is still cost-plus underneath. But the discount a rep used to invent on the phone becomes a set of adjustments the business chose, that apply to every quote, and that anyone can check.
That is the difference between a default and a strategy. A default is what you get when nobody decides. A strategy is the same starting point, plus the decisions about when to move away from it.