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Smarter pricing can be one of the quickest ways to improve the bottom line. But the right approach for distributors is fundamentally different from those used in other industries such as manufacturing. There are specific risks and opportunities that distributors should not ignore.
Pricing risks specific to distributors include:
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Threats to customer relationships. The trust that has been built up within these relationships is often the single most value asset that a distributor owns. If that trust is broken because the customer feels deceived or cheated, the results can be dire.
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Widely varied sensitivity. One customer's "C" item may be another customers "A" item, and vice-versa. Raising prices on an item for all customers can end up subtracting more gross profit than it adds.
But, letting the most sensitive customer dictate the price of a product means leaving money on the table.
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High management complexity. Distributors typically have throusands of customers and thousands of stocked SKUs. The effort involved in analyzing, setting up, monitoring and adjusting all these combinations can overwhelm even a large organization.
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Sales force reluctance. A large percentage of most distributor's sales are at negotiated prices, so the sales force almost always plays an important role in realizing pricing improvements. If they aren't fully on board, all your hard work could end up being circumvented.
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Gravitational forces. It's common for distributors to implement a one time price increase, only to see the gains slowly erode over subsequent months. By the end of the year, gross margins may be no higher than before. Distributors need a consistent, institutionalized framework for fighting the forces of margin erosion: waning management attention, constant customer negotiation, sales force lethargy, supplier sales targets, etc.
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Immature analysis and measurement capabilities. Pricing can involve some fairly sophisticated data analysis that should be repeated at least annually. Careful measurement and monitoring are required so that market issues can be identified before they cause a serious sales impact.
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Fortunately, IRCG's extensive experience in distributor pricing projects can help you overcome these risks. Our proven model addresses all of the factors involved in successful pricing realization. Best of all, when we are done you own all the tools and methodology so you don't need to come back to us next year.
Analysis
IRCG has a sophisticated pricing analysis engine that used with almost any technology platform (ERP software, SQL Server, Access, Excel, data warehouse, etc.) We collect and synthesize data on customers, products and order history. The engine not only identifies opportunities based on estimated price sensitivity, it helps you make the most appropriate management trade offs. As illustrated in the following diagram, the best pricing decisions for any company must reflect trade offs between margin improvement, the risk of sales loss and the administrative overhead of ongoing pricing management.
The best trade off is ultimately determined by your market strategy. For example, if your value proposition centers on inventory availability and retail counters, then you might push for higher margins, because lower customer loyalty negates your sales loss risk. IRCG has straightforward methods for estimating these risks.
Implementation and Management
Analyzing sales history and changing a product price is relatively simple, realizing ongoing margin improvement is much more challenging. It requires an adaptive feedback loop with solid measurement systems. It may also require organizational and behavioral changes. IRCG typically conducts root cause analysis to identify key barriers to effective price realization prior to any pricing changes. Sometimes we find that relatively simple process changes, such as display net margins instead of gross margins to inside sales reps, can yield substantial improvements all by themselves.
We ensure that you can manage risk and continue margin improvement long after the initial project has been completed.
Take advantage of pricing optimization opportunities with controlled risk. Call us for a free phone consultation, or email
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