BUS 530 Module 6 Pricing and Channel Strategy Example

Where $41 of Every Waterer Went: A Price Waterfall and Channel Strategy for a Livestock Equipment Maker

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MBA Program, Aspen University

BUS 530: Marketing Management

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Month Day, Year

Where $41 of Every Waterer Went: A Price Waterfall and Channel Strategy for a Livestock Equipment Maker

Prairie Spring Equipment, a composite manufacturer in western Kansas, makes heated livestock waterers, insulated tanks with thermostatically controlled heaters that keep water open for cattle and horses through winter. Its best-selling model lists at $189 and is sold through three channels: two regional farm supply chains, about 140 independent farm equipment dealers and online marketplaces. Sales volumes are healthy, but margins have fallen for three years, and dealers have begun complaining that customers see the waterer online for less, then ask them to match. This paper analyzes Prairie Spring's pricing and channels and recommends changes.

Pricing From Value

Nagle and Müller (2018) argue that prices should be based on the economic value a product delivers relative to the customer's next best alternative, and that companies should communicate that value rather than compete on cost-based prices. A rancher's next best alternative to an automatic heated waterer is an unheated tank broken open by hand or with a floating tank heater. Prairie Spring's field data suggest that its waterer saves about 40 hours of winter labor per site, prevents an average of two frozen tank repairs a season and uses about 30% less electricity than floating heaters. At conservative values for labor and repairs, the economic value over the waterer's eight-year life exceeds $1,200. The $189 list price captures a small share of that value, which suggests the problem is not the list price but what happens to it.

The Pocket Price Waterfall

Marn and Rosiello (1992) showed that the price a company actually keeps, the pocket price, is often far below the invoice price because of discounts and allowances given off the invoice, which managers rarely track in one place. They also found that, for the average company in a large sample, a 1% improvement in price, with no loss of volume, raised operating profit by about 11%, a larger gain than the same percentage improvement in sales volume or in variable or fixed costs produced. Prairie Spring's finance team traced every adjustment on sales of its best-selling model last year.

About $41, or 22% of list, disappears between list and pocket price. More important, the waterfall varied widely across accounts: some small dealers kept $155 of pocket price while the largest chain account, through freight, rebates and allowances, delivered only $139.

Channels and What They Do

Palmatier et al. (2020) explain that channel members are paid for the functions they perform, such as holding inventory, providing information and advice, financing purchases and offering service after the sale, and that channel design should match these functions to what end customers need. Conflict arises when channel members believe others are taking rewards without performing functions.

Dealers perform the most costly functions, advising on the right model, installing units and handling warranty repairs, but they increasingly lose sales to online sellers who perform none of these and advertise prices below what dealers can match. Some ranchers research with a dealer and then buy online. If dealers drop the line, Prairie Spring loses the channel that serves its largest customers and handles its warranty work.

Why Discounts Spread

Interviews with the sales team explained how the leakage grew. Freight absorption began as a one-time concession to win the second farm chain and became standard for every large order. Co-op allowances were paid whether or not the advertising ran. Early payment discounts were taken by customers who paid late, because no one checked. Each concession made sense to the salesperson who granted it, and none appeared on the invoice, so management never saw their combined effect until the waterfall put them in one table.

Testing the Price Itself

The value analysis also suggests a modest list price increase is possible. If Prairie Spring raised the list price of its best-selling model to $199 while holding discounts and allowances steady, and lost 3% of volume, its total pocket revenue would still rise by about 3.6%, because each retained unit would bring in $10 more. A test in two dealer territories before a national change would show how ranchers respond.

Recommendations

First, Prairie Spring should adopt a minimum advertised price policy for its waterers, under which it will not provide co-op funds or preferred terms to sellers who advertise below a set price, while sellers remain free to set their actual selling price. Because rules on resale pricing are complex, the policy should be reviewed by counsel before adoption. Second, it should replace the flat dealer discount with a performance discount tied to functions: dealers who stock display units, install and handle warranty claims would receive an additional 5% that online sellers would not. Third, it should cap freight absorption and require larger accounts to earn rebates through measurable volume growth, narrowing the waterfall's variation. Fourth, it should manage the waterfall monthly, with a report by account showing pocket price.

Measuring Results

Prairie Spring will track average pocket price, pocket price variation across accounts, the number of active dealers and warranty claim handling time. A target of raising the average pocket price by $6 within a year would, by Marn and Rosiello's logic, have a substantial effect on operating profit.

Conclusion

Prairie Spring's list price was not the problem; leakage between list and pocket price was, along with channels that rewarded sellers who performed few functions at the expense of those who performed many. Value-based pricing shows there is room to hold price, the waterfall shows where money leaks, and channel rules tied to functions protect the dealers that serve the company's most valuable customers.

References

Marn, M. V., & Rosiello, R. L. (1992). Managing price, gaining profit. Harvard Business Review, 70(5), 84-94.

Nagle, T. T., & Müller, G. (2018). The strategy and tactics of pricing: A guide to growing more profitably (6th ed.). Routledge.

Palmatier, R. W., Sivadas, E., Stern, L. W., & El-Ansary, A. I. (2020). Marketing channel strategy: An omni-channel approach (9th ed.). Routledge.