The Distribution of Price

Distribution is one of the hardest places to find answers when building a business. How do I sell this thing? To whom? Where? Price is usually considered next to distribution in a business strategy, but not as a function of it. In an increasingly digital world, it is important to consider how price is distributed.

Distribution here means carrying the price from the layers of interfacing, agreement, all the way to settlement. Most spend their precious time looking for the perfect price to display on the window. They look at distribution as data points relative to other like businesses or opportunity to analyze instead. Knowing this information remains a pillar of any strategy, but it is not the end of the deal. What matters is what hits the ledger. A lot happens before then.

Some businesses dislike taxes and fees to the extent they operate independently and of their own charisma as cash enterprises. Side jobs taken by retired professionals to the quirky diner may conduct themselves this way much to the chagrin of ubiquitous card holders. Having a million dollars in an app on your phone won’t replace a blown tire for the $20 in your pocket. If you had more, the settlement is immediate. These operators likely don’t care about scale or franchising or whatever else. They save 2% on a credit card transaction. You paid $4.99 to take $50 out of the atm to go there. You have $6.87 left in your pocket you’ll not use again anytime soon. What was the price of your meal?

There are far fewer of these types in existence today for the obvious friction it induces. The price is clear. Agreement is there. Yet, settlement is binary. You have the cash on hand or you don’t. Most businesses today can transact clearly with a variety of payment method, making the friction to transact evaporate. Larger debts accrue in wake of low transaction costs for the consumer. The trade-offs for the added middle-layer is a bigger ticket than would be otherwise, but settlement is deferred in chunks and at a net number less fees per transaction. The accounting needed is perfunctory and invisible to the consumer. Only taxes and other fees need be considered. Hopefully just the taxes.

When these middle layers are stuffed with regulation, agents, and market competition the price displayed can be miles apart from the settlement price. When buying a car or house there is a sticker price, fees and commissions, concessions, and financing rates that all coalesce to a final bill. That bill is then spread across length of term and pay different for every buyer no matter if they both started at the same origination price.

As of this past weekend, house buyers can now haggle with agents and sellers can concede commissions in house sales easier. If one buyer covers the commission at a lower price point while a secondary offer comes in higher but wants coverage of the buyer’s commission, which price should the seller take? At what prices are buyers better able to cover or not?

These opaque means of presenting, garnering agreement, to how things are settled catch ire of consumers the most. A car salesman asks what monthly payment you can make in order to keep the full price opaque. The initial display is a base rate or anchor. It then casts in fees, additions, warranties and service plans in order to conflate a total financing charge. Then comes the interest.

If you don’t like the payment, add 6 more months. Some operations decrease friction to interact with the price of a vehicle with $0 down or accepting low credit scores but then add 14% to the loan and receive 2x the sticker price if paid in full. Higher end dealers offer 0% interest. $50k buys two very different vehicles. The price paid is the same. The price on the stickers were not.

The mind hates traveling to lump sums, so any further calculation or surprise often leads to confused angst. Outside food prices increasing in level, expectations have made it so food can be available in a multitude of pick up and delivery methods. The cornucopia of options have increased friction back into price actions. The $5 meal deal is great unless you live 3.6 miles away and don’t want to drive. Then it’s easily $20. The local sub shop down the street has a $14 grinder that’s pretty good but they installed a new card reading system that prompts 18% tip minimum with no easy way to change it. $2 tip isn’t even 15% and turns it into a $16+ dollar sandwich you pick up yourself. Ashamed for spending that much and not even getting fries.

Make your own sandwich, coward, they proclaim. For $2.49 Bread loaf, $1.99 cheese slices and ½ lb of deli meat $5.49 the most basic of sandwich can be formed closer to $10 total up front. You get to spend an hour traveling, bagging your own groceries, then making it at home. The price per sandwich only goes down if you make more.

This isn’t meant to lament on first world problems. Each example highlights how we interact, shape, accept, and settle prices in a variety of ways that makes the idea of price more multidimensional than most appreciate.

The lesson for any restlessly applying for perfect accuracy in pricing is to evaluate the life of the transaction versus solely what is written on the tag. One person in the bid put rates 10% lower than another, but they get it back in accessorial schedules. The algorithm is nailing the right range religiously but you can’t break out fuel or use a different dynamic fuel approximation. These issues have nothing to do with your price but everything to do with your problems. It was the wrong kind of distribution.