Pricing pains

Devising an effective pricing policy for products in the Middle East and Africa (MEA) is a tough task. Differential pricing can be used to promote in-country channel development, but unless monitored closely it also creates the potential for grey market product flow.

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By  Stuart Wilson Published  March 16, 2005

Devising an effective pricing policy for products in the Middle East and Africa (MEA) is a tough task. Differential pricing can be used to promote in-country channel development, but unless monitored closely it also creates the potential for grey market product flow.

Many IT vendors are currently trying to drive regional distribution efficiency into their channel model while simultaneously asking their tier one partners to reach out to second tier resellers in-country. These two independent goals do not always sit comfortably side-by-side and this is where the pricing model often comes into play.

The theory goes that by reducing the channel sell-in price in specific markets outside Dubai, in-country distributors will be able to repel the efforts of unauthorised sub-distributors and re-exporters buying in bulk out of Jebel Ali and moving product between countries.

With no price advantage, the re-exporter and sub-distributor in-country knows that the kit it purchases is competitive on price and can invest resources in reaching out to the local channel by building up its local operation in terms of sales, service, stocking points and product availability.

That’s the theory anyway. In practice, differential pricing and trying to operate an in-country distribution network alongside a few distributors with regional rights can turn into an administrative nightmare.

Product flow remains incredibly chaotic and unstructured across the MEA region and some vendors’ impression of their market share in specific countries varies wildly from the reality on the ground.

Differential pricing, varying rebates on a country-by-country basis, offering rewards for hitting specific targets and trying to allocate distributors specific territories opens the door to channel abuse.

A vendor can offer distributors operating in Saudi Arabia selling to genuine second-tier resellers slightly cheaper prices than those given to UAE distributors operating out of Jebel Ali. It helps the Saudi distributor really invest on the ground in building up the vendor’s channel and protects their position in the market as an authorised distributor.

The problem with this model is that it only really works if a vendor is prepared to go down the road of appointing separate in-country distributors in every market it serves. That doesn’t happen with too many vendors and as soon as they appoint a regional distributor the fun and games can begin.

For example, if you’re a distributor sitting in Jebel Ali with distribution rights for the whole MEA region it makes sense to claim that you’re selling the product into the country that offers you the best price and maximum in terms of financial incentives from the vendors — even if the product is actually going elsewhere.

It is really not that complex to do. Most major distributors have ERP systems that provide complete visibility of the stock situation, where the stock is being held and where the reseller it is sold to is based. Many vendors request that distribution partners feed this data back to them and this is where the opportunity to alter the details emerges.

I can fully understand why distributors bend the rules as much as possible to push the gross margin just that little but higher. Distribution is a tough business characterised by a fiercely competitive landscape in the Middle East and any opportunity to boost profits needs to be grasped with both hands. If it makes financial sense to say you sold a product in a certain country (and you’re pretty confident that no one will be able to check up) then why not go for it.

And if one distributor distorts the information it feeds to a vendor in order to gain an extra advantage, then everyone else is forced to follow suit. If they don’t they cannot be competitive in terms of price because they receive less financial support from the vendor.

Too many vendors accept the data they receive from distributors concerning the quantities they are selling into various individual markets at face value. There is no check-up, no on-the-ground verification and as far as they are concerned no problem. After all, as long as the targets are hit who cares?

It is quite amazing to talk to vendors, distributors and resellers about the market share that certain brands enjoy in individual markets. Even if you ask vendors for their most conservative estimates the results are startling.

In one product category, adding together the most conservative percentage market share figures for a specific emerging country from five major vendors produced a figure of 200%.

Five vendors claiming that between them they hold 200% market share? That is pretty laughable, but it is also indicative of the lack of visibility and transparency that still exists in this region.

Talk to the distributors and you move slightly nearer to the true picture. Talk to the actual in-country resellers and the precise situation quickly materialises. There are quite a few vendors that need to do this exercise in order to truly understand their position in the MEA market.

For vendors that are serious about building a long-term channel strategy that values the role of in-country distributors, now is the time to step up the support and protection these partners receive. It is the only way forward if they are serious about developing a long-term channel strategy and building a brand that is both known and respected by customers across the region.

There will always be ways to play the pricing system and it is an area where many Middle East channel players excel. And who can blame them? Until more vendors wake up to the reality on the ground and deploy enough resources in the region to manage, regulate and accurately observe product flow, there is no real reason to stop the channel fun and games in MEA.

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