SPASigma was featured in a recent The Distributor Channel article “Why do customers buy? Questions and Comments”. The article is a review of the Industrial Distribution Magazine’s annual survey which focused on a distributor’s value to its clients. The article addresses the root causes of the fact that over 50% cited “Price” as the answer on the survey when asked “Which are the primary reasons your customers do business with you?”
“I am disenchanted, but again, not all that surprised.”
This was the 69th edition of this survey; meaning the very first edition fell well before my father started in the distribution business back in the 50s. Silly me, but somehow I imagined our industry had progressed. With a couple exceptions, the results look like something straight out of 1965. I am disenchanted, but again, not all that surprised.
“The importance of relationships and trust…“
Customer relationships are just as important today as they were back when our dads were making sales calls. I have to wonder, however, if this comment wasn’t overstated. I can recall a couple dozen hiring instances gone amiss when salespeople were hired mostly for their customer relationships. It went something like this: Sales manager hires sales guy with a long list of customer contacts “ready to follow” him to the new company, only it didn’t happen. The sales dollars didn’t follow. In fact, in most of the cases I witnessed, only something like 25-30 percent went with the seller.
With this in mind, relationships with distributors are important. But when the distributor uses a team selling approach, and most good ones do, building customer connections with product specialists, engineers, inside salespeople and management types, the individual salesperson relationship is not as important.
“Price, really are you kidding me?“
According to over half of the survey respondents, customers are buying from them because of price. In other words, they see their value as the low cost discount leader. I wonder, if this is a response flavored by the responses of those involved in sales, does their management see things this way? Over the course of several hundred (probably over a thousand) detailed conversations with distributor owners and top-level managers, I have never heard any of them say, “We are striving to be the low cost leader in our market.” Instead they talk about solutions, technology and great customer service.
Reviewing the list above, one would wonder if some of the same distributors touting price as a customer attractant aren’t also investing in technical services, engineering skills, support and improved logistics.
I believe the price focus and the services focus are inherently incompatible.
“Why price is even mentioned at all?“
Purchasers constantly push for price. Distributor salespeople are told, “Your price is too high in dozens of ways.” Friendly customers give the seller a “last look” where they are allowed to beat the price of some real or imagined competitor; the message is price got you the order. Not-so-friendly folks mask preference for other suppliers with “your price was out of the ball park, this time.” The message often plays over the top of technical services and sounds like this, “Your service is great, but all of our suppliers provide the same kinds of things.”
We have already stated buyers constantly test our price. This creates a repeated message: price is important. Scientists tell us when messages are repeated the message becomes believable; the thought develops an aura of truth. When the message is repeated by many people, the directive appears as an absolute truism. Psychologists call this the “validity effect” and distributor salespeople respond like laboratory guinea pigs.
“sheer number of the pricing variations makes it humanly impossible”
Distributors trust their sales team to understand market conditions, but the sheer number of the pricing variations makes it humanly impossible. In the face of such overwhelming obstacles to proper pricing, most distributor sellers resort to cost up pricing. It works something like this: OEMs get cost plus 20 percent, end users get cost plus 25 percent. All regardless of product, type of purchase or support required. If the competition has the business, the percentages drop.
“How to address pricing…”
Margin management falls squarely on the shoulders of management. Our industry now has the tools to manage and control the pricing process. This is not just the addition of some derivation of the 30 year old concept of matrix pricing (which has largely been a failure in our industry.) Instead, it involves a process tying customer size, type and purchasing habits with product and vendor/supplier. Further, salespeople are no longer allowed to make changes in pricing at will. Instead, a management directed pricing leader is used to oversee exceptions to system pricing.
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