Devinator

During my tenure at Aerohive, I’ve learned alot about how pricing structures work, from how “COGS compares to List” to how “one-tier in Market-A” compares to “two-tier in Market-B.”  It’s a complicated, ever-changing mess to be sure.  The part that borders on stupidness is what I would like to discuss in this blog: discounting.

I would like to offer some context to my ranting before proceeding, so please bear with me.  First, every smart business person (did you catch that?…that was PC) knows that holding onto your margin is important.  We’re all in the business to make a profit, and if we don’t, then we’re not in business very long.  Some companies take this to the extreme, cheating customers at every turn with every kind of confusing strategy.  Some companies believe in an “honest day’s work for an honest day’s pay.”  Customers buy from both kinds of companies, obviously.

Any discussion on discounting has to start at the beginning, and it all starts with COGS (cost of goods sold).  List price (called “List”) is basically a multiple of COGS based on the philosophy and experience of the person(s) within a company who sets the price and what the market will bear (against the competition who has similar products).  Discounting structures range broadly because there are different distribution models, such as the following:

1) Direct - this is where the manufacturer sells its good directly to the end-user.  It could be from a website, through a store-front, or directly through its inside or outside sales force.

2) One-tier - this is where the manufacturer uses distribution partners called Value-Added-Resellers (VARs).  VARs buy the manufacturer’s goods at a specific discount level based on their partnership level (e.g. silver, gold, platinum).  Their partnership level is determined by such things as (but not limited to) the number of trained/certified people within the VAR and the volume of goods they sell for the manufacturer.  The VAR can sell the goods at a price ranging from their own price from the manufacturer (called “pass-through”) up to List Price.  Discounting levels to the end-user depends on the situation (competition, location, end-user/VAR relationship, end-user budget, how much professional services are involved, etc.).  The “Value-Added” part is where the VAR may help the end-user with installation, configuration, troubleshooting, or other tasks related to using the goods they are selling.  The amount and price of professional services being purchased can affect the price of the goods being sold to the end-user because it’s often sold as a package deal.

3) Two-tier - this is where the manufacturer inserts a “middle man” called a Value-Added Distributed (VAD) into the distribution equation such that the manufacturer sells to a VAD (who takes a few points of profit for every item they distribute) who sell to their VARs who sell to the end-user.  VADs know their local markets, they have relationships with local VARs, and they often act as a sort of “bank”, often taking inventory from the manufacturer.  VARs have relationships with customers.  It’s simply impossible for a manufacturer to establish that many relationships because they aren’t large enough to have that many “feet-on-the-street”, so they rely on VADs in many places.

VADs and VARs are collectively known as a manufacturer’s “channel”, so you may hear terms like “channel marketing” or “channel sales manager” or “our channel rocks.”