Why do customers buy? Questions and Comments

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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.

How to Incentivize a Distributor Purchasing Professional

The Challenge – How to Incentivize a Distributor

Photo from zazzle.com

Purchasing Professional

After writing tons of articles on the sales process in distribution where I brutally vilify purchasing and procurement types, I received an email with the following:

“Frank, you often make sweeping generalizations about purchasing types. As a former sales guy, I tend to agree with most of what you say. However, my organization (a distributor) has a couple of purchasing people. And while I certainly don’t push them to lie, cheat or steal from our vendors, I would like for them to be more proactive in helping our business make money. Do you have any recommendations for points we should intensify them on? Is it possible for them to do more than just enter orders with our suppliers?”

This was a very good question and one I hadn’t thought about for quite some time. There are many purchasing folks working in distribution. These folks are critical to our organization. Most are hardworking, trustworthy and loyal. A good many are also not working at their full potential, vis a vis, generating revenue for their organization.

I decided to create a list of topics I believe should be included in discussions between distributor management and their purchasing groups. This is my first pass. I hope it generates some discussion here and more importantly, in the conference rooms of distributors.

Let’s start off with a few assumptions:
1. Outside of commodity products, most Distributor Purchasing folks do not decide the manufacturers of products which are going to be purchased.
2. Purchasing people are often responsible for setting inventory levels.
3. Purchasing people are responsible for returns to manufacturers.
4. Purchasing people are often charged with keeping dead stock under control.


Discussion Points
Inventory:
• What is the dollar amount of inventory which has not sold in 180/365 days? Are there ways this number can be improved via returns, inventory swaps or some other method?

• When we stock new product offerings from our supply-partners, do we insist on reviewing the quantities and amounts after 60 days? If so, does the review actually take place?

• How do we calculate a good deal when presented with a seasonal or special buy situation?

• How often do you process returns for warranty items and defective returns from customers? How do you handle suppliers who are slow to process these items?

• What is the inspection process for equipment returned from customers? Are the items in first class shape? Are boxes and packaging in “sale ready” condition?

• If we scrap dead stock, who oversees the process to ensure nothing sellable is lost?

• How do you manage purchasing of commodity products? Are there some products which are completely interchangeable in our market?

Freight:
• Which manufacturers offer freight allowance (free shipping) with certain size orders? Are there times when we miss the freight allowance? Have we attempted to negotiate better shipping terms?

• Do we regularly use our own freight accounts for companies who do not allow freight to avoid hidden mark-ups in the freight cost?

• If we do not receive freight allowance for an item, is the cost of freight calculated into our pricing? (In one instance we discovered a line where freight would have added a full 9 percent to the cost of the item. Incidentally, the typical GM on the item hovered in the mid-20s. A big ouch.)

Special Pricing Agreements (SPAs):
• How do we ensure our company takes advantage of all SPAs available to us?

• If a manufacturer uses ship and debit procedures for customer specific SPAs, how do we track them and what safeguards exist to ensure we get our money in a timely fashion?

Don't let this be you or your team!

Networking with other distributors:
• Do you network with other distributors to cultivate sources for hard to find products?

• What do you consider to be a “reasonable” price over cost to buy products from another distributor?

Supplier Relations:
• Do we regularly review and “scorecard” our suppliers?

• Which of our suppliers provide us with back-side rebates on purchases? How do you manage this group to maximize the rebate?

• Which suppliers provide co-op advertising and promotional items as part of their package of value? How do you work with marketing and other departments to ensure we harvest all of the dollars available?

• Which suppliers are “notorious” for missed shipments, poor shipping documents, quantity errors or other actions which make them difficult or costly to deal with?

Non-stock items:
• How often do you review “non-stock special purchases” to determine if they should become “stock items?”

• Who enters the data for non-stock items into our ERP system? Is there a review process to ensure the proper catalog number and description was used in our ERP system?

Technology-based products:
• Do we have products which need to be rotated due to revision, software or other changes? How do we manage the process?

• When new technologies are added, how do you determine the proper part numbers and quantities to add to our stock?

In closing
This is merely a starter list. Your own list should be far more detailed; however, there are a number of folks without any list. If you are one without a list, feel free to use mine until you get yours fine-tuned.

13 times You Should Never Discount

A quick review of the Profit Reports generated by several knowledge-based distributor associations reveals a few undeniable facts:
• Distributors sell thousands of SKUs
• Distributors sell to thousands of customers
• This equates to millions of customer/product combinations

Another point dwells just below the surface. While it is harder to spot without lining up the reports over long period of time, our research indicates the typical distributor discounts more when times are good than when they are bad.

You would think that margins would go down in tough times and up in good times, but the preliminary results indicate just the opposite. Perhaps times of economic growth cause us to loosen up our grip on pricing mechanisms. Maybe we get just a little sloppy. Or, perhaps our customers rev-up their negotiating strategies. Still, we find ourselves discounting.

As we say here in Iowa, "let’s put some lipstick on this pig."  Our customers don’t think poorly of us because we discount. They have even put a kinder name on the beast – they call it “leveraging the relationship," “customer concessions” or “rollbacks."  You can thank Wal-Mart for that last one.

They reason - their size, industry sector, quantity of purchases, advanced ordering techniques, or plushness of their office carpet somehow justify a price slightly lower than

your norm. In extreme cases, we have discovered situations where customers insisted on discounts because of clerical error. Really, the inside sales person made an error in a one-time quote and the customer insisted on the price for the next 12 months. My guess is, if times were tough, the distributor sales manager would have fought and argued to get the money back, but what the hay-- times are good.

Other times, we discount without the customer’s assistance. In these cases, our purchasing department makes a special buy. Instead of putting the extra margin in our pocket, we get discount drunk – dishing out special deals to everyone who crosses our path. Don’t believe me? Next time copper takes a jump, watch electrical sales guys fight to sell their customers copper wire at last week’s older and lower copper price. That’s a form of wacky discounting that seems to only happen in distributor-land.

I realize these discounting practices have been going on for a very long time. Further, old habits are hard to kick. But join me for just two minutes while we talk about the 13 situations where you should never discount.

1) Never discount to make your quota or goal.
There are salespeople who really do try to end their years with a bang by offering some amazing discounts. This strategy seems to be part of the American lexicon. Just listening to radio or TV for a couple of hours you will most likely hear ads touting end of the year (month or week) discounts from car dealers, appliance stores and carpeting outlets. Remember, these people sell on price. When knowledge-based distributors get sucked into this mentality – they lose. Don’t be tempted to offer up an end of the year deal… ever.

2) Never discount on emergency stock.
Good wholesalers hold onto certain items “just in case." Here’s a quick example. A number of companies in your area use gigantic fuses to protect their plant’s electrical system from catastrophic failure. This almost never happens but you decided to keep a couple of these fuses around as a customer service. It’s emergency stock. When the emergency rolls around, price should not be an object of discussion.

3) Never discount on your exclusive products. 
There are products where you are the exclusive supplier. If you happen to be the only source for the product, why would you offer a discount? It doesn’t make sense.

4) Never discount spare parts.
Really, you already sold the solution. It has provided the customer with years of solid operation and finally something must be repaired. Why would you discount these parts? Providing a special price here really won’t guarantee you future business. It will guarantee you less margin.

5) Never discount a modification to an existing product.
An existing product needs to be modified to work with new equipment. Adding the modification extends the life and the serviceability of the product, discounting is not needed.

6) Never discount weekend or after-hours deliveries.
It’s totally amazing that distributors will go to the trouble of opening their doors for after-hours pickups or weekend deliveries then succumb to a request for a cheaper price. Say no to discount requests here. If the customer really wants a lower price, ask them to wait until Monday. If they won’t wait; you shouldn’t cut your price.

7) Never discount on parts required after troubleshooting.
If you or your distributor specialist help the customer figure out what is wrong with their existing product and helped establish the solution, say no to requests for a discount.

8) Never discount after the fact.
One negotiation ploy purchasing types have learned is the request for a lower price after the product is installed. They will ask nicely and you should respond nicely as well. Sorry, but we cannot do anything about the price now.

9) Never discount on a first time sale.
If your price level is right (and it should be,) this is wrong. We have heard of companies offering a “welcome to our business” discount. Here they unilaterally provide a discount to customers who have placed their first order. In our opinion this sends a message – everything we sell is priced high, so always ask us for a better price.

10) Never discount to someone who is slow pay.
Unfortunately some of our customers are slow to pay. This fact alone most likely justifies a higher price. I ask sales managers repeatedly, why discount?

11) Never discount a safety related product.
We’re not talking about the consumables sold by Safety Distributors here. Instead, think of products which impact workplace safety. Things like machine guarding, particulate monitors and other products. Safety shouldn’t be purchased on price. You shouldn’t sell it on price.

12) Never discount to convince a customer to return,
This one may sound strange, but when you offer discounts to convince an ex-customer to return to the fold, you are in essence sending the message that you are willing to match any price on the planet. It’s a reverse auction on steroids.

13) Never discount without getting something else in return.
When you come to think of it, this really isn’t discounting – it’s called negotiating. When you are absolutely forced to make some type of price concession, get something of equal value in return. Freight, long term commitment, other products which are not discounted or payment terms all can offset a lower price. As you do this, remember whatever you’re given in return must have a value.

We don’t want to discount our time together…
Many people inadvertently discount because they are unsure of where the pricing should be. In the world of wholesale distribution, this puts pricing responsibility on the shoulders of someone who should be concerned about helping the customer create real value.

Salespeople, customer service reps, counter sales folks respond to customer need when pricing levels are systemized and maintained properly. Pricing expert David Bauders of Strategic Pricing Associates recommends that his clients to establish a management-level Pricing Czar. This person bears the responsibility of establishing company price.



We recommend three actions to virtually every client we work with:

1) Build a process around sales activities.
There is no such thing as an informal process. If you lack metrics, coaching points and the ability to train on your process, you need to reevaluate your process.

2) Pricing responsibility belongs in the hands of somebody besides the line sales team.
I am not saying you don’t need the sales team’s input. I also believe in aligning gross margin with sales compensation. But unless there are some rules and some separation, your sales team will give away margin. It’s too prevalent to argue away.

3) Unless you understand the value you provide to customers, you will have a tough time with the first two – Measuring and understanding the value you provide makes you price proof.

Call on us if you want to argue these points. We would love to be proven wrong.

If you are a distributor specialist involved in the pricing process – we would like to interview you for some research we are conducting.

Product Training, Sales Training, Price Training?

It just dawned on me; the way distributors view training is skewed. After observing hundreds of confabs carrying the “Distributor Sales Meeting” moniker, I would characterize the content as product-centric community bulletin boards with an occasional dash of something else. Here’s my unscientific rundown of content:

49% New Product Introductions
Everything you ever wanted to know about some new product. Often these are conducted by Supply-Partner field sales teams with little grasp of the local customer mix, competitive landscape or the sales team’s technical abilities. Only rarely is customer application information discussed.

20% Existing Product Re-Launches
We started selling this product a year ago. After limited success, we decided some of the sales team didn’t pay enough attention to the product minutia shared last time. So here we are back with more information, only this time the sales guys ask a little better questions.

15% Delivery/Logistics Issues
Time is devoted to issues with long lead times, factory recalls and seasonal stock outages. These meetings are good because often they provide “work-a-rounds” to keep customer’s plants running and minimize damage.

10% Company Policy, Quotas, Performance

Everybody needs to understand the new benefits program and vacation policy. Meetings to discuss Quotas and annual performance are equally important and may be the only thing we’ve talked about that deserves to be part of a “sales meeting.”

5% Sales Training
Once every great blue moon, someone talks about how to better sell the company and products. Generally these come in half day bursts every 18 months or so. The rest of the time, there is no discussion of the company’s intrinsic value, no talk of presenting to customer management and no words on developing better questions.

1% Pricing
A rookie may receive misguided price training while shadowing a rock star salesperson on the road; however, this type of training barely makes list. If it comes up at all in a sales meeting, it generally follows a distributor association meeting where somebody does the “Power of One” presentation.

Why do I believe this is totally skewed?
First, we live in the age of information. Twenty years ago, distributor salespeople were viewed as important sources of customer information. Things have changed. Customers have access to massive quantities of product information. Raw product data presented by a salesman is almost viewed as a nuisance. What is valued is application support, tips on product interconnection compatibility and troubleshooting support.

Customers do value training; however, most distributors charge product specialists and application engineers with this task. On a side note, I believe salespeople can gain important understanding of customer issues by accompanying their customers to training and asking customer-focused questions about what is being discussed. But, this is not something for the sales meeting.

What should be covered in a sales meeting?
One major point is why a customer would benefit from the use of your product. This benefit question must be tied to value drivers. Labor savings, lower cost maintenance, better energy usage, increases in uptime, and improved operational efficiency must be studied in detail. Whenever possible, it makes sense to tie these to monetary values. For example, our product saves the customer $105 dollars during the installation procedure.

Distributors also add value via the services they provide. Just in time delivery, emergency back-up stock, parts kitting and application support join valuable yet mundane tasks such as locating and serving as a source for some obscure manufacturer.

A real sales meeting would stress the importance of the value the distributor provides to each and every customer. A real sales meeting would cover the questions needed to bring out customer-centric information which would allow for better solutions.

But what about Price Training?
Would it make sense that some distributor solutions are scarcer than others? With this in mind, the
distributor is entitled to charge more. The problem is, most distributor salespeople don’t fully understand the cost of handling the products. This could be part of price training.

A few of the products we sell are truly commodity-like. When commodities are sold, quantity and types of logistics required impact the price. Would it make sense to talk about precisely what makes a “quantity order?” Is it 10 pieces, 10 cartons or 10 pallet loads? Are the people in customer service aware of the price breakdowns? Are they measured by the way they adhere to management’s directive?

The sales team must continually review (and occasionally improve on) the following topics:
1. How was the system price derived?
2. What are the natural customer segments and how do they impact price?
3. What product types deserve a higher margin? And why?
4. How do we handle pricing exceptions?
5. How are market prices impacted by competitors?
6. The importance of understanding customer-based negotiations?

Based on my experience, very few distributor sales managers can answer questions arising from a discussion of this list. And, price training is not a place to stumble around in your response.
Here’s why:
Customers are trained (perhaps conditioned) to question our price. Many use price as an excuse for not doing business with us when the root cause is actually something else. It’s easier to say, “Your price is too high,” than it is to outline the truth, “We decided to go with your competitor because they out service you on routine stuff.”

The message is confused. Training is difficult. At the same time, it is an extremely important topic.

In distribution, a gross margin increase of just a couple of points stands to increase bottom line profitability by 50, 60, maybe even 100%. To achieve the same results by way of sale growth requires a near doubling of company size and that kind of growth can take years. Successfully impacting pricing can happen in a few months.

Price Training starts with a Pricing Process.
Developing a real pricing process is central to price training. The Strategic Pricing Associates (SPA) process uses scientific computer analysis of data pulled from your own past sales. Further, the process has detailed documentation designed to enable multi-layer training for literally everyone within the distributor organization (Sales, Customer Service, Purchasing, etc.) Finally, the SPA process has metrics developed to coach, help and manage the sales team into the future.


Strategic Pricing Associates has assisted over 350 distributors through the implementation of their process. Most SPA clients see results in 90 days. The results pay dividends. The typical SPA client sees a gross margin increase of two full points.


A final thought
Strategic Pricing Associates hosts several Pricing Strategy Seminars. These are a gathering of clients already using the SPA system, Industry Experts and companies considering a pricing process.  The seminars are thought provoking and powerful.  I have had the honor of speaking at a handful of these events and will be doing so again in Chicago on June 6th.

If you find that your company has not had price training since the days of the Carter Administration, I encourage you to attend. What’s more, attendance is free.  Click here for more information.

Are we Crazy or What? 2014 Pricing Strategy

Just back from a whirlwind tour of distributor locations. There’s plenty to be thankful for. Business is still doing pretty well. Most of the sellers we hired last year have gotten traction at their assigned accounts. The same goes for the inside support and customer service people: the number of lines entered each month has risen steadily. Things seem to be progressing nicely with one exception: margin squeeze.

There are a lot of excuses for the lower margins. The internet boogieman, new competitors, purchasing people flexing their muscles taking more aggressive stands all get mentioned during the first few minutes. We talk about manufacturers being to blame for a portion of the woes. I ask a few more questions about the market. Then we turn to price points.

When asked how customer price levels are established, I repeatedly hear the same story.

“The salesperson sets the price, they’re the closest to the customer and understand the commercial situation.”

Then it dawns on me. A good percentage (as high as 30%) of these salespeople have been with the company for less than two years. Many were hired from adjoining industries; similar to ours but not the same. Some are new college graduates. A few are freshly minted engineers. None have detailed market price experience in our industry.

Most, if not all, of the training done for these guys is technical product training. Nobody talks about market prices, margins needed to maintain levels of business, or the cost to provide any of the services customers stand ready to consume. Training on negotiation or customer value is as scarce as the Iowa hen’s teeth. And in my 30+ years in this industry, I can count instances of market price related training on one hand.

But price related training takes place. Purchasing guys train our people about price. If our product doesn’t match the current needs, they tell our guys, “Your price is too high.” If the customer doesn’t like our service, procurement people say, “Your price was too high.” When we bomb the heck out of the price and come in 10% less than any competitor, the buyer says, “You were a point or two high, but I am giving it to you anyway.” Based on this constant string of misinformation, our new guys think they know the market.

Now for the “are we crazy” part.
Here are the facts as I see them:
• We are giving employees with just a couple of years’ experience the ability to set our price, limit our income, and control our future success.
• We are leaving the whole topic of price training to the evil ones in the customer procurement group.

And…
• We are wondering why margins are going down.
• We justify our actions because new sellers spend time driving around visiting customers.

Ask yourself, how many years of experience in the market does your management team have? How many times in the early stages of your career did you discover you fell for a purchasing trick and left money on the table? Think about how complex the whole matrix of customers, price levels and product types can be.

I believe now is the time for distributors to put some discipline into their pricing process. Further, I attended my first Matrix pricing class over 25 years ago and have seen flop after miserable failure mostly because the distributor didn’t have the right combination of analytics, metrics and coaching points for their team.

If you don’t have a scientifically developed and well-defined pricing process, you need one. The process you select should feature not only analytics, but documentation, training and ongoing metrics. After looking at dozens of purported experts in pricing, I feel the state of the art in the field belongs to Strategic Pricing Associates. David Bauders and his team have

worked with over 350 distributors and I have had the opportunity to interview over 30 of SPA’s clients. Here’s what I have discovered.

Strategic Pricing Associates (SPA) is more than a “how to” book and way more than a consult with a plan. SPA combines scientific computer analytics with training, coaching and user friendly metrics to drive change. Their system works, the distributors I have interviewed all commented on two things. First, real impact to their gross margin percentage; the two points SPA advertises are real. Secondly, every Strategic Pricing client observes an overall improvement in the outlook of their sales team. One commented, “Our people used to fret over pricing issues. They didn’t really know the right direction to follow. Today, they work on the one thing that’s really important – providing value to our customers.” I believe this demonstrates what happens when we think differently.

Pricing Process: 10 Simple Questions

Some questions demand an answer, they literally jump up and down screaming for intelligent action. The problem is this; many times these questions develop over a long period of time. Because they develop slowly over time, they become invisible. Life’s like that. My dad used to say, “We’re too busy picking up acorns to see the tree.” I think we’ve gone past the tree and are neck deep in forest.

Last week I had the opportunity to address the leadership teams from a select group of distributors at the SPA Strategy Session in Fort Lauderdale. I was the final speaker, and the meeting was running long. To cut my talk short and put a little life into the meeting, I cut my presentation down to ten simple questions. I feel each of these questions demands an answer. Together, they demand action.

Question 1: Do you believe our business environment is changing?
It’s pretty hard to justify any kind of answer except for a resounding… yes. Our customers want more services, faster responses, more solutions and tons of other things. We’ve got more competitors. The big national chains are pushing into the sacred waters of our product niches. Amazon and Google are eyeballing the green grass we once claimed as our own.

Supply Partners want more from their distributor partners. We find ourselves doing some of the tasks once performed by their field sales teams. Besides these obviously sales related functions, suppliers want POS data, online order capabilities and extensive customer training capabilities.

Technology is a wonderful thing, but the internet has changed the role of selling from human search engines capable of coming up with specification and application data to complex problem solvers. Phone systems and voicemail have created a world where everybody is hard to reach. Technology is now available to everybody regardless of company size and type.

Even the people we work with has shifted. Boomers are marching off to the retirement sands at a rate of 19,000 a day. Generation X and the Millennial Generation aren’t behaving or thinking like the old timers ahead of them. Demographics shifts make our world spin like a broken boomerang.

Question 2: Does your own company need to change keep up?
“Eliminate the Middleman and save”, for some reason I can’t seem to get the picture of that old billboard along Route 151 out of my head. It’s an American axiom that’s only true if we distributors fail to change and morph our business model to match the needs of the folks we deal with, both customers and suppliers. Distribution is a change business; not changing brings death to our industry. Or, it brings extinction to our own organization.

To me the answer has to be yes. We need to be in a constant state of change.

Question 3: Does it work better if everyone in our company changes in the same direction?
As leaders, our job is to direct the change. When everybody flies in formation, we are more efficient, more effective and more profitable. All departments, all our branches, our technology resources and our culture has to change in the same direction and at roughly the same time.

I find any argument for changing in divergent direction questionable. So again the answer must be yes.

Question 4: Is it harder to change when you don’t know what you’re doing today?
The answer to this question comes via my dash-mount GPS unit. Before providing any driving directions to my destination, it goes through a series of steps called “finding current location”. Most distributors feel like they know what they are doing today. But deep analysis indicates they aren’t really sure how things work in the sales department.

I concur with my GPS on this one. We need to know where we’re at and what’s going on before we start making any changes.

Question 5: What’s the difference between your accounting and sales department?
Some say, “She’s was a natural born salesperson”. I’m not going to get into that argument, but I wonder if it’s feasible to say, “He was born an accountant”? True some folks have natural skills with numbers, they like to keep track of things. But, would you trust your accounting functions to a “natural” if they didn’t have a strong understanding of standard accounting procedures?

Tax codes, financial institutions and others insist on specific procedures and distributors are pretty good at following them. As leaders, we insist on it. But when we get to sales, we have few procedures, no measures of success in building customer relationships. Many of us have a hard time explaining if a salesperson is successful because of their regimented activities or if they happen to have a “lucky territory”.

I believe evidence points to a simple answer to this question. Accounting has a process. Sales does not.

Question 6: What happens when you try to change the sales group?
Screaming, kicking, gnashing of teeth? Most distributors discover the one department which should be a harbinger of change is the most resistant. What’s worse, salespeople can be pretty darn convincing. They offer up dozens of excuses; customer issues, competitive issues, supplier issues and some even more convincing.

The very nature of their work puts them outside the eyes of supervision. Some say they’ve changed, but don’t; silently biding their time until management relents. Others use their commission plan as a trump card against change. A good many will go underground. Their company begins charging for delivery on nickel and dime sized orders, and they take time from selling to personally run all over the territory delivering from their car.

The point of all this is we’ve got to anticipate pushback. And, as leaders, we’ve must hold our ground.

Question 7: Why is it important to document your direction?
Thinking about sales department pushback, one of the things the sales guys will say is “our boss goes out and hears some slick talking consultant (who probably has never sold) and comes back with a hair-brained idea and tells us to go forth and follow the plan”. It’s the old idea of the month thing.

Documenting slows down the whole activity. It forces us to rethink the idea. It helps us refine the course. But there’s more… Documenting the direction helps others better understand the direction. It allows better and faster training. It steadies the course removing distractions along the way.

Question 8: Why measure your progress?
“That which is measured improves, that which is measured and documented improves exponentially”
Pearson’s Law
In a world filled with distractions, measuring progress keeps you moving in the right direction. One client of mine is fond of saying, no coach trains their team to the final score; no football coach says we need to score more touchdowns. Instead, they work on blocking, tackling, first downs and lots of little steps that lead to better scores. They realize it’s the little things that drive success.

For the leaders of a distributor, it’s about the steps that lead to more customers, customer retention, more efficient handling of orders. Simply stated, if we only measure the final gross margin, we miss out on the things that drive customer orders.

Question 9: What’s the difference between coaching and managing?
For one thing coaching is about personal development; helping each and every person perform to the best of their ability. Coaching is one-on-one. Coaching is the first approach to growing your team. Coaching is about building playbooks and organizing the players so everyone is in the right place. It’s about getting the most from everyone on team.

Managing is the next step. Sometimes coaching involves setting harsh reality that a player doesn’t belong on the team. Managing sometimes involves jettisoning a person who refuses to respond to management.

Ideally, both managing and coaching is based on objective metrics. People aren’t judged on personality or attitudes. Instead, decisions are made based on performance data. Are they following the documented procedures? Are they performing in the small steps needed for larger success?

Question 10: What can we do today?
This is the question that needs the greatest thought. Doing nothing is easy. Doing the right thing involves the evaluation of risks and rewards. Doing something right now is important. There may be a lot to do.

Here are some points to ponder.

First, in a well thought out plan, the processes are interactive. Improving one thing typically improves a many other points along the way. Everything in our business interacts with the things they touch. Here’s an example.

When you build a pricing process, one of the typical first steps is segmenting customers by size, business type and ease of doing business. The activity of segmenting improves marketing, sales effectiveness and planning. Different pieces of the puzzle, but each is improved. Building a real process is important.

Three parts of a real process
First, there is no such thing as an informal process. Many distributors lull themselves into believing they have a process but it’s done on a person by person basis. Not so….

To be a real process it must have three important ingredients.
1. Documentation – a detailed written document which describes how the process works, who is specifically responsible for each phase of the process, how success is measured and who has the ability to modify the process in exceptional cases.
2. Metrics – metrics take the subjectivity out of the equation. We can understand if progress is being made. Our team can easily understand their own personal improvement, without management intervention.
3. Coaching and management points – the metrics give us places to help our team improve along as the organization moves through the growth plan. Coaching and managing is predictable and without opportunity for personality to come into play.

Let’s get moving
I am often asked how and where to start in building a process. I believe there are a two places that stand out in comparison with others. Here’s my criteria. First, they carry major impact to the distributor’s bottom line. Secondly, they interact with the greatest number of other processes within the organization. In other words, do a good job with these, and the interaction affects the rest of the business. Here they are…

Targeting
Companies who work a real, and vibrant targeting process are 47% more effective in reaching their sales goals. They understand their value. And, more importantly, they know which customers are most likely to benefit from their value. Salespeople plan better, bring new products to market faster and waste less time. Managers have more and better coaching points and measures of success. New salespeople especially get traction faster and with less thrashing around.


Pricing Process
I have had the opportunity to closely observe the work of David Bauders’ Strategic Pricing Associates for the past two or three years. Their clients typically drive two full points to their bottom line. The cool thing about gross margin improvement comes because most of it (80% is a good estimate) falls to the distributor’s bottom line. We see instant profit improvement for the home team. And the Pricing Process improves the distributor’s work in segmentation, value selling and overall operational efficiency.

We’ve asked you a lot of questions. Do you have a question for us?