The term "agency pricing" refers to a business practice in which the price charged by a reseller for a product is set by the supplier, with the reseller legally designated as an agent of the supplier rather than an independent broker between buyer and seller.
We'll go through some of the most compelling features of agency pricing in this post, as well as which type of agency pricing is an example:
What is Agency Pricing?
Agency pricing is a type of pricing where the supplier sets the price and the reseller acts as an agent of the supplier.
This means that the reseller is not in control of setting prices, which can often lead to tension between the two parties.
In some situations, the supplier may have a complete lack of involvement in pricing which can lead to poor profits for suppliers.
This is a common issue with online retailers who use agency pricing and do not get involved until after an order has been placed.
Benefits of Agency Pricing:
Despite the potential drawbacks of agency pricing, there are a number of benefits that come with this type of system.
The main benefit is that it creates a closer relationship between the supplier and reseller which can lead to better communications and more trust.
This can be beneficial for both parties as the supplier will have a better understanding of what the reseller is selling and how to market products, while the reseller will have access to information about new products and upcoming trends.
Agency pricing also allows suppliers to maintain greater control over their prices which can be important in industries where margins are tight.
Overall, agency pricing can be a beneficial way for suppliers and resellers to work together and create a stronger relationship.
Drawbacks of Agency Pricing:
One of the main drawbacks to agency pricing is that it can lead to a lack of trust between supplier and reseller which reduces flexibility in negotiations.
When suppliers don't get involved with prices until after an order has been placed, they lose control over their margins which means less profit for them which might not be sustainable long term.
Agency pricing generally requires more paperwork than other types of business arrangements which makes it harder for small businesses or start-ups who may not have resources available to manage this type of system.
Some buyers, on the other hand, are used to dealing directly with suppliers because there is no middleman who might cause communication problems from time to time.
For example, on eBay, buyers place orders with the seller and the supplier is in charge of delivering items to them.
Examples of Agency Pricing:
1) In the airline industry, which is a high-volume low-margin business , suppliers typically don't get involved with pricing until after an order has been placed.
For example, if you wanted to fly from New York to London on American Airlines which uses agency pricing then it would be up to American Airlines and British Airways (the supplier) who set prices based on demand fluctuations at that time.
In this case, there might not be any interaction between supplier and reseller before your flight which means there can often be problems communicating new discounts or changes in prices for flights of different lengths.
This lack of communication combined with tight margins which airlines are forced into due to high competition can lead some travelers feeling frustrated when they find out their ticket costs more than they expected.
2) Another example of agency pricing can be found in the hotel industry which uses a two-tier system.
In this case, there is usually a direct relationship between the supplier and the consumer with no middleman involved.
Hotels that employ this strategy sign a contract with a major online travel agency such as Expedia or Travelocity, allowing them to sell rooms at a reduced rate.
This type of arrangement benefits both the supplier and reseller as it allows hotels to fill up their rooms during slow periods while giving online agents access to more inventory which they can then offer at a discount.
3) In the food and beverage industry which is a high-volume low-margin business , suppliers typically don't get involved until after an order has been placed.
For example, if you were to go to Starbucks which uses agency pricing then it would be up to them how much your coffee costs which they set according to demand fluctuations at that time.
In this case, there might not be any direct interaction between supplier and reseller before your purchase which means there can sometimes be problems communicating new discounts or changes in prices for items of different lengths.
Agency Pricing Models:
1) Hourly charging:
Hourly charging ,which is an agency pricing model, in which you're charged for the time spent on a project not the outcome.
For example, if you were purchasing a property and needed help finding the ideal site and negotiating with sellers, it'd be up to them how long they took, which means there would be no additional costs regardless of how long your purchase takes.
This type of business model can be beneficial for both the supplier and the buyer since
This type of system works best when suppliers are able to provide services at low cost which makes it easier for buyers who have limited budgets or don't want large expenses tacked onto their final bill.
However, hourly charging might cause problems because suppliers could start working inefficiently in order to increase total charges which would be a negative impact on customers.
In this case, despite working inefficiently and adding extra costs ,there would be little motivation for these suppliers to charge less because there are no penalties for taking more hours or performing poorly.
Hourly pricing models work best for simple tasks which don't require skilled workers and where it isn't possible to break down into stages that represent discrete units of labour such as building construction .
2) Based on project:
In this agency pricing model which is also called value-based or stage-gate system, customers pay for the outcome not the time spent on a project.
If you're buying a property and want assistance finding the ideal location, negotiating with sellers, and using an agency that employs based on project as its business model, it's up to them whether or not they make money.
This type of business model can be beneficial for both supplier and buyer since suppliers are motivated by closing deals which keeps prices low while buyers don't have to worry about paying more than what they should.
However, values vary between different people which could lead to disagreements about what the end goal should be which could lead to a breakdown in communication and delayed project timelines.
Based on project systems work best for long, complex projects with many milestones which need to be completed in order such as software development .
Customers may keep track of their spending in this method because they just pay once they reach particular milestones, which is convenient and ensures that everyone is aware of how much money has been committed for the entire project.
In this agency pricing model which is also known as retainers, customers pay for ongoing services before they begin which means there's no risk of not getting work done.
For example, if you were to use an online agent and opt-for a retainer agreement , it'd be up to them what the price is which would depend on factors such as how much inventory they have access to and demand fluctuations at that time.
Customers aren't required to constantly monitor or worry about prices which saves them from wasting money since they can expect rates based on their previous agreements with suppliers .
However, some buyers might find the idea of prepayment distasteful because most traditional businesses charge after providing goods or services which makes allowance for the fact that some customers might not be satisfied with what they've received.
This pricing model is beneficial for companies which offer high-value services and need to guarantee a certain amount of work every month or quarter such as marketing, design, or software development .
It's also helpful for buyers who want predictability in their expenses which can help them better budget and forecast future costs.
4) Mixed Rates:
Some companies which use mixed rates may charge customers one rate for the first stage of a project and another for additional work which means it's important to understand exactly what contract you're signing.
If, for example, your firm is creating an app that will take 12 weeks to complete, they may enter into a contract with hourly pricing for research or planning phases but switch to value-based pricing once development begins.
By using this method, they can ensure that customers aren't overcharged at any point during the process which helps them retain their reputation as affordable providers with quality services.
On the other side, mixed strategies are not appropriate for all types of businesses since some sellers are unwilling to charge by the hour because they need predictability in how much money they will make every month.
Customers who just want to get an overall sense of how much a project will cost and don't mind if prices fluctuate across the duration are best served by mixed rate pricing.
Most services, with the exception of construction or manufacturing, fall into this category.
Agency Pricing which as we've already mentioned, allows suppliers to set prices for their products by a reseller which serves as an agent.
In this blog post we've gone over some of the best aspects of Agency Pricing and which one you might want to choose based on your individual needs.
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