Read an article that highlights how important it is for distributors to have clear and consistent pricing across their sales teams and geographies. If a client shops around and gets multiple answers on price from your team members, they could very well lose trust in your ability to deliver what they need when they need it. Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.
“How can poor pricing process impact customers?”
Nobody complains about your prices being too low, correct? Maybe. However, they will question your integrity when they get different prices from your company depending on who they call. And, when quantity breaks are poorly administered, they will wonder what the real price should be.
Further, if you hold prices for a very long time, absorbing price increases from suppliers over a several years, eventually price levels will need to be adjusted. Typically, this results in extraordinary emergency price increases; the kind that come after you realize you have been losing money for the past year. Distributors often report seven or eight percent increases became necessary just to stay in a break even mode. This practice nearly always puts your whole book of business at risk at the customer.
“Price process impacts profitability and gross margin”
Everyone understands the connection between gross margin and profitability from a macro level: more margin equals great profits. What they fail to understand is the relationship in an industry with very thin bottom line returns. For the typical distributor (regardless of line of trade), the bottom line is razor thin; hovering in the 2ǆ percent range. Allow me to break this down into the simplest terms. For every $100 dollars in sales the distributor gets to keep something just over a couple of bucks. When the gross margin falls by a percentage the two dollars can become something far less. Conversely increasing the gross margin by two points, not percent (moving from 25 percent to 27 percent), has a major impact on the bottom line.
Each time a salesperson decides to offer a special discount of just a couple percent, profitability is hammered. Holding the line on price increases in an attempt to avoid hard conversations with the customer equates to a direct hit to the bottom line.
“You’ve inherited a mess, now what?”
Whether you inherited the issue of poor pricing policy from others or your evil twin took control of your body and created the whole situation, you’ve got to fix it. Rest easy, you can fix the situation. It will take some time and a little planning but you will see steady process along the way. Join me as we review six time tested procedures to improve your pricing situation.
“An ounce of prevention is worth a pound of cure…”
By now you’ve no doubt surmised, fixing inherited pricing issues takes more effort than just establishing a process today. Any real pricing process must contain the following: documentation, metrics and measures, and management tools. If you miss any of these three pieces, the process is doomed to failure.
Looking back at the whole inherited pricing problem, most would wonder how something like this could even happen in an age of high powered ERP systems and computerization. But it does. Most of these same folks have been schooled in matrix pricing and have heard industry experts talk about the importance of margin improvement. Yet the problem exists.
Distributor pricing is not hard. However, it is massive. Consider a distributor with 3,000 accounts and a line card containing 10,000 SKUs. This creates over 30 Million price permutations. Balancing that many data points is not humanly possible, regardless of your skills with spreadsheet. Clearly, some kind of additional resources are in order.
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