How to control retail prices?
The final price paid by consumers is not always directly controlled by the manufacturer. Distribution channels can modify it, generating negative impacts on both the brand and profitability. Understanding the dynamics between manufacturers and distributors is key to maintaining coherent prices in the market.
RETAIL PRICESDISTRIBUTION CHANNELSPRICE CONTROLS
When distributors sell below the expected price
A common scenario occurs when some distributors sell at very low prices, generating complaints from others who cannot compete under those conditions. This may lead to threats of defection and internal conflict.
Actions such as assigning exclusive territories or holding informational meetings rarely solve the problem. In these cases, we are dealing with channel conflict—specifically, conflict over minimum retail prices.
This type of conflict tends to arise in highly differentiated products, such as technology, where distributors operate with different service levels. For example, Apple works with multiple types of distributors: “authorized resellers,” who offer a limited product range, and “premium resellers,” who also provide consulting, financing, and technical service.
If all distributors received the same volume discounts, authorized resellers could sell cheaper than premium resellers, who carry higher costs. This would lead customers to buy in cheaper stores and then use the premium resellers’ after-sales services, threatening their viability.
When channel competition is positive
Not all price conflicts between channels are negative. In mass-consumer products, where distributors mainly provide logistics and communication with consumers is handled by the manufacturer, competition can be beneficial.
If a distributor faces heavy competition in its area, it may seek other regions with less presence, helping expand geographic coverage without additional effort from the manufacturer.
Solutions when conflict does affect sales
When channel conflicts do represent a real problem, the ideal approach is to apply functional discounts. That is, rewarding distributors not just for volume but for value-adding functions: display, consulting, after-sales service, and others.
This way, the manufacturer rewards the additional effort of certain distributors without hurting price competitiveness. Apple, for instance, provides functional discounts to premium resellers to compensate for their higher costs.
When distributors sell above the optimal price
Another critical situation arises when distributors charge excessively high prices, discouraging purchases and hurting total sales volume.
Imagine a department store that buys clothing at $35 and sells it at $50, with a direct margin of 20%. If it decides to raise the price by 5%, the manager assesses that the increase remains profitable as long as sales do not fall by more than 20%.
If sales drop only 10%, the store makes more money. But for the manufacturer, who depends on volume, this reduction means a loss of direct contribution. As a whole, the manufacturer–distributor chain loses value. In this case, $2,500 of monthly joint contribution is destroyed.
For a price increase to be viable without value destruction, sales would need to fall by less than 9%.
Strategies to avoid excessive prices
There are three alternatives to address overly high prices at retail points:
Encourage competition among distributors: This makes raising prices unprofitable because they will lose sales to others.
Communicate the suggested price on the packaging: This tactic applies only to some mass-consumer products, and its effectiveness is limited.
Open branded retail stores: The goal is not to replace distributors but to create competitive pressure to maintain reasonable prices.