Distributors: Upgrade Your Strategic Pricing
The first step to ensuring your strategic pricing initiatives are successful is to understand what you’re doing. Here are a few questions to ask of yourself, as a business owner, and of your top management.
- What is “strategic pricing”?
- What is our Pricing Analyst’s job? (scope, objectives and success metrics)
- What assumptions underlie these answers and is there data to back them up?
- What additional analytics would improve pricing effectiveness?
If you find wildly varying answers, or confusion, from your management team it’s time to upgrade your approach to strategic pricing.
Test Yourself: Do You Believe Any of These Pricing Assumptions?
Buy low, sell high fattens margin percentage, and no other management activities can improve profits bigger and faster.
True! But, only as a static financial analysis exercise. Every distributor has pursued this concept for years with no sustainable profit improvements. Why?
- Suppliers and customers play this same zero-sum, win-lose game to a stand-off
- Hidden mistrust costs then undermine win-win replenishment system possibilities
- There’s no innovation or creation of better service value for target niches of customers to justify higher prices
- Reps often prefer meeting last-look prices, rather than insisting on extra points for their own value added and for the company’s measured, guaranteed service excellence
- No company has ever prospered by raising prices for the same commodity service value
Naturally-occurring high gross profit percentage (GP%) SKUs and customers are profitable. Get more!
False! Higher GP% is not the same as the GP dollars (GP$s) needed to cover cost-to-serve dollars (CTS$s). Small customers with higher GP% usually have small-dollar sales, orders, and picks. Their profit equations are mostly losers (GP$s (less) CTS$s (equals) Profit/Loss dollars).
You can fix losing small-dollar pick items by increasing the mark-ups to what the traffic will bear!
Do it! Your bottom line will improve. But, the small-pick items will still have losing profit equations. Just less so. You can build up GP$ per pick and per order to profitable levels by imitating Amazon. Bundle the popular small items (into 2-12 packs) and make the bundles add-on items.
Every incremental customer, sale, and margin dollar is good.
This data-free chain of flawed rationalizations goes something like this:
- All employees are a fixed cost in the moment
- Any extra order and line-item pick activity just keeps idle folks busier
- This allows for incremental margin dollars to go to profits
- And any extra sales will add to supplier rebates for more profits
What You Need: Line-Item, Profit-Equation Analytics
With a cost-to-serve model that generates a profit equation for every line-item event, you will discover the big cross-subsidies that exist amongst both customers and SKUs.
Take your strategic pricing to the highest level. For a free, tutorial/demo contact me. At [email protected].
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6 年Pricing must become a core competency of every business organization, especially in broad-line distribution houses. The key to success here is data analytics, product classifications based on frequency of purchase, and customer segmentation based on the relationship to the organization. It is not a faith based activity. Data drives the decisions, increases share of wallet by optimizing gross profit.? Generalizations do not work, specific actions, on specific product and customer segments is? a science. Once in hand, however, as pointed out, it is all up to changing behaviors and implementing the documented strategies.
M&A Advisor at Brent Grover & Co.
6 年Bruce - Good thoughts. Strategic pricing projects have disappointed many distributors. The reasons are often the same: inability to change sales and management behaviors, failure to understand the importance of order size, raising prices too much and/or for the wrong customers, and, unrealistic expectations. Good pricing isn't a panacea and it won't fix bad companies.