The first great lesson that I learned after joining a B2B distribution pricing team was to understand the types of pricing that had the most impact on the business. If you start with the biggest impact categories first, you can make the biggest profit impact to the business.
Most B2B distributors set customer pricing through four basic categories:
1) Customer-specific pricing (CSP)/contract pricing. These typically are negotiated prices where the end customer agrees to a SKU by SKU price level for their most commonly ordered items.
2) System price.
3) Price profile (price class).
4) Manual (The price your associate sets at the SKU level for an individual order).
CSP pricing is typically put in place for the largest customers and agreed upon for an extended time period. For this reason, it is often the most impactful on a distributor’s bottom line.
Also see: “How to Calculate Your Profit Drivers and Profit Drains.”
Leading distributors are already experiencing pricing strain and pressure from the economic shutdown, according to comments from our recent MDM Baird survey.
In my experience, I have seen the CSP/contract business to be the most difficult for distributors to manage. Often, the pricing team is reluctant to help or get involved deeply with CSPs, as these are major clients with significant interaction and relationships with the sales team. I recommend you build a tracking system for CSPs that at least allows you to understand the timing of the contracts and revenue/gross profit impacts.
Example CSP revenue and renewal date impact of a B2B distributor. Blue represents large CSPs; Red represents midsize CSPs. Most distributors follow a year-end or start-of-year contract start date, which puts the majority on the impact in the 4th and 1st quarters.
In the above example, you will see that for the typical distributor pricing pressure is most impactful in Q2. If you take a large number of price changes or have to decrease price due to customer pressure with the COVID-19 situation, distributors can get caught in the middle.
You are often months away from your next scheduled negotiation and have pressure to lower prices and take cost increases that you often can’t get your customer to accept. By building a CSP tracking system by month, it will allow you to understand the impacts and start to be proactive rather than reactive with your sales team. With even a simple tracking system it will allow you to plan ahead (work on the next two months’ CSP renewal price points now) and understand big issues, such as evergreen CSPs with no end date.
If you track the end dates and dollar impact and communicate, you can work together to hold margin levels and win in the current environment. Your sales team wants to win. By working together with them, you can find the right balance of top-line sales revenue protection and GM percentage to win as a we come out of the shutdown.
Your sales team is under pressure and needs your pricing team to help them compete. The best place to start if you don’t have good visibility or control of your CSPs is to build a CSP tracking system and process to go line by line and account by account. The price pressure is here to stay for the foreseeable future. Those with a pricing process versus a gut-feel pricing approach are going to have a better chance to win in 2020.
As always, we would love to get your feedback, so please feel free to comment below or reach out to me at firstname.lastname@example.org.
John Gunderson is VP of analytics & e-business at Modern Distribution Management. Prior to joining MDM in 2018, he was a senior leader for 20 years, leading pricing, sales, category management, marketing, analytics and e-business with companies such as Crescent Electric Supply Company, HD Supply Power Solutions, HD Supply C&I White Cap, Anixter and EIS-INC, a Genuine Parts company.