Pricing is the highest-leverage financial decision in distribution. A 1% improvement in average selling price on $3 million in revenue is $30,000 in additional gross profit — with no increase in cost, headcount, or operational complexity. Yet most distributors set prices once, apply a margin target, and revisit pricing only when a supplier increases their cost or a major account pushes back. There's a better approach.
Cost-Plus Pricing: The Foundation, Not the Ceiling
Cost-plus pricing is the standard approach in distribution: calculate your landed cost for a SKU (purchase price plus freight), add a target gross margin percentage, and that's your price. This approach has real advantages — it ensures you never sell below cost, it's simple to apply across a large catalog, and it produces consistent margins if your cost basis is accurate.
The limitation of pure cost-plus is that it ignores what the market will bear. A SKU that you mark up 25% might sell at 35% margin in your market because competitors are priced higher or the product is hard to find. A SKU you mark up 25% might price you out of the market if competitors are at 15% on that category. Cost-plus tells you the floor; it doesn't tell you the optimal price.
Use cost-plus to set your floor. Before you look at market pricing, know your minimum acceptable price for each SKU — the price at which the sale contributes positive margin after freight and handling. Then validate against market pricing and adjust upward where the market supports it.
Market-Based Pricing: Validating Against Competition
For each major category in your catalog, you should understand the competitive price range — what accounts can buy the same or comparable product for from your main competitors. This requires some intelligence gathering: mystery shopping, conversations with accounts who mention competitor pricing, distributor price lists that circulate in trade channels, and industry price surveys where they exist.
With market price ranges established for each category, you can position your pricing deliberately:
- Commoditized SKUs (items available from multiple distributors with minimal differentiation) — price within 3-5% of the market median. Pricing above market on commodities costs you accounts without improving your margin on that category.
- Differentiated or specialty SKUs (items where you have exclusive distribution, unique service capability, or significantly better availability) — price at or above market. Accounts that value the differentiation will pay for it.
- Loss leaders (items priced at or near cost to drive account acquisition and frequency) — use sparingly and intentionally. A loss leader that drives $8,000/month in high-margin orders from new accounts is a strategic investment. A loss leader that's just your standard pricing on a commodity is a margin erosion problem.
Tiered Pricing for Different Account Sizes
Not all accounts should pay the same price. A restaurant group placing $25,000/month in orders has different leverage and different cost-to-serve than a single cafe placing $800/month. A tiered pricing structure formalizes this: different pricing tiers for different account volume levels, applied automatically when an account is assigned to a tier.
A typical three-tier structure:
- Standard (under $2,000/month): List price — your base pricing applied to all accounts by default
- Volume (over $2,000/month): 5-8% below list on most categories
- Key Account (over $8,000/month or strategic accounts): Individually negotiated pricing, typically 8-15% below list
The tier thresholds should be set based on your actual account distribution — if most of your accounts are between $3,000-$6,000/month, having a tier that kicks in at $2,000 is different from having one that kicks in at $7,500. Analyze where your accounts cluster and set tier thresholds that create meaningful distinctions.
Volume Discounts That Don't Destroy Margin
The math of volume discounts is frequently misunderstood. A 5% discount at 18% gross margin doesn't reduce your margin by 5 percentage points — it reduces your margin dollars by 28%. Here's the math: at $10,000 in revenue with 18% gross margin, you have $1,800 in gross profit. A 5% discount brings revenue to $9,500. If COGS is unchanged at $8,200, gross profit is now $1,300 — a decline of 28% in margin dollars on a 5% price reduction.
Volume discounts that work without margin destruction:
- Annual volume commitments: A discount contingent on the account reaching a defined annual purchase volume, not applied per-order. This incentivizes growth without discounting current-period orders before the commitment is reached.
- Category-specific discounts: Offer discounts in your higher-margin categories (where you have room) rather than applying blanket discounts across low-margin commodity categories.
- Early pay discounts: A 1-2% discount for payment within 10 days improves your cash flow while costing less than it appears — because you eliminate the carrying cost of AR during those 20 days.
Handling Competitive Pressure
When an account tells you a competitor is offering a lower price, there are three possible truths: the competitor's price is genuinely lower (in which case you need to decide if you want to match), the account is testing whether you'll discount without actual competitive pressure (common), or the competitor's lower price comes with a service trade-off the account hasn't fully evaluated yet.
Before matching any competitive price, ask: "Can you share the competitor's price list? I want to make sure we're comparing the same products and service terms." Most genuine competitive price situations involve a comparable or lesser service level — freight charges the competitor imposes, minimum order requirements they enforce, delivery frequency limitations. Understanding the full comparison, not just the unit price, often reveals that your all-in cost to the account is competitive or better.
Price Increase Timing and Communication
Price increases are inevitable in distribution — supplier costs rise, freight costs rise, labor costs rise. The question is how to implement increases without losing accounts.
Best practices: give 30-45 days' notice, communicate the reason clearly (not just "we're increasing prices" but "our supplier raised costs 8% and we're passing through 5%"), and implement increases on a defined date rather than mid-order. Accounts that understand the context and have time to adjust their own purchasing are far less likely to push back than accounts who receive a surprise price increase on an invoice.
Timing matters: avoid implementing price increases at the beginning of high-demand seasons (when switching to a competitor is most feasible), and consider implementing across the board rather than selectively (selective increases signal to accounts that your pricing is negotiable).