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Recession Preparation: Don’t Panic on Pricing Strategy

Recession Preparation: Don’t Panic on Pricing Strategy

March 18, 2019

Al Bates is on a quest. The principal at Distribution Performance Project wants to see if distributors can avoid the same mistakes made over and over again, each time the U.S. economy enters a downturn. “Generally, we tend to respond to a recession by cutting price,” he says. “That does nothing more than make a bad situation even worse.”  

Bates’ reasoning is everybody else is cutting price. If it’s already a down market, cutting prices is not likely to generate more volume. Although it’s human nature to do it, Bates hopes his April presentation at MDM’s Pricing & Profitability Summit, Avoid Mistakes of the Past to Stay Profitable in a Sales Downturn, gives distributors reasons not to succumb to the instinct.  

Distributors who observe competitors around them lowering prices are likely to feel pressured to do the same, but Bates argues there is less price sensitivity in the market than most believe. Don’t “lead the parade on lowering the price,” he says. 

Following price cuts, distributors are next most likely to cut expenses when bracing for an economic downturn. Another mistake, Bates says, if those cuts are also across the board. “I’m always in favor of having expenses controlled properly, but we usually cut across the board,” he says. “We end up slashing a lot of expenses, and when the recession ends, we have to add back what we’ve already cut.” 

His solution is to cut effectively. Although its “almost heresy,” Bates says to look first at the sales arena. 

“The reality is that the sales area is the one area in the distribution world where we have not really made any significant changes in the last 20 years in terms of cutting expenses,” he reasons. 

The Right People 

In other areas of business, such as warehouse operations, distributors have already implemented tools to understand current productivity levels and how they can improve in order to drive down costs. But the same can’t be said for the sales department. They know things can improve, but aren’t sure how. 

Aside from reassigning tasks previously designated to outside sales to the inside sales force, some things distributors have tried in order to cut sales department costs have had a negative impact. For example, Bates says, automating call intake to provide a large menu of automated options. “By the time I find out where I want to be, I’m probably more infuriated than I would be if I’d just had somebody answer the phone,” he says. 

Although outside sales may not be doing pure order writing functions anymore, they will always be relationship selling, Bates says. Such relationships don’t lend themselves to automation and technological efficiency. “It’s hard to automate that one-on-one human activity,” Bates says. “I can’t tell the customer, ‘Well, I can only give you 3.5 minutes. That’s my timeframe.’” 

Instead, Bates plans to advocate that distributors rethink if they have the right people in the right seats. “Even if I continue to be inefficient, if I have the right people being inefficient, that’s better than the wrong people being inefficient,” he says.  

Although every sector has its own economics, Bates says his presentation at the Pricing & Profitability Summit will be a universal message for distributors across all sectors. “I don’t think we have the full understanding of the expense side of the business the way we should,” he says. “I’m going to preach for better financial understanding.” 

For more on Bates’ presentation and MDM’s Pricing & Profitability Summit, visit pnp.mdm.com.  

 

© 2019 Gale Media, Inc.

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