Non-Price Benefits of a Pricing Process

You see us write a lot about pricing and pricing strategies.  For most distributors, the obvious advantage of a disciplined pricing process is the corresponding increase to the bottom line. Research conducted by David Bauders and Strategic Pricing Associates of Cleveland, Ohio indicates that most

distributors see a margin bump of more than two points. At the same time, examination of the Profit Reports generated by a number of distributor associations indicates the bottom line advantage enjoyed by the “upper quartile” members – those who outperformed 75% of their colleagues - comes from more than “just” a margin advantage.

We discovered these upper-end players were at the vanguard of distributor organizations using Strategic Pricing Associates data driven pricing process. We wanted to explore two points:

What non-pricing benefits/advantages have they discovered as they implemented the SPA process?
How has this migrated into the overall company culture?
We spoke with Jay Johnson, President and COO of Plumbers Supply in Louisville Kentucky, to find the answers.  In his mind, the price related dollars are just the tip of the iceberg. Mr. Johnson went on:

“We believe that our Strategic Pricing Associates based process is a cornerstone in nurturing customer relationships. Consistent pricing builds trust. Nothing is worse for our contractor customers than getting one price today and an unexpectedly different price next week. When a customer experiences this, they begin to question every aspect of our relationship. Things like inventory, service and programs all flash through their minds."

Jay isn’t alone in his feelings about non-price benefits. We interviewed John Wiborg, President of Stellar Industrial Supply of Tacoma, Washington. As we talked about building a pricing strategy, John made this comment:

“The biggest benefits from SPAs disciplined pricing process come in employee morale and service. Let me elaborate. When we centralized the pricing function, it took a lot of the complexity and stress out of our CSRs life. When they (the CSRs) use system price, they don’t need to worry about creating long term customer issues.  It helps them concentrate on the area they typically enjoy most – solving customer issues. When we solve a problem, it makes the customer money. If our price is a little bit more but our expertise creates addition uptime and more customer profit, we feel good. This translates into better customer service where it really counts. Further, our quotes are turned around and delivered faster – customers appreciate that because it allows them to be more efficient. The accounting departments of our customers appreciate accurate billing their invoices. This accuracy has improved the morale of our credit department because they don’t get stuck with disputed invoices that require hours of research and multiple phone calls to correct.”

The Company Culture Piece
Successful distributors simply don’t sell on price. In depth studies of purchasing patterns in segment after segment show price ranked in the fourth or fifth slot. Yet, our sales people repeatedly get “hung up” on this one seemingly low ranked point. And often price moves to the number one spot in their personal hit parade.

Why? I believe it has to do with three basic points:

The uncertainty of price
Metrics like product application features and delivery times can easily be measured and compared. Our competitors provide this information to the public and we can easily measure their widgets against our own.

Human ego
For sales types nothing has the sting of being told, “Your competitor out performed you.” When sales people find themselves on the wrong end of the purchasing decision, they immediately look for something else to blame. Price is a pretty good excuse.

Nice Customers
Regardless of what you read, most people are really nice folks. They don’t want to hurt other people’s feelings (even if they are a quasi-incompetent sales guy,) the human ego is a terrible thing to bruise. Rather than simply say, “I like you. You work for a good company and you seem like a nice enough guy but your competitor out worked you,” it’s easier to convey the message – your price was too high.
Combining this with the human ego above creates an unnatural aura around price.

On the road to building a strategic pricing strategy, distributors face a barrage of pushback not from customers – but from their sales team. But once the process is launched and the sales team witnesses no customer backlash, experiences no loss of business and sees the uptick in gross margin, these sellers start to feel empowered. They savor a new found freedom from the heavy yoke pricing had placed on them.

Distributors with a data driven pricing process, know cognitively and empirically - our price is fair. The data and metrics used along the way give them pricing confidence. It removes a portion of the pressure. A new logic embeds itself into their consciousness. Value is the new game in town.

When sales teams loose an order to a competitor and price is uncertain, there is a strong propensity to blame price and move along. But, take price out of the equation and the self-reflection is directed at a new more meaningful set of evaluations.

Questions like:

• Is this customer really the type of business best matched to our organization?
• Did I really understand the customer’s needs?
• Is something lacking in a component of our relationship?
• Did my package of values align with the customer’s needs?
• Did I properly communicate the value provided with the product?
• Does my competitor offer better product, service, delivery, etc?

These questions drive behavior in a direction that promotes positive human and organizational growth.

Before we go…
Allow me one favor. Go back and review the first question. Research indicates that companies who build a process around targeting customers are 47% more effective in reaching their sales goals. Strategic Pricing Associates is the only organization that provides data rich pricing statistics and a value driven process for improving sales. Targeting is a natural extension. Wouldn't you agree that 47% is a big number?

It’s happening again: Big Manufacturers Tightening Up their Supply Chain

It’s happening again:  Big Manufacturers Tightening Up their Supply Chain

Over the past several years Mega-Manufacturers have settled on a strategy to sustain

profitability in a slow growth economy: Tighten up their supply chain.  To the unaware, this sounds like a solid strategy.  Improving the flow of goods, creating more symbiotic relationships with those providing services, eliminating waste, streamlining, re-engineering and a tassel of other business buzz words, all resonate with Wall Street types. 

Distributors have been through this a couple of times before, but unfortunately a good many sales managers have forgotten the lessons.  Many of our Millennial-generation sellers were still in school.  But, this is another page from the playbook of previous recessions.  Recalling the pain of the mid-90s, 2001-2002 and the Great Recession, allow me to review.

Our largest customers jauntily inform us they “love” doing business with us.  They want to formalize our partnership and do more to strengthen the ties.  Mostly, it’s a love-fest.   Midway through the conversation, the kind words turn sour.  Being a partner requires efficiency, effectiveness and lower supply costs for the customer.  If you worked with anyone in the Automotive sector back in the 90s, you heard the pitch followed by a directive to immediately drop prices by five percent.

After a three-year reprieve, the practice is back in play.  Here are a couple of examples:

In April 2015, Business Day ran an article outlining the new strategy of delayed payment.  Here’s a juicy tidbit: 

“Adopting a tactic widely used by 3G Capital, the Brazilian private investment group behind the recent merger of Heinz and Kraft Foods, a growing number of the world’s largest food and packaged goods companies are asking their suppliers to give them as much as four months to pay their bills — even though they typically require payment from their own customers in 30 days.”

That’s right, suppliers to these very large companies now get to provide banking services.  Typically, distributors expect payment in 30 days.  Part of the wholesale distribution model takes advantage of a “float” period; the time between when the distributor sells the product and when the distributor must pay their supplier.  Getting paid in 120 days interferes with the balance.

In December (2015), The Wall Street Journal ran an article which was later picked up by other publications.  Quoting from “The StrategicSourceror” a blog dedicated to “articles in business topics surrounding strategic sourcing, supply chain, procurement, purchasing and spend management:”

“Due to a slow economic growth, manufacturers are tasked with re-strategizing supply chain operations to increase profit margins and reduce costs, the Wall Street Journal indicated.”

And this little gem…

"The weak link in our whole manufacturing process remains the supply chain… As good as our factories can be, if you have a crappy supplier, it doesn't matter. You need all the parts."

Distributors and the Purchasing Teams face off

Distributors will find themselves facing off in negotiations with some of their largest customers.  In many ways this is a combination of the strategies carried out during previous downturns.  Strangely, very few distributors have equipped their sales teams for the battle.

Negotiations are going to be tricky and mean.  In some instance, the Purchasing Dude (or Dudette) will imply there is no option, our way or the highway.  Procurement teams will practice their lines.  Implications will be made:  Everybody provides the same stuff and exactly the same service as you.  Or my perennial favorite, suppliers like you are a dime a dozen, say no and we’ll just go down to the mission and pick up another. 

What should you be doing?

Don’t wait till you hear the message from the customer.  Practice your value pitch now.  Train your salespeople on the unique stuff you provide and why it would be darned hard to replace at the customer.  Teach them to make conditional price concessions.  Stuff like, “I will give you a discount but if I do you will need to begin paying for my specialist’s time” or “If we provide you with the additional payment terms, what added business will you provide to me?” 

At the very least, you need to get your team some negotiations training.   Last month we said, “Don’t send your sellers into a knife fight armed with a fingernail clipper.”  Read the article here.  In my opinion, this is not an optional investment. 

Invest in a pricing process.  David Bauders and his team at Strategic Pricing Associates has a number of tools which will allow you to boost your margin.  Knowing what to negotiate on is critical.  Understanding which products have price sensitivity is golden.

Finally….

If you are running into some of these situations, shoot us an email.  You are not alone.  We will be happy to share some of our experiences in other industries and other parts of the country. 

I recommend you look at this (just click):

Strategic Pricing Associates Negotiation Workshop and Pricing Strategy Seminar

Distributor Fight Club: Knife vs. Fingernail Clippers

Are your salespeople headed to a knife fight with fingernail clippers?

photo: jokeoverflow

I travel for a living.  Delta Airlines loves me.  Over the course of the last decade of travel, the fine folks at the TSA security checkpoints have managed to confiscate over a dozen of the fingernail clippers I inadvertently left in my computer bag.  Dangerous weapons?  Somehow, I have my doubts, but the point is to the TSA Security team they fall into the same category as a 17 inch Bowie knife.  Would I want to take on someone armed with a real knife, switchblade or anything thing else?  Heck, no!  This brings us to the question, are we sending our sales teams into a virtual knife fight armed with a measly manicure set?

Allow me to get real. Our salespeople go into negotiations with professional buyers on a daily basis, most without real negotiation training.  Further, many sellers and their managers don’t really believe negotiations play a role in their world.  But they do.  Allow me to present a couple of points. 

Have you ever called on a person with the CPP credential behind their name?  This stands for Certified Purchasing Professional.  In order to maintain the accreditation, the individual must meet the following minimum continuing education requirements as listed on their website:

“Reapplication must be made every five years in order to keep certifications valid. A minimum of 15 additional points is needed for an approved updated status. Also, anyone who has not taken and completed the self-running online courses "Business Ethics for Buyers and Sellers", "Essential Law for Buyers and Sellers", "Managing Inventory - Maintaining the Proper Level", "Math for Purchasing and Business" and "The Science and Art of Negotiation" will be required to do so.”

Remembering these are the minimum, the list of the other 28 course options includes 6 which are negotiation-centric, including one little tidbit which reads as follows:

“Body Language - Make Buying and NegotiatingEasier and More Successful
Body Language, a new online course to help you deal with suppliers. This course will give you an insight on how to read the gestures, body positions, and movements that reveal what the other person is feeling and how he or she is reacting. It will help you determine if the person is telling the truth, if the person is sincere, or if the person is hiding their opinion and motives. Being able to properly access a salespersons body language is an important skill that every buyer and negotiator should know.”

For those still wondering, let me throw in another detail.  I

asked well-known negotiation trainer Tony Perzow of SPASigma, an organization dedicated to improving sales negotiation, to elaborate on the issue.  Tony said, “During the years of the Great Recession we saw a change in the mix of our classes.  As companies worked to reduce their costs, I saw classes full of purchasing and procurement guys.  These companies realized the easiest way to drive cost out of their system was to apply pressure to their suppliers.”  Putting ourselves back in the time, sellers were desperate to get sales; at almost any cost.  My experience with distributor sales organizations shows many companies are still trying to work some of these poorly negotiated deals back to profitability.

Our customers don’t believe negotiation is a bad word.  As a matter of fact, they have made good use of the process.  Our sellers were ill equipped to even begin playing the game.

It is time to even the playing field

For the past couple of decades, distributors have been focused on “Value Adds” as their differentiator.  Extra service, extra work, extra product and other free stuff became the lexicon of the field sales team.  In an environment like that, any thought of real give and take negotiation was pushed to the side.  Is it any wonder distributors struggle with margin squeeze? 

Distributors need to revisit the lost art of negotiation.  Finding the right deal for both buyer and seller is the game we have elected to play.  Further, negotiating allows distributors to push their margins forward.  With this in mind, allow me to share another valuable point from my conversation with Tony Perzow, it simultaneously has everything and nothing to do with negotiating. 

Mr. Perzow pointed to a philosophical difference between street names in North America and Europe.  Very generally speaking, European streets are named for artists,

philosophers, places and scenes (The famous Abbey Road with tons of Beatles references was named after a farm.)  American streets are named after persons of power.  A quick walk through River Height Consulting’s “headquarter city” of Davenport, Iowa illustrates the point.  Presidents Washington, Jefferson and Adams intersect with General Pershing and Grant with a diagonal named for Iowa Governor Samuel Kirkwood.  We love power and it spills over into the selling world. 

Salespeople want the power to negotiate the whole deal.  But, this power works against them.  Distributors who limit the negotiating power of their sales teams score better in profitability and margin.  Why?  Selling is an emotional sport and even experienced sales guys can find themselves in that “make a sale at all costs” mentality. 

Saying “I don’t have the power to commit to that price” slows the process.  It gives the seller time to develop strategies, time to understand all of the costs associated with the concessions, time to understand the value the distributor provides and time to think about what commitments the customer needs to make in return.

If you are a sales manager, ask yourself these questions:

• Do your salespeople really need to make the deal instantly?
• Have your sellers ever made a deal and later determined it wasn’t as good as they thought?  Did your company make less money than deserved?
• What would have happened if the seller could have stepped back and evaluated it or sought management feedback?
• Are your salespeople willing to give up a bit of ego for more money?

Let’s get some training…

I don’t believe it’s a matter of if distributor sellers (and purchasing teams, too) need training.  From my point of view the real question is: What is the best training and how soon can you get your folks into the course? 

After reviewing the work of SPASigma, I heartily recommend their work.  Why?  First, the fundamentals are sound.  Secondly, classes are geared towards distributor selling.  This is a major difference.  SPASigma’s parent company has experience with over 400 distributors.  They understand the selling engagement at distributors is different than that used selling insurance, real estate and other one-of kinds of interaction. 

Finally, allow me to add one last point.  The very thought of negotiating may be a turn off to some of your salespeople.  In interactions with very successful distributor sellers, I have seem pushback on the topic of negotiation, and almost every type of skills based training.  Expect to hear one or more of the following:

1.      Negotiating is for sleazy used car guys.  People hate car guys for this exact reason.  I will not bring myself to this level.

2.      I have worked hard to build a trust-based relationship with my customers.  Using cheap tricks to squeeze out a few more dollars will ruin everything I have worked hard to develop.

3.      Customers in my territory are upstanding honest people.  They tell it like it is.  They don’t lie to me and I don’t lie to them.  This negotiation hocus-pocus is unnecessary.

4.      I have been doing this for years.  I get paid on gross margin.   I know how to get the best deals.  If anything, I should be teaching the class on negotiating.

5.      I sell solutions.  This is for commodity salespeople. 

I don’t believe any of these issues reflect the real world.  But perception is reality.   Some of your salespeople actually believe that negotiations are not part of their job.  Explore the situation with them.  Review previous instances of “deals” gone wrong.  Look for areas where just a bit of negotiation would have provided extra profits, better defined projects and real win-win opportunities for ever one involved.

I believe possession of negotiation skills at the seller level is…. well, not negotiable. 

Undisciplined Discounting Webcast

Do you have salespeople who seem to create their own pricing rules?  Are you missing out on margin by those who are afraid to miss out on the deal?  Strategic Pricing Associates is hosting webcast coming up on December 8th at 2:00pm Eastern to address such issues.  How to Stop Undisciplined Discounting and Track Sales Force Accountability features Sid Hendry of Gulf Controls and Dave Lienert of SPA.  It's only 60 minutes out of your day and will be well worth it!  Click HERE for more details and registration.

Pricing Process appears to be a Top Secret Strategy

A couple of weeks ago I published an article called Pricing Professional – The time has come. The piece outlined the need for distributors to consider how they run their business and develop a new position. We hit on why the person who typically handled ‘pricing tasks’ was likely more of an administrator responsible for loading the prices of income purchases rather than a margin building professional. We pushed for distributors to consider the impact of a true pricing process and the qualities of the person best equipped to make the pricing process work.


Somewhere along the way, we touched a nerve. Building a pricing process is a viewed as a top secret strategy. While a number of our readers commented, it seems no one wants to go on record with their plans. Here is a sample of the way the emails began:

“Hope things are going well. While you'd probably prefer I comment directly on the post I really don't want our competitors to know we're doing this. So feel free to use the info here without disclosing the source or location.”

But not everybody was concerned about their competition. A couple were concerned about the reaction of their suppliers. One made this point:

“Many of our suppliers don’t understand all of the work that goes into selling and making their products work. Every time they bring us into an opportunity, they recommend prices that are way outside of the range we feel needed to make a decent profit. If we go outside of their suggested 15-16 percent range, they push back with stories of our need to grow their sales more aggressively.”

One was concerned with push back from their selling team:

“Management has given us the responsibility of raising margins, but they will quickly cave when a salesman comes back with a story of this or that competitor having a lower across the board price. We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account they deal with. This will crush our efforts to make pricing stick.”

One distributor executive shared this story from a previous life:

“My previous employer had an entire team developed to establish pricing levels. It was a company-wide effort that crossed over all of the branches so it was impossible for the team to really track the efforts. I, like all the other branch managers, gave the program lip-service. We acted like were engaged, but basically our job was to grow the gross margin as a total rather than improve the margin. Without detailed measures, we could go fight the other battles and continue with the old version of letting sales set the price.”

But all made the point to say, their current version of price process worked. The reports went something like this:

“We went live with Strategic Pricing Associates just a little over a year ago. Based on offline conversations with others already using SPA, we decided to apply our pricing process to all of our customers except our top 100 accounts. In our old culture, it was acceptable for both outside and inside salespeople to set their own price. It took us a while to get this changed. Originally we had a team of three people who spent nearly an hour at the end of each day reviewing the pricing exceptions made by our salespeople. We constantly reeducated and argued. After a month or so, everyone knew the new program had teeth. We still find ourselves discussing price issues but not nearly as often. And, our GM is up dramatically, over 2 points…”

“Our management team attended a two day workshop at Texas A&M last year on this subject. We came back and did the customer stratification and changed some pricing matrices but just from giving the customers a label and allowing salespeople to react to that we have raised our GM by over 60 basis points in less than 6 months. I guess what I'm saying is this really works and we fully expect to get 100 basis points this year and at least 50 next year. In addition if we reach our goal this year everyone in the company will benefit financially. The pressure the inside people exert on the outside people for margins is great to see.”

Over the past couple of years I have talked directly to over 50 of Strategic Pricing Associates’ 350+ clients. A good many of these have been “on the record” conversations, even more were enthusiastic about the results but not ready to speak to the world in general.

Nearly all have seen marked improvement in their Gross Margin levels; ranging from just south of two points all the way to four with one pushing five full points of GM improvement. One of the critical differences seems to be the level of engagement of the distributor’s top management. The second comes in their selection of a pricing professional. Companies who select a pricing leader with strength of conviction, leadership skills and organizational clout gain and hold onto more gross margin gains than their counterparts (who still perform quite well just not as well.)

When asked if the whole process is worth it, one president of a 40 Million dollar distributor made this comment, 

“Our gross margin is up 2.4 points. Do the math. There is nothing we could have done to add a million bucks to our bottom line faster than assigning one of our top guys to the post of Pricing Czar.”

Top Secret Strategy?
With results like these, I can see why pricing strategy might be considered the secret sauce of distribution profitability. Those employing advanced pricing strategies are quietly building their cash reserves for future purchases, systems improvements, building upgrades and establishing shareholder equity.

If they are your competitor, there is a very good chance you’ll never learn of their strategy from shared customers. Why? After speaking with all of these folks, only one reported an issue with customer push back. And, that one was a customer put into the wrong category via clerical error.

How can normally price sensitive customers miss a margin move of this magnitude? The answer falls with price sensitivity. A small subset of the products sold by the typical distributor carry a great deal of price sensitivity; market conditions set the price. The rest are purchased based on availability, ease of doing business, customer convenience and bundled services. Most distributor salespeople price everything at the same low margin levels as the few products with price sensitivity. By doing such, they are giving away huge opportunities to increase profitability.

Returning to the pricing professional, allow me to ask one question: Who is responsible for driving gross margin improvement at your company? If this is such a top secret that even those within your organization don’t know who it is… It’s time for a change.

Pricing Professional – The time has come

Over the past decade, modern distributors have implemented massive organizational change. Most were driven by customer needs and market demands while a few others were based on shifts in the behavior of our supply partners. But, I believe the time has come for us to consider our own needs. The time has come to build a position which benefits the shareholders of the wholesaler.

For the next few moments, let’s review some of the new positions and faces around most distributors.

Enter the Professional Salesperson
Based on any objective view, salespeople have become more professional. Rather than the back-slapping, good ole boy relationship builders of our fathers’ day, salespeople are positioned to add measurable customer-focused value. Instead of carrying stacks of catalogs and the latest jokes, today’s sellers bring technical know-how and professional problem solving skills.

Distributor sellers manage their calendars better, orchestrate teams of support people and often understand bits and pieces of the customer’s business better than the customer. In many instances today’s seller has a technical degree and on-the-job experience equal to any of their customers. In most situations, customers see them as peers, and in the best of cases as trusted professional advisors.

The inside sales group has evolved as well. Without great fanfare and sometimes without notice something happened back in the 1990s. The inside department morphed from its traditional role of training ground for outside sales recruits and elephant’s grave yard for folks who couldn’t make it, to a professional team focused on assisting customers in their

selection of the right products for their applications. Today, distributors search for high caliper people who can contribute to the selling effort from the inside position. The job isn’t necessarily a stepping stone or a training slot; it’s a profession with compensation and status levels designed to attract the right kind of people.

Based on research for “The Distributor Specialist: Customer Champion, Profit Generator” in 2007 over 70 percent of all

distributors employed a specialist. For most the position was a new add. These product specialists armed with in-depth knowledge of new technologies are viewed as highly professional. And their abilities to steer customers through complex decisions before and after the sale often impact the customer’s own decision making process.

Clearly all of these customer facing roles make the distributor business look different than early in most of our careers. But, changes have not been limited to the customer facing side.

In a combination back office and customer side move, distributors have upped the professionalism of their warehouse and logistics teams. Customer tolerance for shipping errors has dropped to nearly zero. The cost of fixing shipping and the resulting billing errors has escalated. In response, many progressive distributors have both installed barcode/location systems and raised the wages they pay “out back in the warehouse.” It’s not uncommon to see warehouse managers with backgrounds that include years in a manufacturer’s central distribution center. Further, the distributors establishing professional systems in the warehouse report improvements in efficiency of their operation.

Why the improvements?
Distributors rarely do anything without cause. In all of the instances defined above the changes have been gradual and designed to meet market dynamics. And, because making each step in a more professional direction equated with a good return on investment to the distributor.

Now is the time to consider creating a new professional. The Pricing Professional.
Many readers may be thinking, “I already have a pricing person.” However, a closer consideration of activities performed by this person has more to do with loading cost-centric pricing into the ERP computer system and very little do to with setting a company-wide official price for the products going out the door.

Considering the concept of matrix pricing was a major topic of discussion during my very first distributor management training in 1991, one would wonder why the pricing profession didn’t evolve further over the past couple of decades. Reviewing hundreds of distributor organizations, experience dictates the following:

1. Many ‘customer sell prices’ are not maintained on distributor’s ERP systems encouraging sellers to use cost up pricing.

2. Cost up pricing generally settles on some ‘magical’ number which often does not reflect the value provided by the distributor.

3. Distributors lose mega bucks because their sales team neglects to consider incoming freight and other acquisition costs on specialty lines.

4. The wholesale industry struggles with eroding margins.

5. Most distributors don’t really know if the margin erosion phenomenon is a product of the economy, the market or their own actions.

At the same time, the typical Strategic Pricing Associates’ client gains two points of additional margin often impacting

their bottom line by over 50 percent. Many clients drive even more gross margin improvement. Armed with this justification, there is economic reason to devote some thought to the need for a pricing professional.

Assuming there is room for pricing process improvement, let’s look at the current state of the current pricing person. Depending on the distributor,

Until now, there was little training for “the pricing guy.” Often, they come from one of four backgrounds, each with their own special set of issues. Let’s take a moment to explore the strengths and weaknesses of each.

1) Inside sales guy moved to pricing administration
The inside salesperson typically has some understanding of how the sales process works. However, they often lack the clout with outside sellers to push back on pricing decisions. Worse yet, they sometimes are calloused to the cost up pricing techniques which push margins in a negative direction.

2) The IT department staffer assigned to pricing
Information Technology skills generally allow this type of person to easily pull data and reports from the system and upload new pricing files. What they lack tends to be good commercial understanding of customer situations. Speaking in broad generalities, many times they have almost no previous experience ‘holding their ground’ against more aggressive sales personalities.

3) Purchasing people migrated to pricing authority
When moved to a pricing role, people with purchasing backgrounds often have no clout with the sales team and often shy from the conflict of handling price level pushback from the sales team. Further, in many instances their previous background makes it easier to focus on the correct buy price rather than customer sell price.

4) Clerical workers plugged into pricing administration
For many distributors pricing administration is passed to a talented clerical person as a parking spot until some other use of their talent is discovered. Many times the position becomes a game of musical chairs. The chief issue here is this: most clerical types lack the resources and training to actually make decision. Instead, they simply keep number up to date and run reports for someone else within the organization.

Until now, there has been no real training path for the pricing professional. Certainly, consultants are willing to help establish a process but once the consultant leaves, things gradually slide back to mediocrity; many times initial margin gains are lost and the process must be reenergized.

http://www.6sigma.us

Six Sigma Master Blackbelt Greg Preuer, of Strategic Pricing Associates has designed the first course designed to apply time tested Six Sigma methodology to pricing. Those who study with Greg will learn not only how drive the pricing process but how to sustain the gains and automate the process. They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement. They will learn each of the following steps:
• How to design and design goals which are consistent with their company’s pricing strategy.
• How to measure and identify characteristics critical for pricing success.
• How to analyze the current situation and steps along the way.
• How to design an improved alternative which moves closer to the desired result.
• How to verify that actions taken create the right results.

Is all this worth the effort?
Imagine what two additional points of margin does for the typical distributor. In an industry were financial returns hover in the three to four percent range, adding an additional two percentage points increases profitability by 50 percent (or more). What’s more in an industry where companies are valued as a multiple of earnings, these extra bottom line results increase the company value by the same factor.

I think it’s worth the effort.

Strange Inheritances

Late last night I found myself channel surfing in my hotel room. Between infomercials, old Walton’s reruns and the cooking channel, I stumbled upon a new program called

“Strange Inheritance.” The premise of the show is something like this: Great Uncle Ralph dies and leaves his favorite niece a roadside Alligator Farm in rural Florida. The recipient of this wondrous bit of good fortune suddenly finds themselves in a predicament. Pardon the pun, but it’s the old “knee deep in alligator thing” except the person struggling didn’t create the mess. Instead they inherited it.

Distributors often find themselves in a similar situation. Examples are many. The last guy hired some doofus to work in the south territory and now you are left with a mess. The computer is loaded with 20 years of bad data and sales metrics won’t work until all the garbage is scrubbed and corrected. Or, territories were laid out inefficiently with salespeople crisscrossing the state in a haphazard manner racking up massive sales expenses.

Experience with dozens of distributors indicates the most common strange inheritance comes in the form of a poorly managed pricing process. Unlike the story of weird Uncle Ralph, this mess is often created by none other than our own previous decisions. The result is poor gross margin performance, sluggish bottom lines and, worse yet, customer issues. Let’s work through this short list in reverse order.

How can poor pricing process impact customers?
Nobody complains about your prices being too low, correct? Maybe. However, they will question your integrity when they get different prices from your company depending on who they call. And, when quantity breaks are poorly administered, they will wonder what the real price should be.

Further, if you hold prices for a very long time, absorbing price increases from suppliers over several years, eventually price levels will need to be adjusted. Typically, this results in extraordinary emergency price increases; the kind that come after you realize you have been losing money for the past year. Distributors often report seven or eight percent increases became necessary just to stay in a break even mode. This practice nearly always puts your whole book of business at risk of the customer.

Price process impacts profitability and gross margin
Everyone understands the connection between gross margin and profitability from a macro level: more margin equals greater profits. What they fail to understand is the relationship in an industry with very thin bottom line returns. For the typical distributor (regardless of line of trade,) the bottom line is razor thin; hovering in the 2-4 percent range. Allow me to break this down into the simplest of terms: for every $100 dollars in sales, the distributor keeps just over a couple of bucks. When the gross margin falls by even a percentage, the two dollars can become something far less. Conversely, increasing the gross margin by two POINTS, rather than percentage, has a major impact on the bottom line.

Each time a salesperson decides to offer a special discount of just a couple percent, profitability is hammered. Holding the line on price increases just to avoid hard conversations with the customer equates to a direct hit to the bottom line.

You’ve inherited a mess, now what?
Whether you inherited the issue of poor pricing policy from others or your evil twin took control of your body and created the whole situation, rest easy, you can fix the situation. It will take some time and a little planning, but you will see steady progress along the way. Join me as we review six time tested procedures to improve your pricing situation:

1. Make good use of manufacturers’ price increases.
Periodically, every manufacturer publishes price increases. In many industries the increases come near the end of the calendar year. Others come irregularly in relation to commodity price movements; things like copper, steel, oil, plastic or other raw materials. When these happen it’s not unusual for the company to publish some kind of justification but rarely is an actual increase percentage noted. We like to see distributors add a little extra for the “home team.” For instance, a manufacturer’s price increase comes in at two percent and the distributor provides the customer with a three percent price increase.

If you want to get advanced and have the proper discipline, prices for items not purchased in the past six months might be increased by an even larger percentage. Again referring to our two percent increase from the supplier, a two percent price increase might become a four percent increase on items not purchased for six months or more. Items never before purchased should be set at the “normal market price,” which will be discussed later.

2. Review all special pricing agreements.
Customers, especially those with professional purchasing types, negotiate prices based on high volume purchases and future growth. Somehow the promised volumes don’t happen. When this occurs, distributors should put the opportunity to good use by reopening the negotiations. Price needs to play a part in the negotiation. If the customer pushes to maintain the old price, this presents the perfect opportunity for a quid pro quo trade for additional purchases. The new products should be fairly priced and hopefully at an improved margin.

3. Narrow the scope of future special pricing agreement.

Distributors often err in setting the price for entire families of products. As a simplified example, imagine you are selling Wylie Coyote’s ACME Anvil line. ACME produces anvils in sizes ranging from a few pounds all the way to the giant 5,000 pound roadrunner smasher. OEMs apply the anvils to their products, but rarely is does any OEM purchase more than a half dozen sizes.

Typically distributors extended their best prices to the entire line up of ACME products. This point limits the opportunity to make additional revenues in those infrequent times when something outside the normal range was being purchased. Narrowing the scope of special pricing allows for margin improvement.

4. Tie pricing to payment terms.
It’s one thing to provide low products at low gross margin when the customer pays like clockwork and something else again to offer low prices and extended terms. Most companies publish standard terms; typically 30 days net in most industries. Conversely, it has become the custom of many large companies to pay in 60, 90 and even 105 days. Review all quotations for statements of payment, terms, and again, open up customer discussions on payment outside your expected terms.

5. Establish and enforce reasonable and real quantity pricing structure.
Candid conversations with sellers and their customer service counterparts indicate customer facing staff often stress over knowing exactly where to provide a quantity discount. For the customer who regularly purchases three parts at a time, an order of a half dozen may include an inquiry on quantity pricing breaks. Unless a policy is established and well documented, the decision becomes an uncomfortable judgment call.

I recommend building quantity pricing around numbers that make sense. For example, full case quantities might be justified over broken case quantities. The same goes with bundles, bags and all kinds packaging right on up to pallet loads. Secondly, quantity pricing should contain “stretch numbers” if a customer’s ongoing needs justify it, they should be able to push up to the next number. Otherwise, they pay a higher margin.

6. Ask manufacturers for additional discounts when you provide extra customer service on their behalf.
The practice of pushing back to supply partners for extra margin has been used, abused, bent, folded and otherwise mutilated. It’s not something I typically recommend. As a matter of fact, I almost decided to not mention this point. However, there are instances when distributors find themselves providing extra services for their supply partners and these instances demand an increase in margin. Examples from the field include, incoming inspections after quality issues, excessive warranty processing, maintenance of just-in-case inventory due to factory delivery issues and a number of other services which extend far beyond the distributor’s normal responsibility. Ask for additional margins in all of these cases.

An ounce of prevention is worth a pound of cure…
By now you’ve no doubt surmised, fixing inherited pricing issues takes more effort than just establishing a process today. Any real pricing process must contain the following: documentation, metrics and measures, and management tools. If you miss any of these three pieces, the process is doomed to failure.

Looking back at the whole inherited pricing problem, most would wonder how something like this could even happen in an age of high powered ERP systems and computerization. But it does. Most of these same folks have been schooled in matrix pricing and have heard industry experts talk about the importance of margin improvement. Yet, the problem still exists.

Distributor pricing is not hard. However, it is massive. Consider a distributor with 3,000 accounts and a line card containing 10,000 SKUs. This creates over 30 Million price permutations. Balancing that many data points is not humanly possible, regardless of your skills with spreadsheet. Clearly, some kind of additional resources are in order.

David Bauders and his Strategic Pricing Associates team has developed a real process for pricing. They attack the pricing problem from three directions:
• Scientific analysis of data from your own customer history and invoices – this allows better understanding of the true market price and price sensitivity by each customer.
• A well-documented plan implementation including training and ongoing employee education – customer facing employees learn how to avoid pitfalls and poor pricing habits. Procedures and best practices are laid out.
• Metrics and Measures are provided for coaching and managing the process – recalling Pearson’s law: "When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates." Coaching and managing with real data can drive behavior.

The real proof of the process comes from the over 350 distributors who have applied the Strategic Pricing Associates process. Distributors report a typical margin improvement of two full points. Imagine how two points could impact your bottom line. Why wait till that dark gloomy day when you find you have inherited something?

A Pricing Tale: Old Joe

Last week, I had the pleasure of addressing the sales team of a fast growing distributor. The topic was sales process and aligning with major industry trends. The group numbered in the mid-twenties and included salespeople from local territories throughout the central portion of the U.S. Prior to launching into my talk, I asked the group to give me a quick introduction outlining their position and background. As we moved through the first few members of the group, it was clear this team had deep product knowledge and understood their customer-base well.

About half way around the room, we came to Joe. As Joe introduced himself, I could see the way the other members of the team deferred to him. Joe was the Senior Inside sales person and when he outlined his industry experience it was impressive to hear the side comments from the group. Joe was THE go-to guy for any tough application or technical question. He exuded customer service from every pore of his body. You could tell Joe was rough, tough and ready let you know if he disagreed with you.

The talk covered a variety of topics ranging from targeting accounts and building a data base of customer-centric information to best practices in bringing manufacturers into accounts. As I moved through the presentation, I made a mental note to gauge Joe’s reaction. Early on, I asked his opinion on a couple of topics and, well, I felt like Joe was falling under my spell. Carefully considering each of my major points and then slowly nodding in agreement, I was feeling pretty good about the outcome of the whole presentation. But things were about to change…

I talk about the power of a solid, scientific pricing process in every presentation I deliver. Why? Because a good pricing process delivers to the bottom line. My clients experience better return (ROI) from money spent on pricing than any other investment; but that’s not the story here.


As I talked about best in practice pricing strategies, I could see old Joe’s face get stiff. His body was rigid, he crossed his arms and this person, who was so friendly, went from receptive to closed. I would have been blind to not see it. Furthermore, I was 100 percent certain everyone else in the room was feeling the bad vibe as well.

Sensing I was about to “lose the room” I asked Joe his opinion on pricing strategy. Joe shrugged and said, “From where I sit, standardized pricing, or whatever you want to call it, is destined for failure in our business. Our customers are tight with their money. They don’t want to pay more, they want to pay less.”

Going around the room, the group largely agreed with Joe with a couple of notable exceptions. One salesperson noted that some customers are willing to pay more when the product is in stock. Another guy stated repair parts were not price sensitive; especially when the customer is trying to hold out on replacing a whole system. Within a few minutes, we had a dozen or so examples of times where a
“standard” price would work. Everyone was on board, but Old Joe looked shaky.
I knew we needed to talk.

One-on-One with Joe

Clearly this isn't us talking.
I charge a higher fee to wear a tie.

Shortly after my presentation, I had the chance to talk to Joe one-on-one. Seated in a cozy spot in the hotel lobby, Joe shared his story and laid out his concerns:

Joe has been in the distributor side of the business for well over 20 years and worked with tools in the industry prior to moving to distribution. He’s been around the block, seen everything once and can give recommendations on products not even listed in the catalog. Since moving into the inside sales role, he has developed a following of people he calls “his customers.” They know him, a bit about his family and he knows them just as well. Further, even though a good many of these customer contacts are called on by outside salespeople, they pick up the phone and call him with their orders.

So far, so good. But then the story headed down a typical path.

Joe reiterated, “My customers are cheap.” When I asked what that meant, he said they called him because he was willing to “work with them on the price.” Before I could ask, he went on to tell me how sometimes customers called him when they were not happy with a price given to them by another member of the team. He called this “saving the order.”

A few years ago his company made a failed attempt at building a pricing process. Basically, this approach put a set margin on all products based on customer type. This is an approach my friend David Bauders calls peanut butter pricing. According to Joe no attention was paid to “real market price” or customer price sensitivity. After a number of months of battling one price change after another, Joe convinced his management team to go back to the old way with price points based on salesperson input and a guideline of cost plus 18 percent.

Interrupting his story, I asked Joe if some customers deserved to pay higher prices. First off he replied yes, but then I asked if there were times he provided small customers with the same price as the largest of accounts. Joe answered to the affirmative, he often allowed small customers to take advantage of the “special pricing” offered by manufacturers to handle the very large guys. He felt like this was fair because they were loyal to him.

Joe, are you a bargain basement discount house or a quality service provider?
This wasn’t a trick question. I really wanted to understand Joe’s feelings about himself and the company in general. I sat back and listened. Joe let loose with a deluge of stories about “walking a customer through the repair process”, finding impossible to get parts, staying late to meet a customer who was in a down time situation and generally providing fabulous service to customers.

When I asked if he had ever lost a customer due to service, the answer was a resounding NO. And, he could relate tales of customers who left because of price who found their way back because of poor service. When asked how he responded, Old Joe said he offered to match the competitive price then strived to give even better service.

Clearly, Joe (and the rest of the team) were a high service organization. But along the way, he couldn’t escape from the fact that people continued to ask him if “he could do better” on price. His opinion that they worked in a price driven market was largely based on these constant requests for a deal. They begged and nice-guy Joe gave them a treat.

As we ended our conversation, I asked Joe if he had ever held firm on a price. Without hesitation he told me sticking to a firm price only happens when the customer hasn’t purchased an item in several years and wants the historic, maybe even ancient, price level. I asked what happens then. He tells the customer prices have gone up, but uses the same cost plus a percentage strategy. And, he always gets the order.
Pricing process and guys like Old Joe…
In my travels around the country, guys like Joe are common; great product skills, fabulous customer service and a skewed vision of how pricing impacts their employer. Over the years Joe has been conditioned to believe, everyone wants a deal. Why? Because he has conditioned his customers to always ask for a little better price.

How has Joe conditioned his customers? They ask once and he caves in. Next go around, they hint that the price is a little more than they thought, and the price drops again. After a couple of go-arounds with the Joes of the world, customers think it is part of the deal. Just like a trip to the flea market, except with top notch products and world class service.

After two decades in the business, Joe has conditioned his customers and convinced himself. But hope exists. Little by little, Joe’s company is setting limitations on precisely which product prices can be over ridden without management approval. For example, exclusive product lines are no longer negotiable. The same applies to products where the company carries deep stocks of repair parts.

Joe will continue to grumble. He will test his management team’s commitment to improving the price process. He will need training, coaching and management, but I believe his actions (if not his views) will change with time. And the result will be higher margins and greater results for his employer.

A couple of final thoughts…
The idea of improving distributor gross margins has been around for a very long time. One of the very first training sessions I attended as a fresh young branch manager 25 years ago covered “the power of one.” Remembering back, the half-day session included the massive impact one measly percent in gross margin had on a distributors bottom line. There was no how to except to cheerlead your team to higher margins but putting up posters and continually reminding everyone of “the power of one.” The plan flopped only to be replaced with a dozen more pricing fads.

In order to build a real pricing process, a distributor needs advanced analytics, solid documentation, training and a means to measure and manage their team. Very few distributors (read that almost none of them) have the expertise to do this alone. Joe’s company tried and missed the mark, and the road to pricing success is littered with other distributors in the same situation.

We recommend David Bauders and his Strategic Pricing Associates team to our clients (like Joe’s company) for five reasons:
1. They apply scientific analysis to data from the distributor’s own work. No assumptions, no national averages, just a scientific look at what’s happened in the past.

2. They have documentation to steer a company through the application of pricing recommendations. Everybody in distribution is busy. The SPA program involves only a couple of weeks of attention to bring it live.

3. SPA has the resources to help train the distributor’s people. This includes pricing people as well as guys like Joe.

4. The SPA system has the measures and management tools required to change behavior.

5. David Bauders has been doing this since 1993. With something like 400 distributor clients and over 20 years of experience, they can help anticipate and address issues.

Now allow me one more statement. I have seen the results up close. The Strategic Pricing Associates process works. Typically, distributors add two points to their gross margin. Two points that pass almost straight to the bottom line. For most distributors, this is like a 50% increase in profit.