Pricing for a new market: when to charge less and when not

A distributor in the new town tells you that local makers sell cheaper and you should come in "at least ten per cent under". It sounds like market knowledge, and it is also what a distributor says when the distributor wants more margin. Whether to charge less in a new market depends on what the lower price buys, for how long, and whether your margin survives the extra cost of serving buyers far from home. This post uses three prices, floor, list and entry, to make the decision. The wider question of haggling is in how to hold your price when a buyer asks for a discount.

Three prices on one line

Your floor is the lowest price at which a sale still pays after the full cost of serving that buyer. Not your factory cost: freight, a second visit, slower payment, the damaged piece in transit. Your list is what you charge at home. Your entry price is a temporary one, below list and above floor, offered for a stated purpose.

Work out the floor first, per product. In a new market it is usually higher than at home. Freight eats the small items, the visit costs a day, and a dealer far away takes longer to pay. An entry price below the floor is not a discount. It is a loss you have chosen not to measure. Write the floor beside each product on the price list your team sees, so nobody has to guess it on a call.

What is an entry price buying?

Complete this sentence before quoting: "I give up this much margin to get..." and the ending must be something you can name. "Market share" does not count. "Two dealers who stock the full range, which I can show to the next dealer" does.

Three things are worth buying with a lower price. One is a reference customer you may name. Another is a stockist who has promised shelf space. The third is information: a short run that shows what local buyers ask for. Attention is not worth buying, since it fades when the price returns. Nor is goodwill with no named customer, or volume you cannot serve.

Imagine: a lock maker from Dindigul meets Bengaluru dealers

Imagine, as an invented example, a maker of padlocks and door fittings in Dindigul, selling to hardware shops across Tamil Nadu. A Bengaluru distributor says the trade there expects ten per cent under list. Every figure here is illustrative.

The maker draws three prices for each product. The small brass padlock has a wide margin at list, so its floor is far below list. The heavy door chain has a thin margin and freight on weight, so its floor is close to list. Say the chain lists at ₹440 and its floor is ₹420. A flat ten per cent cut takes it to ₹396, a loss of ₹24 on every piece.

The entry offer was narrow. The padlock went at eight per cent under list, for the first order from each of the first four dealers, if they stocked the full range. The door chain stayed at list. The offer ended after the fourth dealer. In return the maker asked the distributor for a display and an agreed payment date.

The first draft was a flat cut across the range. It would have shipped the first container at a loss on the chains, and every dealer would have expected the same cut on the second. Setting the offer by product and by number of dealers worked only in part: two of the four dealers took the full range, and the other two bought a few padlocks at list and no more.

Who benefits from the cut

This is the question distributors hope you skip.

A lower price only helps you if it reaches the person you want to influence. Ask whether the dealer will pass it on or simply keep it. If the dealer keeps it, you have paid the dealer, not the market, and you should ask for something in return: a display, a larger first order, an advance. Trade, do not give.

Other ways in that leave the list alone

There may be a way to give value without cutting. A smaller first pack lowers the buyer's risk. A free fitting visit for the first customers costs a day, not margin. A bundle can include a part the competitor charges for. A longer credit period for a dealer you trust is a real option, but it is a loan from you and costs working capital.

Each has a limit. Count the cost before you offer it, as you would a price cut.

When the list price is the right entry price

Hold your list when buyers choose on quality they can inspect. Hold it when your capacity is small and extra volume would starve existing customers. Hold it where trust matters more than price. A visibly low price can read as a warning in such markets. Hold it, too, if you are the premium choice at home: a cheap entry in the new town will follow you back through any buyer who compares notes.

Not sure which describes you? Offer list price to ten buyers in the new town and count how many ask for less. If few do, you did not need to cut.

Write the sentence, then the end date

First, complete "I give up this much margin to get..." for your new market. Show it to whoever keeps your accounts, since they will ask the awkward question about freight. If it survives, put an end date in the offer, so the second order has a visible return to list. How you present the entry price is part of your marketing for the new town, and pricing and packaging strategy is the service for the numbers. For a second opinion on yours, tell us what you need.