From Static to Dynamic: The Evolution of Pricing Science in Distribution

speaker-0: Pricing has always been one of the most powerful and underutilized levers in distribution. But over the past five years or so, that's changed dramatically. In this episode of the MDM Amplify podcast, I'm joined by Jim Vaughn, Global Head of Pricing Advisory at Zilliant, to unpack how pricing science has evolved in a post-2020 world shaped by inflation, tariffs, and near-constant supply chain disruption. We explore why pricing has moved to the center of business strategy, how advances in AI and data are accelerating decision-making, and where technology still falls short, especially when it comes to human judgment and long-term strategy.

Jim also shares practical insights on topics distributors grapple with every day, from managing discounting and avoiding margin leakage, to building smarter segmentation models and simplifying pricing execution through shared price lists. The big takeaway, even in an era of AI driven pricing, success still comes down to understanding customer value and pricing accordingly. Enjoy. Jim, welcome to the MDM Amplified Podcast.

speaker-1: Thank you very much for having me. speaker-0: I always like to start these interviews with an introduction to our guests and their company. So Jim, do you mind sharing a little bit about your role and background and then who Zillion is and its role in the industry? speaker-1: Sure, happy to chat about that.

I maybe the way to start this is I am yet to meet a person who said, when I grow up, I want to be in pricing. We all kind of evolve into what we do. in 1991, I stumbled into pricing. I had a graduate degree in something called operations research.

I went into telecom pricing. I was a pricing scientist for much of my career. ⁓ I've worked in a variety of different industries, everything from telecom to airlines, hotels, cruise lines, apartment rentals. And for the last 19 years, I've been at Zilliant working on specifically B2B pricing for manufacturers and distributors.

I run the pricing advisory function at Zilliant. So for all of our customers, when we deliver software, we don't just deliver software, we deliver expertise. ⁓ And maybe that's a good switch over to what is Zillian? It's a company that's been around for about 28 years.

So I've been here most of that time. ⁓ And we've literally helped hundreds and hundreds and hundreds of customers ⁓ with different kinds of pricing problems. But we are a pricing software company that is also a pricing advisory company. speaker-0: Very good.

Yeah, I think that distinction is very important because there's, mean, there's so many service providers and software providers for this industry, but it's, kind of a disservice to just call them a service provider or a software vendor when just as you mentioned, at least resilient, it's much more than that. All right. Well, to start off with and dive in, pricing obviously has always been a critical margin lever for distributors to pull, but It has taken on such a prominent role ever since really the COVID recovery, as we've been in a state of near constant state of heightened inflation since then, that continues to be amplified by tariffs.

So as someone who has made a career out of pricing science and strategy, what have these past, let's call it five to six years really been like for you and the Zillion team in a time when your services and expertise are in higher demand than ever? speaker-1: You are right. They are in higher demand and to a large extent, the way I think about it is last year at the end of the year, they always come out with the word of the year ⁓ phrase and the concept of dynamic pricing made the top five list of words for the year.

Now, it wasn't the final word, the most widely used word. But that to me says it really has arrived as a very central business focus, whether you're talking about B2C or B2B. Everybody is talking about pricing, and it's really an exciting place to be right now. speaker-0: Well, back in 20 or back in 2015, you published a book called Stop Racing in a Blindfold, Big Data and Pricing Science Drive Bigger Profits.

And in 2024, you published an updated version to address the changes in the business landscape and technology since then. So I have to ask since the new tariff landscape really arrived in full a year ago at this time, does it feel like your book already warrants another update? No, you can take that seriously or not. speaker-1: No, it's a very fair question.

And I think the answer is yes and no, both. Could I write another chapter on the very specific issues around market turbulence as a result of ⁓ tariffs or trade policy or pick the label you want to put on it? But I'll even step back and say, well, before tariffs were an issue, and I wrote a recent white paper about this, and it has to do with you know, supply chain shocks, which tariffs are just a version of a supply chain shock. It could be that, you know, I go back to, you know, the oil industry, oil producers back during the, you know, COVID shutdown.

If you remember, people were actually paying people to take barrels of oil off their hands. They were selling for negative prices. So this long predate those kinds of situations. And so the thing I think that's really important is for distributors and or manufacturers, anybody that's in a B2B business, what's fun about pricing right now is that every day is a new adventure.

Every day is there's a slightly different version of the problem to think about. And as I said earlier, worked in probably, I think I said earlier, I've worked probably in 30 plus different industries. depending on how you count industries. But the real challenge in pricing and why nobody grows up to say they really want to be a pricer is that you're trying to figure out how is one question a lot like another question, a lot like another question.

⁓ And there are people who use different words to mean the same thing and different words to mean very different things. And you know, the same word to mean very different things. And so The I think the fun part about pricing right now and why I could write a whole other chapter about this is just how do you decide which set of solutions best fit any individual company, much less industry, but any individual company, because everybody does business slightly differently, but the problems are really not all that different.

And I think that's why you could I could write an entire book on just that one topic. But maybe I'll get around to that in a couple of years. Who knows? speaker-0: I have to imagine that keeps your job and your role just endlessly interesting while also kind of chaotic at the same time, but yeah, there's always ⁓ Expertise that you can share and that that as we mentioned is in high demand here So ⁓ what a time to be alive here in pricing Well more broadly on that front pricing science has certainly changed a lot over the last decade and besides tariffs and general almost non-stop supply chain disruption Technology is the biggest factor involved here.

Even in 2015, distributors were making great use of technology and data analytics to inform their pricing decisions. But in this new world of AI, there is so much more information at the fingertips of sales and finance teams. So Jim, when you look at the current state of technology when it comes to pricing, how much different is it today than say four to five years ago? speaker-1: I'd say that probably the biggest difference is speed.

It's agility, the need for agility in the market and the need to make well-informed decisions very, very quickly. And I go back to when I started in pricing in the early 1990s. I ⁓ remember a Gartner press release probably in the mid 1990s. I'd probably been doing pricing for three, four, five years at that point.

I was still a newbie. ⁓ And it was titled something to the effect pricing. It's the next big thing. Well, it's been a long time coming.

But the fact that dynamic pricing last year almost made the final five in terms of a cut for words of the year. I think in the last eight to 10 years, we've seen a very impressive advance in the ability to harness technology. AI is one of those tools that we have used to leverage the high-powered computing capability to respond to the dynamics that were already happening in the market on a very regular basis. Sure, the market has sped up, but the market has actually always been faster than the pricing capability to keep up with it.

⁓ And I think we have dramatically closed that gap. And whether you're talking about B to C pricing, direct to the consumer, or whether you're talking business to business, you need to be able to understand a problem quickly. And the new AI tools help you do a lot of the research that would literally used to take hours or days or weeks to pull all the data together and try to understand what's going on. Because it's really hard to manage what you can't see.

and most B2B businesses, distributors, a lot of the time have one of the biggest problems is you're talking to the supplier and you're talking to the consumer and you're stuck in this space between them. You have access to information on both ends, but how do you integrate it? Right? And so AI can provide you the ability to mine that data and understand what's going on and I think the key takeaway though is there's no magic bullet here, right?

The AI can own, one thing AI can't do as we sit here today, five years from now, I'm not gonna say, but one thing AI can't do today is it can't imagine a future. It can pattern match and tell you given all of the historical information available, to that solution, here are some ideas for you to consider. And it can rank them in a particular order. It's basically a statistical mapping exercise in language processing.

But it can't imagine doing something different than what's in the data. ⁓ And I think that that's a key thing that a lot of people step over and say, it's going to solve all my problems. No. But what it can do is make you much more efficient at getting to the decision making stage and making the best decision you can with by using all of the facts that are available.

And what do you want to do next? Because what you want to do next likely isn't in the historical data. Right. And so that's where AI leads you and the human has to take the next step and say, And given all of that, we want to do X.

We want to buy market share. No, we don't want to buy market share. We want to improve the profitability on these three things, but buy market share on everything else. So those are the kinds of things that are business decisions.

They're not model decisions, if you will. speaker-0: Yeah, and with AI, like with everything, it's like you said, it's the research component that the speed there is all the difference. It's mining all those different inputs that would take a lot of manual hours to analyze and it's doing that analysis. But the actual end decision making that's still, yeah, that's that human factor that seems like it's at least in the near term, it's not going to go anywhere anytime soon.

speaker-1: I'm one of the thought that occurred to me and that is really, know, using AI, AI is a very good, what's the right word for it? It's a good forecasting tool. It's a good way to say, this is exactly what's going on in the market right now, right now, right now. And I'm repeating right now for a reason because If you wanted to follow the stock market and you wanted to know what the price is going to be a millisecond from now, you know, a lot of the AI tools could allow you to follow that very, very closely.

But B2B doesn't work, generally speaking, in that space, unless you've got a B2B retail site that, you you're trying to follow Amazon selling of a certain kind of, you know, third. And so you've got access to that information. B2B works differently. It works on an expectation that the distributor has to provide their end customers B2B, their end business.

They need predictability in pricing in order for them to run their business. Distributors need predictability from their suppliers in order to run their business. And so you're not trying typically to follow the market down to the millisecond or the minute or the hour or even the day in most cases. You are setting pricing that needs to have some validity for some duration for a business context.

And that I think is the real difference about trying to take the business to in customer idea of what's going on on a website and tracking that. versus setting pricing that needs to have some weekly, monthly, quarterly kind of duration so that other people in that delivery chain can actually run a profitable business. Both companies have to have a profitable business. So that I think is a key piece of where AI doesn't leap to the front with some new capability is because of the duration of You don't need a thousand pound sledgehammer to follow something.

What you need is effective pricing and there's more to value than just the price. speaker-0: That's excellent. Well, let's talk discounting and big promotional discounts are always another lever for distributors to use, but they certainly pose a heavy lift for sales teams during those kind of major discount promos. Breaking even on revenue always means lower gross margin.

So what are some best practices on that promotional discount front on trying to achieve as close as you can to a win-win for both your sales team which might have margin-based commission and for the customer. speaker-1: Yeah, think that's a fun topic too. I I've dealt with this for a number of years and you know, I don't think I'm spilling any secrets when I say that margin leakage typically comes from a variety of places, but the usual suspects uncontrolled discounting that often is due to a lack of knowing what the market will actually bear because a sales rep only sells to their customers in their markets.

They don't know what the other sale reps in the same market are selling at, or they might, but they don't have a real good sense for it. And a lot of times people think about it and they say, you know, we should be able to have some sort of, you know, pure pricing, but they don't really know how to manage it. And so what they end up doing is having a lot of one-off promotional pricing. to try to stimulate demand.

And it's always an over and pullback, discount a lot and then pullback. And it's almost like put on the brake, put on the gas kind of thing. And that doesn't lead to helping sales reps sell value. And I think that if the sales rep understands what the customer really wants, then you don't need 15, 20 % promotional discounts.

What you need to do is be selling on the value of the product to a peer group of customers. They probably are all, you know, they're similar in all other sorts of ways. They probably are buying your specific product for a very similar purpose. And you should be able to determine what are they willing to pay?

What is, you know, what is their price sensitivity? So I think that that's, that's a big piece of it. One of the things that I also think a lot of people gloss over is the fact that they think, ⁓ well, we'll make it up on volume. I don't know how many times I've heard that.

But I can tell you, and maybe we do another one of these where we can chat about it sometime and in a little bit more detail. But the idea that you're going to make it up in volume implies you're going to make it up in terms of profit dollars, profitability. Rarely does that ever happen. In my 35 years of doing this across 30 plus different industries, it's a rarity.

using promotional pricing to drive behavior generally just pulls demand forward from the next month into the current month, and then you have a gap to fill later on, and then you have to have another promotional discount to fill that one. and another promotional discount to fill that one. And so you never make it up on volume. speaker-0: Yeah, it's a vicious cycle there.

We touched on AI and covered some good ground there, but I want to get a little more specific with it on a different angle. One way that distributors can apply AI in pricing is to better define peer groups as part of their customer segmentation and really leveraging peer group pricing and the business of the street at best possible margins. So what is involved with that practice as far as the segmentation front and what benefits might distributors see from it there? speaker-1: Well, you're spot on in terms of this peer group concept, right?

And how that relates to effective segmentation. What I've done for my entire 35 years of this has been trying to get at not what is the pricing for a specific customer for a specific product and thinking that segmentation is a customer attribute. It's not. It's a customer's product.

order and geographical. it's multi-dimensional kind of problem. So when you think about setting up a peer group, your peer group needs to have those four basic elements in it so that you can say these customers all should behave the same in one way. And that one way is their willingness to pay.

And the best way to measure in a B2B environment, that willingness to pay, is to mine your historical data and say, looking at these customers, they all pay about the same thing, regardless of where they are. But we know they have attributes, like they're all medium sized customers, or they're all small customers, or they're all rush orders, or they were all in a particular market, or they're all of a particular industry and customer type. Those are the attributes that define effective segmentation.

Because what you're really trying to do is say, these customers under certain circumstances, each little cluster, they will pay higher or lower. And you want to know both. You don't want to... gloss over the customers that are more price sensitive and offer them a high price when you know they're not going to buy at that higher price.

You can't make all the customers pay the same. What you can do is make sure that you dial your pricing in through segmentation so that you present customers in each little demand stream or peer group or price segment. To me, they're all kind of about the same word and say, These customers should be buying in this normal range and another group might be buying in a different normal range. Well, as I've told all of my customers for years and years and years, I am never going to tell you to walk away from low price business.

I'm going to tell you to know to knowingly take low price business only when it makes good business sense. how do you identify what's a low price? How do you identify what's an overly high price? If you offer somebody a very high price, you're never going to close the deal because they're going to say, you priced yourself out of the opportunity.

So that's what segmentation gives you. And that's how we go about it, which is really this data science driven, what are like opportunities in those four dimensions? Customer, product, order, circumstances, and geography. speaker-0: It's that segmentation that I think is the most fascinating part of the entire pricing discussion.

Just given that you can have, you know, three or four customers that are relatively the same size customer. might each spend $80 million with you annually, but the way that that $80 million is spent can be very different from one to the next. So yeah, that's where I think this gets much more granular into really what goes into each equation for each customer. So that's great.

speaker-1: Let me throw one thing out there for you real quick. The idea of you have multiple customers, I think is a really good talking point. Maybe everybody could take this home with them. You could have four customers, they're all $80 million customers, and they all buy largely the same kinds of products.

But one of them, 40 % of their wallet shares is in this one product or this one product line. And the other ones, none of them have that much of their demand in that one product or that one product line. They all look the same on the surface, but in effective segmentation, you want to look at, I'll call it, wallet share. You know, is this the thing that they buy over and over and over and over again, like hotcakes?

It represents such a large fraction of their business with you that if you touch that product's price in any meaningful way, they're going to, that one customer is going to respond much, much differently than the other three. even though at a surface level they look very similar. speaker-0: Well, now more than ever, sales teams might really feel like they're overwhelmed with managing their customer price lists and agreements. AI and automation can be helpful here as we touched on, but more generally, what are some best practices for using that kind of tier level or I think it's called matrix-based pricing with limited customer product exceptions to try and simplify things a little bit?

speaker-1: Yeah, I think that an opening question in every business should be something about do all of our customers need to have their own unique price list? And the answer is probably almost assuredly no. There are some customers where you spend a lot of time and effort managing a price list or a contract or, you know, 500 products, thousand products, whatever the number is. And That's an administrative burden.

It's, you know, that prevents you from touching the prices as quickly as perhaps you would like. And there's no business reason why that customer needs predictability on 500 products. And so if you have shared pricing and you've done effective price segmentation, the way we just talked about it, and you say, well, these customers all respond about the same and for the vast customers, $80 million customers, and you say, they all behave the same except for, this one, it's such a large wallet share.

We want to give that customer a better price, but for everything else that that customer buys, he should be buying off the shared price list because that shared price list is already dialed into. They're in the same industry. They're about the same size. They're in the same geography.

They've got the same competitive pressures. Whatever the other attributes are of segmentation. then we know what the normal range of business is for each of the products on that price list and you set your pricing accordingly. And then you only have exceptions, a small number of exceptions for each customer where you have to manage that.

You don't have to manage your full portfolio of products for every single customer. So this idea of shared pricing is a really a question of do they deserve the attention and the cost from your business to give them that guaranteed custom dialed in price that you have to manage? the answer is largely, most of them do not manage the ones that truly matter. Your top 10 customers?

Sure, you probably want to manage those very, very tightly. But the long tail of customers, they probably none of them deserve their own customer price list. And in between, there's going to be some mix. But that's how you save time and effort and increase agility in the market.

Back to our opening comment of where are we. Agility is what we're after right now is how do I respond quickly? speaker-0: Yeah, that's great. Many distributors, whether they're in durable or non durable goods, tend to have seasonal pricing or some kind of promotional pricing at particular times annually.

And at the same time, they're also trying to react to global events. There's plenty of geopolitical matters and certainly supply chain disruptions to keep them busy on that front. So with balancing both sides of that, what are some tips that for distributors to plan for? regular everyday pricing that moves with expected market fluctuations when you factor in high, low shoulder seasons and holiday and seasonal periods like that.

speaker-1: Yeah, this is even goes back to a segmentation question at this point. If you're in and I think there's an opening question here for everybody to think about. First off, are you in a business that has seasonal behavior, demand swings? And then there are questions.

Even if you have a seasonal demand swing, do you want to flex your price? And I do know businesses that don't. They say Our value to our customer is predictable pricing, regardless of the season. Now, that's the exception.

But, and I've worked with a very large paint manufacturer who said, we do not flex our pricing based on season of the year. And we all know you're aren't painting houses in Minnesota in January. Right. It just not going to happen.

But their value to their customers was we don't flex our pricing based on season. Other businesses, other distributors will say, yes, we do want to flex our price. And if you want to flex your price and you know it's a recurring thing every year, then if you need to go back and say, well, let's think about our segmentation. What should should we have segmentation for high season?

And so you base that segmentation for high season based on what happened in high season. and what happens in low season and what happens in the shoulder seasons of the year. And so that could be, again, painting. It could be, you know, heating, ventilation, air conditioning kinds of things.

Who's buying air conditioners in January? ⁓ Not too many people, unless you're maybe in, you know, South Texas. ⁓ Likewise, you could say who's putting, you know, pave stones out? Well, they don't put pave stones out in Phoenix, Arizona in the summer.

That's their low season. or things like that. So understanding that demand shift by season or holiday period or whatever it is, that's a key piece to your designing a matrix, a tier or a schedule that is informed by seasonality, where it exists in your business and where you believe your customers will accept a flex in your pricing or you believe your value is such that you don't want to do that, then you don't need seasonal pricing. If you do need seasonal pricing, plan for it in advance.

Don't rely on those promotions that we talked about earlier that are never ending. ⁓ I pulled demand forward. ⁓ I pulled demand forward. Well, now I have to pull demand forward again and I never make it up on volume.

Be deliberate about having a way to do the full analysis and build the right matrix, the right tier, the right schedule for each seasonal period where you want to flex your price. speaker-0: Awesome. Well, Jim, that's all we had planned out here. think we covered a lot of great ground that our audience is going to get a lot of excellent takeaways here.

And this is just an example of the kind of deep expertise that Zillian can offer that, like you mentioned before. But before we sign off, do you have any final thoughts or parting words of wisdom for our audience on the pricing front? speaker-1: Yeah, I think maybe the parting thought here is to make sure that you understand the value, do good job as you can to understand the value of the products that you sell to different opportunities. I didn't say customers, so you've got to think about it in multiple dimensions.

Customer, product, order circumstance, and geography. And geography could be... an MSA, could be a zip code, could be a variety of different things, contiguous dates, non-contiguous dates, things that price similar. But something like that.

Because if you understand the value of your products to those peer groups of customers, then you won't go in too hot and fail to make the deal. And you won't go in too low and leave money on the table. Because they both leave money. If you don't make the sale, that leaves money on the table.

If you do make the sale but you went in too low, you go, darn, I should have asked for more. Well, you can never negotiate up. So I think that's the value, sell on value and make sure your pricing supports that value. speaker-0: It seems no matter what's happening on the technology front, on the disruption front, it still comes down to value after all these years.

that's a great point to end it on. Well, Jim, that's all I have. So thanks once again for joining the MDM Amplified podcast. speaker-1: Thanks again.

Appreciate being able to chat with you today. I look forward to maybe doing another one of these. speaker-0: Thanks for listening to this episode of the MDM Amplify podcast, which is all about elevating voices and solutions from service providers that serve distributors. Like what you just heard, you can find our entire podcast library at mdm.

com slash podcasts or wherever you listen to podcasts.