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Common Mistakes to Avoid in a Profitability Overhaul

Common Mistakes to Avoid in a Profitability Overhaul

April 22, 2019

At last week’s MDM’s Pricing & Profitability Summit, industry veterans shared tactics on how distributors can examine their business models, recognize ways their priorities are affecting the company’s bottom line and develop new tools and strategies to execute a more profitable approach. Part of that process involves examining where and how things may have gone off course. In a candid Q&A session, several speakers shared mistakes they’ve witnessed and ways for others to avoid repeating the errors in their own journey to improved profitability.

Incremental Approach

Often, a distributor’s success or failure in instituting a new pricing strategy or other business initiative designed to shake up the status quo comes down to leaders’ ability to orchestrate the change, said D. Bruce Merrifield, partner at WayPoint Analytics. The solution, he said, is to find a balance between sudden change and inertia. Instead of trying to change everything at once — “jumping in the river with both feet” — Merrifield recommended taking a look at 10 worst-performing accounts to see what is really going on with them. 

“Let's go out and deal with these one at a time. Crawl, walk, run, fly. Accumulate new skills and diplomacy to figure out how we're going to try to get these people to buy one-tenth as often, 10 times as much and pay 10% more,” he said. “… It's the really tiny little baby step experiments. Looking at rapid prototyping, learning by failing forward, if you will. I advise that strongly.”

Randy MacLean, president of WayPoint Analytics, agreed with Merrifield’s assessment to take an incremental approach to change. When examining numbers, it’s easy for a distributor to declare they’re not going to do any more losing business and cut those customers off, but “that will get you in a lot of trouble,” he said.

A reduction in loss is as valuable as a gain in profit, he added. Improving a customer that is losing a distributor $10,000 a year to an $8,000 loss is a $2,000 bottom-line gain. “That gives you some time to figure out how to … convert it into something else or to find a replacement account,” MacLean said. “Some of the biggest mistakes we've seen happen when people take a black and white approach to these problems and they put in some kind of big policy that applies to everyone. Then they have to backtrack and do damage control after the fact.”

Claims vs. Reality

In examining pricing strategy, members of the sales team will often say a distributor is overpriced in the market — don’t buy that claim, said Real Results Marketing Managing Partner Jonathan Bein, Ph.D. His company has done years of customer research that shows pricing is not a top factor for clients. When asked to rank eight or nine attributes of a distributor, he has yet to see — in nearly 100 surveys — a customer state price as the most important metric. 

“If price comes in fourth through about sixth, that's where we expect it. If it comes out below that, price is really not an issue,” Bein said. “It's powerful when we compare [those results with] what the salespeople say. … So, don't believe what the salespeople say, necessarily. You have to get the data.”

A challenge for Profit Isle, said CEO John Wass, is when the profitability analytics company is working with C-suite executives who either aren’t ready to take action until they get increasingly precise data, and are therefore immobilized, or who direct their full attention to their money-losing customers and declare, “We’re going to solve that problem!” instead of seeking early wins. “They're not getting the value that they could have gotten if they focused on their strengths,” Wass said.

He encouraged distributors to keep in mind that almost nothing works the first time exactly the way it’s envisioned. Trying to tackle the hardest, biggest problem first will create a negative feedback loop, Wass explained. 

Customer Centricity 

Merrifield encouraged distributors who want to execute better to take a page out of Amazon’s playbook and become more customer centric. “Jeff Bezos [set out] to have the most customer-centric company on the planet. I think that's a good thing to do,” said Merrifield.

When attempting to institute change, distributors will often run into naysayers who say the new approach will never work in their market. Amazon faced this issue when it hired people directly out of channels where it was adding business. Bezos’s solution was to leave an empty chair representing the customer at every meeting and, pointing to it, ask, “What do you think the customer thinks?” Customers don’t care about what the sales team thinks are limitations, Merrifield said, they care about themselves. 

To keep the customer perspective in mind at all times, Merrifield recommended distributors reach out to their five most profitable customers in their No. 1 niche. “Let them be the final arbiter of anything you think you're doing that is genius — because it's not, and they're going to tell you,” he said. Ask them, on a scale of one to 10, how much they like the idea. “You've got to start to do that,” Merrifield added. “Customer expectations — thank you, Jeff Bezos — have exploded. B2B buyers, you need to cater to them.”

 

 

© 2019 Gale Media, Inc.

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