Month: August 2015
SPA Featured in Distribution Center Magazine Article “Price Increases: the time, the place and the skills”
SPA was featured in an article in the August 2015 issue of Distribution Center Magazine. It covers how important price perception is both internally and externally in distribution and offers great tips and advice to consider when planning and executing price increases.
A preview of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow, click here to read the complete article.
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.
Driving home from the store, I contemplated what might have happened if the local grocer employed the same pricing strategies as many distributors. Here’s a short list of the notions crossing my mind:
- Distributors insist on providing their customers with a __-day notice of price increases.
- Distributors fear a price increase might send customers speeding off to new suppliers.
- Distributors often absorb price increases in order to avoid potential customer conflict.
- The grocer understands price sensitivity and uses what they call the “Bread/Milk loss leader” approach to maintain margins that distributors don’t.
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 to the sale of HVAC equipment. Competition is everywhere. They face the same issues with national chains (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.
In our industry, we face an epidemic of margin erosion via absorbed price hits. 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 __ percent. A price increase of _ percent comes trickling down from a supplier. And we reach a magic moment. We can follow one of three paths: (_) absorb the price increase and therefore lower our margin from __ to __ percent; (_) immediately pass the increase along to the customer and maintain our current margin; or (_) pass along a slightly larger price increase, which incorporates the supplier’s increase and a small margin increase for the distributor.
Most distributors leave the choice to their sales team. And for some mysterious reason, salespeople fear price increases. Many would choose to go down the first path described above based on the fear that a price increase, no matter how well justified, might irritate the customer. Others avoid the price increase because it creates a distraction from their day-to-day selling activities.
This article originally appeared in the August 2015 issue of Distribution Center Magazine.
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Read a follow up article to “Pricing Professional – The time has come” – the piece outlined the need for distributors to consider how they run their business and develop a new position. We pushed for distributors to consider the impact of a true pricing process and the qualities of the person best equipped to make the pricing process work. Somewhere along the way, we touched a nerve. Building a pricing process is a viewed as a top secret strategy. While a number of our readers commented, it seems no one wants to go on record with their plans. Excerpts of some of the responses follow.
“I really don’t want our competitors to know we’re doing this”
“Hope things are going well. While you’d probably prefer I comment directly on the post I really don’t want our competitors to know we’re doing this. So feel free to use the info here without disclosing the source or location.”
“We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account”
“Management has given us the responsibility of raising margins, but they will quickly cave when a salesman comes back with a story of this or that competitor having a lower across the board price. We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account they deal with. This will crush our efforts to make pricing stick.”
“our GM is up dramatically, over 2 points”
“We went live with Strategic Pricing Associates just a little over a year ago. Based on offline conversations with others already using SPA, we decided to apply our pricing process to all of our customers except our top 100 accounts. In our old culture, it was acceptable for both outside and inside salespeople to set their own price. It took us a while to get this changed. Originally we had a team of three people who spent nearly an hour at the end of each day reviewing the pricing exceptions made by our salespeople. We constantly reeducated and argued. After a month or so, everyone knew the new program had teeth. We still find ourselves discussing price issues but not nearly as often. And, our GM is up dramatically, over 2 points…”
Top Secret Strategy?
With results like these, I can see why pricing strategy might be considered the secret sauce of distribution profitability. Those employing advanced pricing strategies are quietly building their cash reserves for future purchases, systems improvements, building upgrades and establishing shareholder equity.
If they are your competitor, there is a very good chance you’ll never learn of their strategy from shared customers. Why? After speaking with all of these folks, only one reported an issue with customer pushback. And, that one was a customer put into the wrong category via clerical error.
Click here to read the complete article.
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.