SPA was featured in an article in the current issue of Industrial Supply Magazine. It covers how distributors can to tap into buyers behavioral psychology and overcome their own fears when implementing and communicating price increases.
Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.
“when the change involves a price increase, most of us hate the change”
Let’s start with this premise: nobody totally enjoys change. And, when the change involves a price increase, most of us hate the change. Yet, in most cases we accept the change and move forward. For instance, on a recent trip to the grocery store, I discovered eggs have nearly doubled from my expected price. In a nanosecond, my brain spun through the avian flu impacting poultry farmers across the Midwest, healthy egg alternatives and buying something else. But Sunday morning omelets were on the menu and the eggs quickly joined the other goodies in the shopping cart. I accepted the price increase and moved on to the real issue at hand, cooking breakfast.
“price perception is probably just as important to the grocery business as it is in the sale of industrial supplies”
As I pondered these few thoughts and made further contrasts, I came to this realization: price perception is probably just as important to the grocery business as it is in the sale of industrial supplies. Competition is everywhere. They face the same issues with national chains (theirs is Wal-Mart.) At least a sector of their customer base cherry-picks, buying only on price. But the vast majority shop for convenience, brands and bundled services. At the same time there are some notable differences.
“we face an epidemic of margin erosion via absorbed price hits”
Margins are different. The typical grocery chain operates with a grocery aisle margin in the 1-2 percent range. With this point in mind, any thoughts of absorbing the increase come to a screeching halt. In our industry, we face an epidemic of margin erosion via absorbed price hits. In this case, the underlying reason for the margin erosion is relatively simple. We are making “good margin” on one of the products we sell. This number varies from company to company, but, for the sake of argument, let’s says it is 25 percent. A price increase of two percent comes trickling down from a supplier. And, we reach a magic moment. We can follow one of three paths: 1) absorb the price increase and therefore lower our margin from 25 to 23 percent; 2) immediately pass the increase along to the customer and maintain our current margin; or 3) pass along a price increase, which incorporates the supplier’s increase and a small margin increase for the distributor.
“Many suppliers give the distributor a 30- or 60-day notice of the price adjustment”
Periodically, every manufacturer publishes some kind of price adjustment. In many industries, the increases come near the end of the calendar year. Others come irregularly, in relation to commodity price movements; things like copper, steel, oil, plastic or other raw materials. Many suppliers give the distributor a 30- or 60-day notice of the price adjustment. Customary distributor practice dictates distributors give their customers a similar notice. Stop doing this. For all but a handful of your most important customers, this practice does not make solid business sense. The extra gross margin generated during this short time will allow you to recoup a portion of the costs associated with loading new prices into your ERP system.
When this happens it’s not unusual for the company to publish a justification, but rarely is an actual increase percentage noted. We like to see distributors add a little extra for the “home team.” For instance, a manufacturer’s price increase comes in at two percent and the distributor provides the customer with a three percent price increase. If you want to get advanced and have the proper discipline, prices for items not purchased in the past six months might be increased by an even larger percentage. Again, referring to our two percent increase from the supplier, a two percent price increase might become a four percent increase on items not purchased for six months or more. Items never before purchased should be set at the “normal market price” which is established based on a discount from list rather than a cost up approach.
This article originally appeared in the July/August 2015 issue of Industrial Supply magazine. Copyright 2015, Direct Business Media., click here to read the complete article.
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