Years ago, setting prices was a relatively simple task—so simple that most distributors would publish a single price for each product for all customers.

The distribution industry has evolved significantly since those simpler times. Today, it's necessary to provide more targeted pricing. Distributors have attacked this challenge using a variety of means, including matrix pricing—pricing based on customer type. Another tactic—contract pricing, which allows sales staff to discount prices for specific customers—results in multiple price points for the same product.

Within this “pricing chaos” lurks a great opportunity to turn pricing variability into an asset.

Today, when 20 percent and 50 percent of many distributors' business is priced by sales reps, it's not unusual to see chaotic pricing.

The pricing purist argues that the discipline is an exact science and needs to be tightly controlled. In reality, however, it's a blend of science and art. The single greatest ingredient to a successful pricing strategy is a degree of autonomy for sales reps.

The key to benefiting from the chaos is embracing it. Leverage your top pricing performers in the field by transforming seemingly chaotic pricing data into actionable results.

In the chaos scenario, some price points are lower than they need to be, some are spot on and a few are too high. Although you need to avoid making broad generalizations when analyzing the data, identifying patterns can lead to greater opportunity.

Creating a sustainable pricing process involves several steps:

1. Customer segments: The first step in market-driven pricing is segmenting your customers. Although there are a number of methods for doing this, there are two important factors to remember: customers' overall sales volume and market.

The key with this first step is not to be too complicated—establish no more than three or four volume categories and no more than five customer markets for up to 20 market segments (ideally, for a $10 million distributor you would have at most 10 segments). The goal is to group similar customers together and analyze their purchasing patterns.

2. Set target pricing: Once you've segmented your customers, the next step is using your sales history pricing data to develop realistic target pricing for each segment. Take advantage of the pricing examples of your best reps and use the data points as baselines for other customers buying similar products. The easiest way to do this is to establish “starting pricing” and “minimum price” guidelines for each segment. By developing simple and realistic guidelines, you will generate confidence among your sales reps—a vital ingredient in any pricing strategy.

3. Get pricing right: Once target prices are established, the next step is motivating your pricing decision-makers to use them. The best way to get sales buy-in on target pricing is to explain how it is derived and give them the point-of-sale data behind the strategy (such as customers, actual sales and price points).

You can also begin to create rules within your point-of-sales system to drive compliance with the targets. For example, set a rule to prevent overrides of minimum prices for non-profitable customers.

Using the rich market data generated by sales reps' pricing autonomy can turn pricing chaos into a powerful tool in your quest to optimize margins—yours and your customers'.