2021 Presents a Margin Challenge for B2B Distribution - Modern Distribution Management

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2021 Presents a Margin Challenge for B2B Distribution

Pricing strategy can take a hit when your sales team is desperate to get the sales funnel moving with orders and return to a sense of normal.
MarketPulse: 3Q Growth Moderates as Pricing Impact Weakens

If you are a B2B distributor driven by outside sales people, 2020 was most likely a challenging margin year for your business.

When your sales team went from face-to-face relationship selling to making Zoom and telephone calls from their kitchen tables, it created significant price pressure. This new remote selling model made maintaining margin tougher than ever.

Margin compression is not a new problem, though. Prior to 2020, most distribution sales teams already thought their prices were higher than the competition.

Our epaCUBE pricing survey, taken by thousands of distribution selling personnel, has always shown pricing is the No. 1 pain point. Of all the distributors we have partnered with, we’ve never had a distribution sales team who believed their prices were more competitive than those of their competition.

It’s not a surprise that reps can feel this way, and feel pressure to respond, because one of the highest-rated buying factors by end customers is competitive price.

Why is Your Sales Team so Focused on Price?

The largest factor is the B2B customer’s buying process. When a customer places an order, often the only part that is easy for them to change is the price. Why?

  • It’s hard to change the quantity of each SKU the customer buys in order to create a more margin-friendly quantity. They rarely can or want to buy more than they need for this single order.
  • It’s hard to get customers to add additional products to their purchase order, even with a concerted, “Would you like fries with that?” approach. Again, the customer only needs certain items for each order and is often reluctant to buy more than they need.
  • It’s easy to change the price. If you can’t get them to buy more, or add products to the order, the only variable you can change is the price. In fact, 90% of the time changing the price is the only part of the order process the sales representative can change.

Distribution primarily serves demand rather than creating it. Changing how much a customer buys is hard. Selling them products not on their P.O. is hard. But the one sales variable you can easily change is the price.

Price is easy to change and going lower does often result in more sales. You may not make enough margin to be profitable, but you can grow top-line sales quickly with a price lever pull.

These variables are creating a perfect margin compression storm in 2021. So, what can you do to maintain margin without hurting your sales efforts?

3 Margin Maintenance Actions

Here are three potential steps I often see pricing teams take to try to get their sales teams to maintain margins in a tough demand situation:

  1. Temporarily reset your floor pricing (minimum GM% at the SKU level) to a higher level. Facing sales decline pressure, your team will be more tempted to get down to the minimum floor levels, and your sellers know at what margin percentages you set the floors.
  2. Re-examine and monitor your customer-specific pricing. Put a temporary double-check on all CSP revisions that require management approval. Managing contracts effectively when supplier price increases arise during a slower sales cycle is the most challenging margin compression.
  3. Watch your temporary items that are built for one-time orders. When you build new pricing guardrails (like No.s 1 and 2) the number of temporary SKUs will often increase.

These are just three actions out of many you can take to maintain margin during economic slowdowns — but they won’t be effective on their own.

One of my mentors in distribution pricing once shared with me this analogy: “Distribution pricing is like a balloon. When you work on improving one area and put your finger into the balloon, it will often just cause the problem to get bigger somewhere else.”

For example, putting in higher pricing floors may cause your temporary SKU count to rise, as your sales team will find ways to get to the price they need to win the order.

Taking actions like the three options presented above can be helpful, but as managers and pricing leaders, the No. 1 way to help your sales team is to help them with pricing review and support.

On average, we have found that when we survey distributor sales people on how often their managers and pricing team review pricing with them, more than 50% say they review pricing with their managers infrequently (less than one time a week).

In many cases, distributor sales teams report that they can’t remember the last time they have reviewed their item level pricing with their leaders.

It’s time to help your team try to find better first-cost positions, and find ways to stay competitive and take orders off the street. It’s often a product-by-product street battle to find ways to help a sales team during a time where the pressure to go low is at an all-time high.

Your sales team may be desperate to get that sales funnel moving with orders to get back to a sense of normal. Winning profitably is going to take a combination of strategic pricing moves and management review and support of your account manager pricing tactics.

George Dunham is CEO of epaCUBE and has been working in B2B distribution pricing for more than 20 years. Reach him at gdunham@epcaube.com.

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