Month: November 2014

What do your people believe about your company’s profitability?

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Read our article about the importance of educating your sales reps on the actual profit margins your company makes and the value you provide to your customers. This will go a long way towards reducing their inclination to offer discounts as a matter of course. Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.

“Many distributors refer to the difference in sale price and costs of goods sold as Gross Profit.”

I believe this is a major mistake. Here’s why. When our employees here the term Gross Profit, they assume the lion’s share of what I call Gross Margin goes straight to the owner.

If your company buys something for $80 and sells it for $100, how much money ends up in the owner’s pocket?

The answers are mind boggling. I hear answers ranging in the $15-18 range. When I share numbers from distributor association benchmarking reports, I get blind looks of dumb disbelief. There is a big difference between the supposed 20 percent return and the actual 2-3 percent return of real distributors. The looks turn to utter amazement when I further explain that the 2 or so bucks are later taxed at rates nearing 45 percent.

“Distributors work on a razor thin margin.”

Lack of education creates an ongoing ignorance (not stupidity). Because the distribution model is about a whole lot of people making independent and often unsupervised business decisions, this leads to some really poor choices; especially around pricing.

How do we break out of this situation?

The first step is actually pretty easy. Creating an awareness sets a person’s mind into action. Posed with the question, how much of a discount can we give customers in a two percent business starts the process. Simply talking about it can make a difference with a few of the more astute employees. Back this information up with some other rules of thumb. For instance (and using the Profit Analysis Report of one distributor association), distributors in our industry must make an average of 24.6 percent gross margin to break even or the cost of processing a special order for a none stock item costs around 67 dollars.

Make sure your people understand the value you create for customers. Knowledge-based distributors carry out services far beyond just transactional sales. They provide technical guidance, engineering assistance, product selection and often hold special purpose inventory just to cover unique customer applications. One would expect these tasks and services cannot be provided at the lowest price on the planet. This move helps your team better react to offhand pricing challenges from customers.

Click here to read the complete article.

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Why do they buy?

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Read our article about the keys to effectively communicating the value of your products and associated services and pricing them accordingly. Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.

“Yesterday, I received a marketing intelligence survey phone call. And, while I generally just hang up when I get this type of call, this one came at the perfect time.”

I was in the car alone, facing a lengthy drive and just decided to go with the flow and take part.  Convenience stores were the topic.  And, I am an expert.  Over the past couple of decades, I have a hard time remembering a single day that I haven’t stopped by one of these little spots.

“Then the discussion turned to price.”

It drug on and on.  The price of my favorite QuickSpot’s candy bars, fountain drinks, coffee, hot dogs, salads, bread, milk and beer were all rated on a one to ten scale.  And, I recognize QuickSpot as the high price store in every category.  It was a magic moment when the lady doing the survey asked, “If you recognize their price as higher in every category, why do you shop there?”

In my mind, they forgot to ask the most important question; “Why do I buy?” What is it that keeps me coming back to this same place every morning around 7:00 AM?  For me it’s about convenience and speed.  I can hit this place grab my coffee and other sundry items hop back in my car and be seated at my desk in less than 5 minutes.  Price has nothing to do with the equation.  Strangely, the survey forgot to ask.

As strange as it may seem, very few distributors ever ask the single most important question in the selling business. Why do people buy from us?

“Most of your top customers will tell you, “As long as your price is competitive, we’re good to go.” But salespeople struggle.  Why?”

Let’s face it, nobody has ever sat down with your sales guy and said, “Hey Joe, your price is too low.” Conversely, someone, (a purchasing guy or an account justifying their position with a competitor) has definitely stated, “Your price is too high.”  This leaves a lasting impression.

Because most of our customers are nice people, most wimp out when the salesperson doesn’t perform. Instead of saying, “You really dropped the ball on this order and I decided to give it to your competitor.”  They say, “You were just a little bit high.”  And, this message gets pumped back into your organization under the heading of the competitor down the street is bombing price.  Other salespeople take the message to heart.  And, your margin goes circling down the drain.

So what’s a distributor to do?”

Gather your team.  Ask them for real examples of why customers make the decision to steer their dollars to your organization.  Let the team ramble.  They can probably come up with a long list.  After the list has been created, ask where they got the information.  Discuss each example.  Who said, local inventory is key?  What were the circumstances?  Who were the competitors? Why did the customer select us versus them?

As strange as it seems, very few companies reinforce these thoughts with their sellers. Instead they leave them to fall victim to random negative thoughts on pricing.

“Old habits die slow agonizing deaths.”

The habit of discount pricing in a value rich environment is no exception.  Sales teams need help and guidance.  Strategic Pricing Associates (SPA) analytics are a powerful tool in measuring progress.  Let’s dive into the topic.

SPA analytics allow you to segment both customers and product offerings. Different customer types are more price sensitive than others on a product by product basis.  Going back to my convenience store thoughts outlined above.  The c-store survey team didn’t even touch on gasoline prices.  Why?  Because at three or four bucks a gallon most people are very much aware of the cost.  Across my city, the price gap is just a few cents; something like a one percent spread.  If the price is close, the c-store is good to go.  But, step inside the c-store.  The same folks who are price sensitive on gasoline pay almost no attention to the cost of their double diet mocha cappuccino and prehistoric hunk of beef jerky.  Same customer different product, totally different pricing sensitivity.

“Determine the discounters in your organization?”

SPA’s unique process allows you to measure salespeople for conformance to pricing strategy.   This is key.  Some folks need coaching, management and subtle nudges along the way to break away from a career of poor pricing practices.   The ability to individualize the message, gauge improvement and set incremental improvement goals does wonders to push whole teams ahead.

 

Click here to read the complete article.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can subscribe to our Strategic Pricing Pays blog or follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.