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?

A Few Thoughts on The Reactionary Sales Model

Talk to any sales manager and they will tell you they want their team to be proactive.  Proactive as in sales calls, targeting, prospecting and product introductions.  Planning and setting detailed customer-centric goals is also viewed as proactive.  Sales managers preach proactivity.  Detailed studies of distributor salespeople, however, reveal a lot of folks who are anything but proactive.  In spite of the directives from their managers, a lot of these guys seem happy in their roles.

Defining Reactionary Sales…

A good many knowledge-based distributor salespeople have quietly slipped into what I call the reactionary sales model.  Here is the premise of their system:

·         The seller becomes engaged with the customer.  Sometimes this is an inherited relationship, other times, it builds gradually over time as the seller proves their worth as a provider of sound advice, support and technical assistance. The seller builds a level of trust and becomes one of those called in to assist in problem solving and solution building.

·         The seller becomes available on demand.  The deeper the relationship, the more available the seller becomes as a source of advice and assistance. It is not uncommon for sellers working in this mode to drop whatever proactive plans they may have developed to run to their customer’s location at a moment’s notice.  This activity is typically rewarded emotionally with appreciative words and with a regular stream of orders.

·         The seller develops deep loyalties with customers.   As loyalty builds, the customer begins moving business to the salesperson’s company and business grows.

Sounds pretty good so far….

But there is more, maybe even vindication.  A recent study of engineers in the OEM side of our business reveals much about the way our industry sells.  Three things are made clear in the study:

1.      Engineers prefer to request information – “don’t call us we’ll call you”.

2.      Once a salesperson is established as a source of information – they call often.

3.      Local and Regional Distributors are viewed as better sources of information than National Chains (something we have always known but didn’t have the data to prove.)

But there are problems…

The story doesn’t end with “they all lived happily ever after” because there are some issues standing in the way of great business.  While time and the nature of this post don’t lend themselves for a detailed study, we should touch on the issues.

·         This model takes time.  Engaging with customers, proving yourself and building trust take time; probably measured in years.  How long can a salesperson wait for business to come? 

·         Distributors lose customers by attrition.  Depending on the expert, between five and ten percent of our customers drop off each year.  We’re not speaking of business lost to competitors; instead customers go out of business, are purchased by another organization or move to another location.  When this happens, it takes a long time for a reactive guy to replenish their customer base.

·         Reactive salespeople are slow to introduce new products and technologies.  When salespeople operate in the reactive mode, they wait for the customer to request information.  Since the customer has someone else providing assistance with the new line of technology, the time to introduce new products is painfully slow (years.)

·         Reactive salespeople struggle to justify which account receives their high quality reactive service.  Oftentimes, reactive salespeople peak out early.  One of the main causes is they run out of time.  This level of service takes time.  If they don’t “justify” their time against customer potential or business volumes, they get consumed by helping accounts which cannot provide the necessary volume to fuel their business.  Since the emotional reward can be high from small accounts, who thank them profusely for their assistance, they struggle to prioritize their time. 

By now the point should be clear, the reactive model works but does not align itself with the goals of most distributors.  Expansion into new product technologies is hampered and organic growth is slow (even if arguably steady.)

Improving the situation…

If your team is overloaded with reactive mode sellers, you must answer this lucky seven list of questions:

1.      How can we speed up the relationship process?  We’ve determined the reactive seller is good once a relationship is built.  But, they need help with jump starting the relationship.

2.      How can we help focus their efforts?  Most sellers don’t track their time, even though CRM Systems are good tools.  If we can help them understand the value of their time, they may refocus energies on accounts with greater potential.

3.      Can we develop tools for introducing new products?  Training is the new marketing.  Are you exploring all the opportunities to increase your training portfolio?

4.      Are add on products well understood?  If the salesperson is assisting the customer with a solution, do they understand the nuances of expanding the products by providing a bigger piece of the solution?

5.      Does the reactive seller know how to leverage existing contacts to expand their customer contact base?  Since the time to build trust and establish a relationship is long, we need to find ways to leverage the relationship.  Does the seller ask his contacts for referrals within their company?  Does the reactive guy understand the importance of knowing everyone within their account?

6.      Are negotiation tools part of the reactive seller’s skillset?  Long sales cycle… check.  High service… yep.  Products customized to the customer’s needs… inherently clear.  If the seller has not been trained on negotiation tactics, there is a very good chance you are missing out.  Research indicates negotiation training is not part of the distributor vocabulary.  I have seen SPASigma’s training and believe the reactive salesperson needs all of the advantages offered.

7.      Should a reactive seller be paid the same commission as a “rain making” sales guy?  This one is a lightning rod, but I am convinced there is a difference.  Plus, reactive sellers don’t bring the same level of value to the business. 

Finally….

I’ve made some pretty brash comments.  I am sure some will disagree.  If I’ve upset you, send me a note.  Heck, post it right hear for everyone to read.  I look forward to hearing back from you.  Who knows, you might receive the River Heights Consulting Grand Prize: a postcard from Iowa.

By the way… I made reference to SPASigma’s fabulous distributor-centric Negotiation Training.  Founded by Distributor Pricing Expert David Bauders of Strategic Pricing Associates.  David has helped 500 distributors grow their gross margin (typically around 2 points) through a scientific analysis of price sensitivity and customer type.  SPASigma moves the needle forward again.  There’s a five minute video at www.SPAsigma.com.  

Dealing with Renegade Factory Salespeople

In a recent conversation with a very progressive distributor, we touched on an age old topic: the activities of factory salespeople.  To give you a flavor for the call a bit about the distributor. 

 

They are extremely qualified, technically competent and have demonstrated the ability to drive their business forward.  In a time when most distributors in their sector are struggling, their sales are still pushing upward; well ahead of the industry average.  At the highest levels, their supply-partners admire their work, but there is a strange disconnect at the local level.  The local factory sales guys don’t seem to get along with the distributor folks. 

Things get complicated from here.  The distributor, being technically qualified, well trained and totally familiar with their supplier’s products doesn’t need a lot of support.  In a couple of instances, it turns out the distributor team is actually more savvy on the products and applications than the factory sales team.  At a glance, the scenario sounds like the factory salesperson’s dream.  However, friction has developed between the groups. 

The root of the problem...  

The distributor salespeople don’t feel like the factory sellers bring value.  In fact, they believe the factory team slows down the selling process.  On the other hand, the factory guys don’t feel like they are being used properly and see this as a lack of aggressiveness on behalf of the distributor.  Communications suffer and ultimately the disagreement creates problematic “noise” in the relationship.

Complicating the situation, the distributor shares the line with other distributors, which creates some serious repercussions.  Lacking a connection (or sense of appreciation) with my distributor friend, the factory sellers focus their efforts on the other distributor.  In some regards, the factory team actually serves to “prop up” the lesser sales efforts of a weaker competitive distributor.  This happens in a number of ways, but here are a few examples:

·         Most of the factory generated leads go to the competitor.

·         When the factory person “stumbles onto” potential business it is steered to the competitor. 

·         Factory people provide technical services on behalf of the competitor and, thus offset the technology based resources paid for by my distributor friend.

·         Distributor activities reported up the chain of command at the factory paint a picture of aggressive action from the competitor.

·         Negative, or at best, neutral reports are provided back on the better distributor.

·         The response time on pricing required for special commercial situations are slow in coming and most likely questioned more strongly.  This impacts the good distributor’s ability to improve gross margins.

We must understand the whole situation…

Let’s walk a mile in the factory salesperson’s moccasins.  They have a job to do.  And, if my friend’s sales team won’t work with them, they are going to find another outlet; in this particular case – the competitor.  Getting uncharacteristically soft and fuzzy in my comments, they want to be appreciated.  If they feel the love from the competitor and not you, they will help the other guy and (perhaps unconsciously) do harm to your effort and definitely damage your relationship with their management many miles away.

Taking this point a bit further, these factory sellers will work doubly hard to justify their decisions in the field.  It’s a mistake to believe that routine reports and casual conversations with co-workers will not continuously play a narrative of their hard work, customer intimacy and strength in the market.  The customers they choose to introduce to management will be those of the competitive distributor, and probably carry loud messages of why they selected the other guy over you. 

Experience dictates all of this leads to unnecessary and unwanted friction between business partners.  Something needs to be done.  Even if you are right, you still loose.

An action plan….

No message of love and appreciation here, instead think of this as a business plan.  Three basic principles apply; invest, manage and harvest dollars. 

What is the investment?  A little time, some direction, a few compliments and a dash of activity.  Let me hammer out a few ideas:

·         Does the factory guy know on which accounts you are currently?  If they don’t, there is a chance they could inadvertently visit the prospect with the competitive distributor.  This could create a new competitor and might end up with the other guy getting price support which could be used against you.

·         Have you asked the factory guy for leads lately?  The other folks are probably getting the lion’s share of the leads now.  When you ask, promise to communicate results back and involve the factory sales guy in future activities.

·         Set target accounts together.  Assign some responsibilities to the salesperson and some to yourself, keep records and agree to the end results.

·         Schedule joint calls.    While every situation is different, I typically recommend starting off with three days per month.  Spending a day with the salesperson allows you to build a relationship, that’s a good thing.  Further, a day spent with you is a day not spent with the competitor.

·         Arrange for the factory salesperson to handle a few routine issues.  You probably know how to get literature from the factory.  You may even know who to call to get samples, demos and other sales tools.  Assign the action to them.

·         Involve the factory salesperson in lunch and learns, technical presentations and anything else where their presence can be viewed positively.

Now for the managing portion:

·         How can you help the factory salesperson meet their goals?  Get a list of the points on which they are judged.  Don’t expect all of these to be in full alignment with your own goals.  However, understand will help you get more from the vendor sales guy.

·         Keep track of the agreed upon activities.  If the factory salesperson misses a date, doesn’t come through with the promised sample or something else specific, keep a log.  This allows you to provide some level of critique and also understand their weaknesses. 

·         Provide praise, share the thrill of victory.  If they assist, even in a small way, in the capturing of a new account or gathering more business, make it a point to thank them personally.

·         Help them understand the value of working with you.  This comes in the form of periodic reviews of activities and successes.

·         When appropriate, praise them in front of their boss.  Nothing is better than a fat juicy compliment on your work to the big boss man.

The dash of activity:

Find ways to engage and keep them busy.  Remember, a day spent working for you is a day spent not working with the guy across town.  This is so very important, let me repeat.  Consume major portions of their time.

Finally, it is the real world, so let’s cover the two most common scenarios….

Let’s assume the guy is a total jerk and caustic to customers.  Working with him is painful.  Working with him may damage customer relationships.  His boss may or may not know the situation.  Complaining does little to move the needle ahead.  Specific examples allow you to provide feedback without looking like a whiner.  Follow the steps above and in short order, you will have a log of unfortunate instances to discuss.

Fortunately, most times the situation isn’t a complete fiasco.  The guy has some socially redeeming qualities, he just lacks the skills to work in your organization.  While it’s not your job to train factory salespeople, good things could happen.  The guy starts to get the picture and joins your team, leaving the clunky competitor in the dust.  You get an ally and another resource.  Life is good, we all live happily ever after….  Or maybe we just make a little more money, buy a vacation package to Bandera Bay.  Somehow, there aren’t that many unhappy people sipping cool drinks on the beach.

50 Questions for Distributors

Last week I wrote an article titled “Six Questions that Demand an Answer.”  Sharing the article with a few trusted advisers, I received one consistent bit of feedback best summarized by this response.

“Frank, I agree these are questions we must ask ourselves; they caused me to pause and ponder.  I used them as an exercise with my team to think about our overall strategy.  I believe taking the time to think about our business from an outside perspective to be justified and worthwhile.   Sometimes it’s hard to do this subjectively.  I would like to see more questions just like these.”

The following is my first round of questions.  I have put them into categories to make them easier to digest.  Some will apply to your position, some will not.  I suggest spending a moment visiting these topics with members of your own team.

A note:  The readers of this blog come from a variety of backgrounds, hold a diverse collection of positions within distribution and come from a number of lines of trade (Automation, Industrial, Safety, Power Transmission, Fluid Power, HVAC/R, Building Materials and a lot of others.)  Not all of the questions apply directly to you.  Skip over the questions that apply to other departments or forward them on to your colleagues, but do take a moment to think.

Do you believe your customers’ worlds are changing?

1.       Are customers experiencing new global competition?

2.       Are customers under new pressure to perform financially?

3.       What pressures are your customer’s customers putting on them?

4.       Are there governmental regulations which impact your customers?  

5.       Are all customers experiencing the same changes?

a.       In what ways are they the same and how are they different?

6.       Are some customers experiencing shortages in trained workers?

Do you believe your supply partners’ worlds are changing?

7.       Do they have new competition in the market place?

8.       Is there current product technology under attack by something new?

9.       Have they recently been acquired or have they acquired a new division?

10.   Have they lost market share because they have not expanded into big box stores or alternative channels?

11.   Have they had new leadership come into the company?

12.   Is their stock value under some kind of pressure?

Do you believe change at the customer or supplier level impacts your position?

13.   Which five things are most likely to impact you in the next year?

14.   What five things are likely to impact you in five years?

15.   Do you see major customers or customer segments with no long-term future?

How does your sales effort differ today than in 1990?

16.   How have technology tools changed the customer interaction?

17.   What new positions have been added to the sales team?

18.   Do you segment your customers by industry, size and buying patterns?

19.   How do you know which customers are profitable?

Do you have a sales process?

20.   Do you have a written on-boarding program for new sellers?

21.   Do you have well-written job descriptions which explain expectations, measures of success and critical skills?

22.   Have you developed a product knowledge checklist which describes the level of knowledge sales people should possess to meet management expectations?

23.   Do you have a written sales process which defines the following:

a.       Who should be called on at accounts, including customer management?

b.      Behavior on the call? (such as note taking, recapping of action items)

c.       Frequency of sales calls?

d.      Entry of data from the call into a CRM or other knowledge base?

e.      Etiquette on joint calls?

f.        Use of support staff and specialists?

g.       When to introduce management into accounts?

h.      Quotation follow-up?

i.         What you should know about the customer?

j.        When to deviate from standard price?

24.   Does your company have a pricing process?

a.       Do you believe sales people can truly understand the price point for the thousands of products in your portfolio of products?

b.      How are market price levels established and maintained within your business?

c.       What percentage of your business uses “system” pricing vs. salesperson driven manual overrides?

d.      Does your business have a magic number (ie 15, 20 or 25 percent) which is used as a “safe” margin with customers?

e.      Do you measure each sales person against the percentage of sales falling outside of the pricing process?

What tools are used in the sales process?

25.   Do you have the ability to quickly review customer purchases by product technology?

26.   Do you have the ability to provide your sales people with FOCUS Fraction of Catalog Utilized (sometimes called GAP) analysis?

27.   Do you have a working CRM system in place?

28.   Are you capable of receiving EDI orders without manual intervention?  

Do you offer more customer value than in 1990?

29.   What services do you provide that weren’t available in 1990?

30.   Do you measure the internal cost of these services to your organization?

31.   What new services will you be launching in the next five years?

a.       Have you measured your company’s cost for providing these new services?

b.      Will you be charging a fee (outside of gross margin) for these services?

Is your company’s technology current?

32.   Is your ERP system modern and updated with the latest revisions?

33.   Do you have the ability to track inventory which has not been sold for 180 days?

34.   Do you have the ability to accept orders electronically?

35.   Do you have a mechanism for eCommerce?

Can your warehouse/logistics operation keep pace with changes in the world?

36.   Are items placed by location in your warehouse?

37.   Do you use wave picks to make order processing more efficient?

38.   Are errors (shipping, receiving, lost inventory) tracked in your organization?

39.   Is cycle counting accomplished so that fast moving items are counted at least 4 times per year?

40.   Do you regularly write off dead stock and other unsellable inventory?

41.   Is there a plan for efficiently handling returns and defective materials?

42.   Do you know the cost of running your delivery truck?

43.   Do you use GPS tracking on delivery vehicles to expedite deliveries?

How progressive is your financial model?

44.   Do you do a financial projection based on sales forecast for each year?

45.   Do you provide managers with parameters for measuring their portion of the business against industry standards?

46.   Do you benchmark your financial performance against industry standards using an industry profit report or some other national model?

47.   Do you know the approximate cost of transacting business?

a.       What is the cost of placing an order with a supply-partner?

b.      What is the cost of processing an order?

c.       What is the approximate cost of shipping an order?

d.      How much gross margin is required to break even per month?

48.   Have you developed activity based costing number to determine your most profitable customers?

Do you have a succession plan in place?

49.   If you are the owner and you are at least 55 years old what is your plan for leaving the business?

50.   If you are a salesperson within five years of retiring, what is your plan for passing on your deep knowledge of your customers?

We welcome your comments

Truthfully, we settled on 50 questions because it’s a nice round number.  It could have been, and maybe should have been, 100 questions.  What do you think we left out?  Send us your ideas and well send you a postcard from Iowa. 

If you want to talk about any of these questions, we’d be happy to spend a few minutes talking about your situation. Shoot us an email or pick up the phone.  We can’t wait to hear your thoughts.

Why do customers buy? Questions and Comments

www.inddist.com

I just had the opportunity to review Industrial Distribution Magazine’s annual survey.  This year they focused on distributor value and quite frankly, I am not shocked by the results.  I am, however, deeply disappointed. 

The survey question asked “Which are the primary reasons your customers do business with you?”  The respondents reported the following reasons:

• 85.17% Relationship
• 74.16% Product Availability
• 68.42% Technical Support
• 62.20% Delivery Time
• 50.72% Price
• 31.10% Engineering Capabilities
• 30.62% Vendor Managed Inventory
• 28.23% 24x7 Support
• 3.35%    Other

This was the 69^th edition of this survey; meaning the very first edition fell well before my father started in the distribution business back in the 50s.  Silly me, but somehow I imagined our industry had progressed. With a couple exceptions, the results look like something straight out of 1965.   I am disenchanted, but again, not all that surprised.

Looking further at the survey methodology, we see the survey was sent to a broad range of distributor professionals – everyone from executives and upper management to sales and customer service.  Thinking about the demographics of most distributors, this would point to a large percentage of sales types participating in the survey.  This is a point to ponder. 

The importance of relationships and trust…

Customer relationships are just as important today as they were back when our dads were making sales calls.  I have to wonder, however, if this comment wasn’t overstated.  I can recall a couple dozen hiring instances gone amiss when salespeople were hired mostly for their customer relationships.  It went something like this:  Sales manager hires sales guy with a long list of customer contacts “ready to follow” him to the new company, only it didn’t happen.  The sales dollars didn’t follow.  In fact, in most of the cases I witnessed, only something like 25-30 percent went with the seller. 

With this in mind, relationships with distributors are important.  But when the distributor uses a team selling approach, and most good ones do, building customer connections with product specialists, engineers, inside salespeople and management types, the individual salesperson relationship is not as important.

In today’s environment, I believe it could best be said, “Customers buy from companies and individuals they trust.”  Developing a strong track record of integrity matters.  If all the technology, product availability and everything else is fairly similar, most customers buy from the company they trust.   By the way, I trust Amazon and don’t know a soul working for the company.  Is this a customer relationship?

Product availability…

Does this mean you are the authorized distributor for a highly valued product line?  Many manufacturers go to market via limited and sometimes exclusive distribution. With the right interpretation, it could mean having what one distributor calls “the A-line manufacturers.” This same guy feels this attracts what he referred to as “A-line customers.” 

The other interpretation is concerning.  If product availability refers to local inventory, I see dark clouds just ahead.  Logistics are shrinking our world.  Back in my younger days, overnight shipping was either impossible or very expensive.  Now it’s cheap and mega-distributors have mastered the placement of distribution centers to get anything to anywhere the next day.  I am told plans are underway to begin shortening the delivery lag to half days in some areas.   Amazon is testing a new service called Amazon Now and they are offering two hour delivery.  If Amazon can do it, others will follow suit.

My parents’ business thrived because they had the best inventory within a 30 mile radius.  Thinking back, even small towns had distributor locations.  The adage, "the only game in town" was real.  Travel and logistics were almost laughingly different 50 years ago.  This business model is gone.  Looking forward, I see this phenomenon only continuing.  I struggle to imagine 74+ percent of distributors imagining availability as a key buying point.

Price, really are you kidding me?

According to over half of the survey respondents, customers are buying from them because of price.  In other words, they see their value as the low cost discount leader.  I wonder, if this is a response flavored by the responses of those involved in sales, does their management see things this way?  Over the course of several hundred (probably over a thousand) detailed conversations with distributor owners and top-level managers, I have never heard any of them say, “We are striving to be the low cost leader in our market.”  Instead they talk about solutions, technology and great customer service.

Reviewing the list above, one would wonder if some of the same distributors touting price as a customer attractant aren’t also investing in technical services, engineering skills, support and improved logistics.

I believe the price focus and the services focus are inherently incompatible. 

Why price is even mentioned at all?

Purchasers constantly push for price.  Distributor salespeople are told, “Your price is too high in dozens of ways.”  Friendly customers give the seller a “last look” where they are allowed to beat the price of some real or imagined competitor; the message is price got you the order.  Not-so-friendly folks mask preference for other suppliers with “your price was out of the ball park, this time.”  The message often plays over the top of technical services and sounds like this, “Your service is great, but all of our suppliers provide the same kinds of things.” 

We have already stated buyers constantly test our price.  This creates a repeated message: price is important.  Scientists tell us when messages are repeated the message becomes believable; the thought develops an aura of truth.  When the message is repeated by many people, the directive appears as an absolute truism.  Psychologists call this the “validity effect” and distributor salespeople respond like laboratory guinea pigs.

We’re drinking our own Kool-Aid…

Through the validity effect, these sales types believe two points: 

• Point One - We only get the sale when our price is lower than or at least equal to the lowest price from a reasonable competitor. 
• Point Two – Because I am interacting with price-driven customers, and perhaps selling a lot of “stuff,” I know what the price should be for everything in our catalog. 

Hook these guys up to a polygraph and place their right hand on a stack of Bibles and the two points listed above show valid, but we need to think about the statements.

What is a reasonable competitor?  Pressed for information and objective data, most sellers lack the ability to carefully outline what makes their organization better than the competitor.  When I facilitate distributor sales meetings and ask for a list, I hear some pretty flimsy differentiators.  One of the most popular is “we have professional inside salespeople to assist in handling orders.”  When I ask if the competitor recruits their inside sales team down at the mission, everyone laughs.  The truth is we need to do better than “good service, great company culture and professional sales team.”  It’s management’s job to constantly reinforce specifics on why your company provide greater value.

Point Two requires the greatest scrutiny.  Most distributors sell tens of thousands of products to hundreds of customers.  This creates over a million price permutations, meaning, every customer purchasing every product carries a slightly different set of characteristics.  Let’s take a deeper look at how this impacts price.

We know large volume OEMs view products they purchase differently than the end user buying just one of these parts every few years as a repair part.  Research indicates many OEMs sell “repair parts” to their customers at levels equating to 250-400 percent gross margin.  Clearly, for some small users of the part, the price is justified because they lack the technical ability to determine precisely what part to purchase.  The OEM eliminates the risk and hassle factor associated with the part.  So we extend discounts to the OEM.  But, is every part purchased by the OEM the same?

Let’s assume the OEM is forced by customer specification to create a special one of a kind modification to their product.  Since this is their first use of the product, they require lots of technical and other support.  However, unlike their typical purchase, this will not come with large follow along orders.  Should the price be the same? 

Keeping with our OEM example, suppose the OEM needs to modify the lighting of their production floor.  In this particular instance, the OEM is acting as an end user of the product.  Should the margin be the same?  In many instances, distributor salespeople treat all of these situations the same.

Distributors trust their sales team to understand market conditions, but the sheer number of the pricing variations makes it humanly impossible.  In the face of such overwhelming obstacles to proper pricing, most distributor sellers resort to cost up pricing.  It works something like this:  OEMs get cost plus 20 percent, end users get cost plus 25 percent.  All regardless of product, type of purchase or support required.  If the competition has the business, the percentages drop.

How to address pricing…

Margin management falls squarely on the shoulders of management.  Our industry now has the tools to manage and control the pricing process.  This is not just the addition of some derivation of the 30 year old concept of matrix pricing (which has largely been a failure in our industry.)   Instead, it involves a process tying customer size, type and purchasing habits with product and vendor/supplier.  Further, salespeople are no longer allowed to make changes in pricing at will.  Instead, a management directed pricing leader is used to oversee exceptions to system pricing.

Cleveland-based Strategic Pricing Associates is the industry leader in this field.  With their systems in practice at nearly 500 distributors, they have fine-tuned the process over two decades.  Based on detailed studies of over 50 of their clients, we have observed gross margin improvement which typically turns out to be a sustainable two points.  The impact for a “smaller” distributor with $10 Million in sales runs around $200,000 in additional gross margin.  Further, a large percentage of the added gross margin falls to the bottom line.

Looking ahead for distribution…

When pricing isn’t an issue, it allows sellers more time to work on the things which really matter to the customer.  Things like improving the customer’s productivity, eliminating waste and driving more profits to the customer’s bottom line. 

Is improvement in distribution important?  Undoubtedly, finding ways to improve the overall productivity of the distributor is important, too.  Improvements in our industry’s overall operation will be important.  As an industry we are finding ways to do more with less.  We’re finding ways to handle order flow, logistics and billing more efficiently.  The gains made are critical to the long term health of distribution.  However, without taking care of the customer facing side of the business, we are destined to merely “give away” the gains.