3 Practices that Prevent Healthy Pricing in Distribution — and How to Fix Them - Modern Distribution Management

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3 Practices that Prevent Healthy Pricing in Distribution — and How to Fix Them

With the right strategies, distributors can reduce price/cost volatility impacts by using predictive analytics and evaluating cost pass-through methods.
pricing strategy calculator and computer

With the economy in flux, pricing, volatility and cost are all major factors that impact distributor profitability. However, distributors can find ways to maintain profitability despite these challenges.

Over the past 18 months, many companies focused on meeting customer demand and managing profitability through targeted cost savings. Pricing remained an afterthought as they focused on other important issues such as staying within budget or satisfying employee needs.

The Consumer Price Index continues to rise. Raw-material costs have also increased steadily since July 2020. As a result, several manufacturers and distributors implemented price increases. The question now is how to control these changes without diminishing sales volume or profit margins on each sale.

Here, we explore three areas where distributors get stuck and how to fix them.

1. Poor data and undefined cost-pass-through strategy

It’s estimated that more than 70% of distributors have no processes in place to systematically gather and track their exposure through the supply chain, with many waiting to act until there is pressure from a particular supplier or customer.

Top-tier suppliers often issue quotes within emails that include other documents. As a result, sourcing/purchasing team members may not see them. Some distributors do save this information in their ERP for later use but find themselves too busy to analyze fluctuations or trends.

Tips to help:

  • Talk to your ERP provider. If you are not gathering or tracking sourcing data, reach out to your ERP provider to see if they have a feature that loads all vendor quotes into your ERP in an organized way. If your ERP system does not have such functionality, you can leverage low-cost, easy-to-use options with Microsoft Windows or Google IT stack.
  • Evaluate your cost-pass-through strategy. You will know if it is working or not by comparing how fast your average cost is increasing versus average price for every SKU. The example below shows cost increasing while price is decreasing. This means the strategy or execution is not working.
  • Change your costing processes. Revamp your standard, actual and forecasted costing processes to ensure the true impact of input cost changes reflects the cost of goods sold in your pricing.

2. Poor or undefined pricing strategy

Pricing is like 30 moving targets, all running at full speed in different directions. Your pricing strategy can be different if you are quoting a long-term contract, a list of materials for a bid, or one line item over the phone. Someone must decide how to make or lose money, but how many decision-makers have the right data so that they are prepared to handle the real volume of their decisions?

For example, let’s say a typical mid-sized distributor has 1,000 customers with an average number of 5,000 active SKUs and at least three quantity breaks. When you do the math, you get 15 million possible combinations that need to be priced properly.

Without the right data, those numbers would make it extremely difficult to deliver an optimal experience for every customer, and the business’s bottom line.

While most distributors have an ERP, the number using its pricing capabilities is shockingly low. There are plenty of reasons for this: They do not know the capabilities exist; they haven’t thought about how to use them; the implementation seems cumbersome; they think the business is too complex for the tool. There are endless reasons not to use it, but there are even more opportunities for those who do.

By utilizing the built-in capabilities of an ERP, distributors can set and provide customer pricing with a few clicks that still replicate most existing price guidelines. This takes the guesswork out of pricing strategy and execution. It saves time and provides control over win rate.

Simply put, if you’re running a $20-million distribution business, you could be leaving $200,000 on the table by not using your ERP’s pricing features.

3. Not measuring impact

Changes in sales during any time should not be a mystery. Frequently, I meet with companies that go to great lengths to develop an annual, calendared sales budget. Then, when the monthly results flow, they’re at a loss to explain what is happening from that budget.

I hear:

  • Sales are higher but there have been no sales price increases.
  • Sales of XYZ widget are through the roof, but profits just aren’t there.
  • Our GM percentage is under monthly pressure, but we have no clue which items and/or customers are the biggest offenders.

Tips to help:

  • Measure cost pass through into pricing. Measure how fast your average cost is increasing versus the average price for every SKU.The transparency of cost and terms can identify quick wins, such as outdated margin-bleeding contracts.
  • Prioritize monitoring. A business’s success relies on the ability to monitor which customers have been quoted, what price levels need adjustment based on cost-pass-through strategy and whether the company is meeting its target.
  • Measure often enough. To implement a change in an efficient manner, know what changes will have the biggest impact on your business. This could mean tracking results at customer-item level or even daily, if necessary, and looking for any patterns that might help guide future decisions about where to focus efforts next.

As a business leader looking for ways to boost profits and achieve healthy pricing in distribution, evaluate which of these tips might be most beneficial, and whether you need to let your data do the driving for you.

Editor’s note: Hear Valderrama discuss this topic in depth with an on-demand listen of the MDM webcast, “Strategies to Stay Ahead of Cost/Price Volatility.”

Nelson Valderrama is CEO of Intuilize, which specializes in helping mid-size distributors transform data into profits. He has 25 years of experience in the industrial distribution industry helping businesses uncover hidden competitive advantages and unleash the power of data in the new digital economy. Throughout his career he has worked and consulted for companies such as GE and Private Equity firms.

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