Be efficient and disciplined with pricing. If you can increase prices (or terms) without losing sales, do it. But, in the process, fix the forces that cause margins to erode, and improve service value more than costs to deliver so you can justify your margins. To achieve the latter, boost employee engagement and productivity.
After years of trying to “buy low and sell high,” more than 90% of distributors get persistent poor financial returns. While “strategic pricing” is no panacea, the top 5%, by contrast, consistently grow a bit faster and score ROIs that are three to four times higher.
To be a part of that 5%, there are five margin and profit erosion forces to fix:
1) Buy Low, Sell High. This is a zero-sum, someone wins, the other loses proposition. What are your win-win replenishment total-cost solutions?
2) Multiple regular suppliers. Customers suspect distributors sneak prices up more than reality. So, most customers feel they must buy from two or three regular suppliers (versus partnering with the best) to “check prices.” Customers’ buy-low efforts easily exceed distributors’ sell-high energy. And, what’s the opportunity cost of the customer mistrust? Sole supplier partnerships can theoretically be much better, win wins. 3PLs sell customer-centric, precision solutions using cost-plus, a la carte services for fees. McDonald’s distributors do the same and McDonald’s requires open-books with generous, targeted profit margins. How can you have several different selling models for different segments of customers?
3) Last-looks. When reps get last-look to meet a price, most consider that offer as a win and a chance to curry favor with a customer. Why not prohibit them from cutting price? Let all deals be decided by a pricing czar. But, more importantly, coach them to do one of three moves:
- Get last-look plus two points: one for their own unique value-add and one for the service excellence from the company.
- Negotiate a quid pro quo. “We can give you a better price win in exchange for what win for me? More volume? Larger average-order size consolidation solutions? Lower cost order entry?”
- Propose doing a formal analysis to co-create a better, win-win replenishment process. If your cost-to-serve drops as a percent of sales volume, then those savings can be shared with lower prices.
In the process, don’t forget to have worthy reps; basic service brilliance guaranteed; customer profitability analytics at the SKU/pick level; and a team to do upgrades of replenishment processes.
4) Misunderstanding high margins. Distributors confuse naturally-occurring, higher margin percent — SKUs, orders and customers — with being “more profitable.” But the majority of high-gross-margin percent events have losing profit equations. The profit equation for the macro (year-end P&L) to the micro (for every line item) is:
Gross Margin Dollars (-) Operational Cost Dollars (=) Profit/Loss Dollars
Note GM% is not directly in the equation. Distributors who ignore the dollar-size of a pick/order and the cost-to-serve dollars are missing two big parts of the profit equation.
5) Paying on gross margin. If you pay reps only on GM dollars (with extra for higher GM%), then they will give away all service costs to get and keep incremental margin dollars. What incentives can you offer for both reps and customers to rethink systems for a larger, average-order size?
Be Like Top 5% Distributors
What targeted-customer, service-value-improvement plays are the top 5% doing? How do they simultaneously boost service productivity to increase both gross profit dollars and profit dollars per headcount? The short answer: Attend my presentation at MDM’s Pricing and Profitability Summit, April 15-17 in Denver.
But be forewarned. All plays based on net-profitability analytics will clash with financial beliefs based only on growing sales, margin dollars, margin percentage and rebates. Who wants to see and believe that they are (typically) losing money on: 70% of all line items; 62% of all orders and 30-60% of all customers — including some big margin dollar accounts (with huge small-dollar pick and order problems)?
Executing the solution plays will take additional invested time and modified skills. But, isn’t everyone busy doing what they habitually do? Who will be the full-time, change champion(s) at your organization? What’s your roadmap? And how will you track your new innovation metrics?
Improving more service metrics (tuned to best target customers and customer niches) will require changes by all employees. What’s in it for them? How do you get everyone (including senior coasting employees) signed up?
These are tough questions but the status quo is even worse.
Amazon may nibble or chomp on some of your most net-profitable SKUs with their equally excellent, clone products (with five-star reviews) for 50% less. Amazon has also taught your next-gen buyers to want 24/7, mobile, total product info shopping experiences. Why not at least take business from your traditional competitors with better digital service capabilities? Before digital transformation investment and change, shouldn’t you dramatically improve your profitability and agility by boosting what you do best and fixing all of your hidden losing activities?
I hope to see you in Denver in April. For more on the conference, visit pnp.mdm.com.