Read our article about the keys to implementing profitable pricing practices with respect to setting list prices and how sale people avoid asking for list or more when it is justified by the amount of services provided with a given product. Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.
“salespeople believe list price is that artificially high number which is used as a marker for future discounts”
Many salespeople believe list price is that artificially high number which is used as a marker for future discounts. In their minds, it is an unnatural sin to sell anything to anybody for “list”.
Part of this attitude and philosophy comes from daily life. For instance, “Nobody pays sticker price for their new Ford and no real customer pays list for their supplies in our industry” can be heard echoing through sales bullpens.
But the story doesn’t really hold up well. For example, car dealerships have regularly charged more than sticker for hard to find or limited production vehicles. Toyota dealers still stick to the manufacturer’s sticker price on most of their line-up.
“SPA’s team regularly identifies hundreds of products which should/could be sold at prices greater than list.”
I recently had a conversation on the list price topic with distribution pricing expert David Bauders of Strategic Pricing Associates. Using their years of pricing expertise and a sophisticated algorithm, SPA’s team regularly identifies hundreds of products which should/could be sold at prices greater than list. Further, his clients have successfully implemented strategies which scientifically direct the list (and greater) concept. Let’s explore the situation.
“Broken cases are sold purely as a customer convenience. Distributors who apply the normal pricing to single items lose money on the transaction.”
Some products are meant to be purchased by the case, carton or pallet-load. They are designed for large “wholesale” orders, but a good many customers only need one or two at a time. They ask you to break the carton, split the quantity, repackage the product and sell it to them in the smaller number needed to match their immediate needs. List price levels set by the manufacturer are defined by the case quantity.
Broken cases are sold purely as a customer convenience. Distributors who apply the normal pricing to single items lose money on the transaction. Not only does the gross margin generated by the sale not cover the cost of a sales transaction (inside sales time, invoice costs, and sales expenses), the transaction generates extra costs for things like repackaging, manual processing (because the bar code is on the case) and potential issues with lost products down the road in the warehouse.
“Sometimes, orders require massive amounts of engineering/specialist involvement. Support time is consumed answering dozens of pointless questions on the front end and constant babysitting throughout the production.”
Distributors have vendors (I won’t call them supply partners) who are difficult. They insist on terms and conditions which always put the distributor at risk. Sometimes, orders require massive amounts of engineering/specialist involvement. Support time is consumed answering dozens of pointless questions on the front end and constant babysitting throughout the production.
Thankfully, these aren’t our bread and butter suppliers. Whenever possible we direct customers to other manufacturers. But for a number of reasons, the customer either chooses to use the product or must use it based on the dictates of the MRO environment.
“distributors are better equipped for finding hard to get items than their customers. But, the distributor needs to get paid along the way.”
Customers are leaning down their operations. Every purchasing department worth its salt used to have a clerical person trained on the use of the Thomas Register. When a specialty machine imported from Lower Transylvania needed fixing, this person spent entire days on the phone tracking down a catalog (often not in English), deciphering the numbering system, staring at drawings and bouncing back and forth between the maintenance and procurement departments.
Guess what? Today the customer has a much more efficient solution. And, it’s not the internet. They simply call their friendly neighborhood distributor customer service group and let somebody else do the work.
“Distributors do a poor job of measuring profit contribution by customer.”
All of these lead to a massive profit giveaway. Distributors do a poor job of measuring profit contribution by customer. But experts agree; less than half of our customers actually make us money and the rest are charity cases. We are taking from good customers and making handouts to the rest.
Bauders’ Strategic Pricing Associates does statistical graphs by product showing the pricing spread of products. Tiny customers, placing miniscule orders get pricing levels equal to or better than the largest accounts. Measuring the impact of transactional costs, some of these folks are charity cases, living off the profits made from their larger brethren. This is a gap that must be fixed but it’s not easy to spot.
The issue of identifying the costly issues of pricing can best be understood by revisiting a conversation I had with my boss back in 1991. We were talking about margin erosion (even then it was an issue). He suggested putting orders into a spreadsheet and sorting them by size and gross margin. He said, “You don’t have time to look at everything, so examine the biggest opportunities.” And I believe this is the root of the problem. The average distributor has hundreds of thousands (Millions?) of transactions each year. It’s humanly impossible to plan, measure and gage each of these. The biggest ones get handled, the rest are shoved to the side. And, here’s where SPA comes in.
“a great deal of the profit improvement comes from tiny and small customers who are brought typically brought under control first.”
In research surrounding the over 350 distributors who are using SPA’s process, I have discovered a great deal of the profit improvement comes from tiny and small customers who are brought typically brought under control first. Many of these accounts must pay “list price” on the categories of products defined above because they lack the size to offset the transactional costs via their other purchases.
But the SPA process does not just segment distributor customers. An additional segmentation takes place with vendors. Identified by the distributor, product lines falling into the categories described are earmarked for margins levels which provide a fair return for the efforts of the distributor’s sales and support teams.
Click here to read the complete article.
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