Four reasons to use the suggested retail price when communicating discounts to your customers

There are four reasons why it is better to use the suggested public selling prices as the basis for communicating discounts to your immediate customers:

Greater focus on public selling prices
When you make decisions based on internal list prices, you tend to disconnect from the market. By calculating and communicating discounts using the public selling price, you force yourself to be clear about the prices at which your end customers find your products in the market.

A pharmaceutical company managed the commercial terms of its customers based on internal list prices. These prices had been defined many years earlier, and no one remembered what they meant. Additionally, they were increased every year based on inflation, in line with shareholders’ profitability expectations. Surprisingly, within the business there was no clear notion of the actual prices at which their products were sold in retail outlets.

Since using the public selling prices as the basis for discount calculation, there is greater awareness of the competitiveness of their products at the point of sale. This has enabled the company to make decisions aimed not only at ensuring the purchase of its products by its immediate customers, but also at guaranteeing that consumers find its products at competitive prices in stores.

Easier comparison with the competition
Your internal list prices are not comparable to those of your competitors. Public selling prices, however, allow you to make an objective comparison, identifying possible cases where you may not be competitive or where you may be leaving money on the table.

The pharmaceutical company used to compare its prices through a platform that consolidates the prices at which distributors sell to pharmacies. This method is not ideal, as wholesale prices are affected by inventory management, bonuses, etc. As a result, these comparisons failed to measure the true level of competitiveness of the company’s prices versus those of its competitors.

Collecting public selling prices to communicate customer remuneration has allowed them to know exactly which products are leaving money on the table. This way, they can adjust selling prices to distributors so that public selling prices change indirectly.

Greater clarity around suggested selling prices
When you communicate discounts based on the public selling price, you send a clear signal about the price at which you expect your products to be sold to the end customer. While this is not enough to control your final prices, it helps communicate your expectations throughout the distribution chain.

When the pharmaceutical company communicated discounts based on a list price with no commercial meaning, distributors had no reference for the price at which they should sell products to pharmacies, and pharmacies in turn lacked a reference price to sell to consumers. As a result, price volatility at the point of sale was greater than expected.

Since using the suggested public selling prices as the basis for communicating discounts to customers, there is a tacit commitment not to stray too far from that level. Public selling prices give an idea of the price at which competitors—other distributors or pharmacies—will sell the product. The result is lower volatility in final price levels.

Better understanding of the commercial margin
When you offer your distributor a 35% discount on a suggested public selling price of $100, you know the total commercial margin of your product is 35%. If stores buy from your distributor at an average price of $80, it means they earn, on average, a 20% margin.

Previously, the pharmaceutical company lacked clarity about commercial margins across the distribution chain—although they knew the net selling price to their immediate customers, they were unaware of the final public selling price. This prevented them from knowing whether intermediaries enjoyed reasonable commercial margins.

By communicating discounts based on public selling prices, the pharmaceutical company was able to determine which products and customers had higher commercial margins and take action to adjust commercial terms across different distribution channels.

In summary…
Calculating and communicating commercial discounts to your immediate customers based on list prices with no commercial meaning gives you no advantage. In contrast, using an objective market reference—such as public selling prices—allows you to optimize your price strategy, not only by managing the prices at which you sell to your immediate customers, but also by monitoring the prices paid by your end customers at the point of sale.