With the economic slowdown, your sales team will likely be pulling the only lever they feel they have to make up for lost sales: going ultra- competitive on pricing.
Why is there such a focus on price in distribution? I’ve been using the below slide for the past decade because it really shows why it’s often all about price. When I ask distributor personnel these three questions, these are the answers I always get.
Distribution primarily serves demand rather than creating it. Changing how much a customer buys is hard. Selling them products not on their P.O. is hard. But the one sales variable you can control is price.
Price is easy to change and going lower does often result in more sales. You may not make enough margin to be profitable, but you can grow top-line sales quickly with a price lever pull.
However, now we have demand going down significantly and the sales process has been disrupted from face-to-face sales to digital. These variables are creating a perfect margin compression storm.
Here are five potential steps I often see pricing teams take to try to get their sales teams to maintain margins in a tough demand situation:
1. Temporarily reset your floor pricing (minimum GM% at the SKU level) to a higher level. Facing sales decline pressure, your team will be more tempted to get down to the minimum floor levels, and your sellers know at what margin percentages you set the floors.
2. Re-examine and monitor your customer-specific pricing. Put a temporary double-check on all CSP revisions that require management approval.
3. Re-examine and monitor your price profiles. Monitor all new accounts tied to a price profile or price profile changes at existing accounts.
4. Watch your temporary items that are built for one-time prices. When you build new pricing guardrails temporary SKUs often increase.
5. Watch increases in manual overrides to system price. Once again, building new pricing guardrails may cause more manual adjustments from your team.
These are just five actions out of many you can take to maintain margin during economic slowdowns — but they won’t be effective on their own.
One of my mentors in distribution pricing, Mark Sommers, once shared with me this analogy: “Distribution pricing is like a balloon. When you work on improving one area and put your finger into the balloon, it will often just cause the problem to get bigger somewhere else.”
For example, putting in higher pricing floors may cause your temporary SKU count to rise, as your sales team will find ways to get to the price they need to win the order.
Taking actions like the options presented above can be helpful, but as managers, the No. 1 way to help your sales team is to help them with pricing review and support.
On average, I have found that when I ask distributor salespeople how often their managers review pricing with them, more than 80% say they review pricing with their managers infrequently (less than one time a week). In many cases, distributor sales people report that they can’t remember the last time they have reviewed their pricing with their leaders.
It’s time to help your team try to find better first-cost positions, and find ways to stay competitive and take orders off the street. It’s often a SKU by SKU street battle to find ways to help the sales team during a time where the pressure to go low will be at an all-time high.
Your sales team may be desperate to get that sales funnel moving with orders to get back to a sense of normal. Winning profitably is going to take a combination of strategic pricing moves, like the above five steps, and management review and support of your account manager pricing tactics.
As always, we would love to get your feedback, so please feel free to comment below or reach out to me at [email protected].
John Gunderson is VP of analytics & e-business at Modern Distribution Management. Prior to joining MDM in 2018, for 20 years he led pricing, sales, category management, marketing, analytics and e-business with companies such as Crescent Electric Supply Company, HD Supply Power Solutions, HD Supply C&I White Cap, Anixter, and EIS-INC a Genuine Parts company.