There are literally hundreds of studies, books and seminars on distribution pricing. They all have catchy titles like "How to stop price wars before they start," "How to win the price war," and "How to improve your team’s negotiation and price augmenting skills."
But who started your price war, anyway? On average, when distribution leaders are surveyed, “Who started the price war?”, 85-90 percent come back with this answer: our competitors.
The math doesn’t work; it can’t always be the other guy’s fault. So who started your price war? Was it really your competition? There are ways to find out if it was the competition, or possibly the person who looks at you in the bathroom mirror. As a distribution leader you get a lot of anecdotal evidence: price quotes from the sales team that show a specific example of getting beat low on a bid, and leaders who constantly tell you it’s tough and that the competition is going low to win.
You also probably hear from suppliers who – feeling the effects of a distribution price war – confirm that it is the other guy. Of course, it's tough to tell the customer that it really is their team who are bombing price levels, and they might just be telling you what you want to hear.
So how you do you move from anecdotes to data? I recommend you survey two groups – your front-line teams making the pricing decisions who are selling to customers, and also your customers. Make it anonymous if you want real answers. You also have to have a big enough sample size and ask proper survey questions. To do this properly, you may need to get some outside help on survey design. Here are some basic questions you need answered from your front-line sales team (outside and inside teams).
Top five price war questions:
- How often do you change prices (in percentages)? For example, if you know that your team overrides system prices 50 percent of the time and they answer they only do it 20 percent of the time, that’s a significant gap.
- How often do you lower a price when a customer informs you they can get a lower price? If you have answers that are over 50 percent, then lower it; you have issues.
- How competitive are our prices compared to our competitors? If your team says your prices are too high, you have a gap to address. To balance this feedback, conduct an anonymous survey of your customers (that doesn’t identify who it comes from). Ask them about your price competitiveness versus a specific competitor. If you have your team saying the other guy is selling on price and your customer is telling you something different, you have a gap to solve.
- How often do you get competitive pricing from your customers? If your team isn’t getting regular pricing feedback (on paper) from customers, you have an information gap. Information gaps are profit gaps!
- How often does your manager review your end customer pricing? If the answer you get is "never," or less than once a month, that’s a profit gap. Fill it!
If you have multiple gaps, then the team who is bombing market levels might be your own. Metrics and customer input will help you solve this problem. A key tip: distribution surveys are like gasoline. If your leadership team is open to the results, and you use the knowledge to get more day-to-day leadership on pricing, the survey can help drive your business engine forward.
If your management team is prone to dispute the survey results and still blame the other guy or operations, then the survey will be like throwing gasoline on the pricing fire you have already started. Here are a few key things to look for. If your associates' answers for question 3 on how they feel about are price competitiveness are basically "we are high," then you will have many customers who tell them they are high and take advantage of that gap.
I’ve found that distributors who use pricing and margin associate surveys and feedback to improve consistently meet their margin and profit goals. Distributors that don’t get organized feedback – or when the survey is presented don’t use it to develop improvement programs – usually don’t meet their margin and profit goals.
Price wars are real, and it can’t always be the other guy who started them. It might be your team that started the price war. The important takeaway is that you can stop the war with feedback, a plan and looking in the mirror to realize that stopping pricing wars often begins with you.
As always we value your feedback. Feel free to comment below or contact me at john@mdm.com
