Despite pressures from commodity price increases the past few years, many distributors are finding it hard to raise prices. The traditional method of price increases has too often been to throw five percent (or another guesstimate) against the wall to see if it sticks. The authors of the article in this issue argue that there is a better, more profitable approach. The solution is to develop products and services that target unique segments with very specific offers. For most distributors, this involves developing a range of offers from the high end (with all the bells and whistles) to the low end (no frills). The key, the authors say, is to segment the market and build specific offers based on your unique ability to drive economic value (e.g. revenue growth or cost reductions) for each chosen market segment. This article gets to the heart of why many distributors have trouble differentiating themselves: Most distribution companies have good visibility of their product costs but a poor understanding of their costs to serve customers. By assigning costs to services your company provides, distributors can assess true cost. However, simply knowing the cost-to-serve is insufficient. "Costs must be compared to the prices actually paid by customers to understand where problems reside and where the potential for improvement exists. Especially in distribution companies, where products and services are typically bundled together under one price, there is a high potential to overcharge segments that don't need services and undercharge segments that are heavy consumers of services."
Distributors have to shed their unprofitable business or get taken out by competitors who are happy to have them focus on it.