pricing is an important part of the profit equation," Saunders says. "He is willing to invest to support that capability. That's one way you know you're getting there."
Managing the Change
As with any shift in strategy, the biggest obstacle may be employee reaction. A change in pricing strategy especially affects salespeople who may be concerned about compensation.
Be open with sales teams, Saunders says. "Show them how they can make more money using the tools you are going to give them," he says. Turn your top salesperson into an advocate to get everyone else on board.
"The first thing they see is that their commission check is going to go down because they are selling fewer units," Saunders says. But if implemented properly, a new pricing strategy should not have an adverse effect on compensation if you reward improved profits.
Usually, Saunders says, a new compensation system is developed to go along with a new pricing structure.
"Some people aren't going to get it," he says. "It is business so you need to cut your losses, and you may have to recognize that some people cannot make the transition to selling for profit. By the same token, you don't want your best people leaving because you haven't done this right."
Jim Saunders is the leader of the Pricing Management practice at Pricing Solutions Ltd. in Toronto, Ontario, Canada. He joined Pricing Solutions after 12 years in management at two major international corporations. Saunders can be reached at firstname.lastname@example.org or 416-863-0685.
worth," Saunders says.
In addition, create a set of metrics to measure whether you are meeting your pricing goals. Are you achieving target prices? How are margins changing over time? How profitable are individual customers?
Know the Customer
After setting up a nuts-and-bolts plan, distributors must take a closer look at their customer base and design offers to match each segment they service. Talk to your customers to learn what they value.
"You really need to understand your value versus your competition," Saunders says. Understand what you can offer your customers. "If that's what your customer wants, they will pay for it."
Design offers to match customer segments, Saunders says. This has become more important as product channels converge and distributor customer bases expand to include new market segments.
Some distributors have also gone the other way, going super-niche as specialists in specific areas. "If you're going to be smaller, you can't compete on cost," he says. "You have to improve the knowledge side of your business."
When going up against bigger players in a market, including big-box, integrated suppliers and national distributors, "sometimes you're pushing uphill, because a bigger player can offer both better service and a better price," Saunders says.
"But we have seen a few firms flourishing because they really took the time to understand their customers' needs. They narrowed down their customer base but really expanded the breadth of their relationship with those customers."
In addition, distributors must determine which customers are price-focused and which will pay for value. In one case study of an industrial products manufacturer, Saunders found the company had two basic sets of customers. One set made decisions based on service and delivery first, and the other made decisions on price first. The latter was the smaller group. Unfortunately, many distributors center their pricing strategies on the group of customers who focus on price first.
"They bang the table the loudest," Saunders says. "… You know you're dealing with a price customer if they don't have a lot of long-term relationships; they switch suppliers a lot." These customers tend to view products and distributors as the same.
For customers who are price-focused – if you need the volume they provide – provide a lower level of service. Don't give them all the bells and whistles, Saunders advises, and you can afford to serve them as a customer.
React to Costs
The next level of pricing optimization is to learn to react, day-by-day, to customer demand, your costs and commodity price shifts. Hotels, airlines and entertainment venues, with prices that constantly move, are examples of this, Saunders says.
In the distribution world, smaller players often are the most flexible. "We find that a lot of times sole proprietors are the best dynamic pricers," Saunders says. "They take a look over their shoulder and say, 'I need some work so I'll drop the price a little bit.' Or they are as busy as they can handle so the next customer that comes in needs to pay full freight so that he can be serviced properly. He has to pay his way onto the list."
But Saunders says that distributors have to make a transition from a gut-feel to a systems-based approach to price optimization. It's not possible to change the price of a widget everyday, however, because there are contracts and expectations. But you can optimize the price by responding quickly to changes in demand, commodity prices and other cost factors, such as fuel, before they hurt margins.
Companies that reach the top level of Pricing Solutions' pricing competency scale usually have a senior manager that understands pricing optimization. "At that level the CEO knows
As customer bases shift, competition intensifies and commodity prices seesaw, it's more crucial than ever for distributors to maximize profitability by magnifying the value they provide for their customers and not competing on price alone. Increasing prices by 1 percent without hurting volume can improve profits as much as 11 percent, according to one pricing consultant.
Distributors looking to boost profitability and refocus on value should analyze and redesign their pricing strategy.
"If a sales force is out negotiating deals, there's very little control. They come back and say, 'I've got a deal at $90. I know our price is $100, but if we don't give them $90 we won't get the deal.' And everyone feels as if they are being held for ransom," says Jim Saunders, partner at Pricing Solutions Ltd., Toronto, Ontario.
"There's often no real support in place to help you make that decision. It's a lot of gut-feel and stress." Saunders estimates about 30 percent of companies across industry lines have ineffective or non-existent pricing processes, based on his firm's research.
But there is a way to climb out of the black hole of pricing inefficiencies, he says, by creating a strategy with controls and metrics that ensure company-wide follow-through.
According to "World-Class Pricing," Pricing Solutions' approach to pricing strategy (see graphic), there are five competency levels companies fall in when it comes to pricing. In order to fully optimize their pricing structures, distributors must work their way through four levels, each of which takes about a year. The first, simply put, is to create a plan and put it in place, with appropriate controls and metrics.
The problem, Saunders says, is that without a strategy, "you don't have the backbone to convince your sales force to tell the customer this is our price, and here's why," he says. "If you can't say here's why, the salesperson won't have the backbone to stand up to the customer when they are asking for a discount."
First, meet your immediate needs and regain control. Create guidelines before the sales force goes out to sell a particular product line. For example, stipulate that you will accept deals at a specific price for a particular type of customer in a product category. "Deal with those questions before you are confronted with a discount," Saunders says. Another control: Require sign-off on deals.
Regaining control over discounts is regaining control over profits. "Structure the prices so customers are making the decision," he says. "Say, 'You want to pay $90 for this, then your delivery window is 10 days. If you pay $100, you can have it in four days.'
"Let the customer make the choice." Be upfront about what they can get for the lower price they are asking for, he says. "You're not just negotiating price, you're negotiating value and price together. You can say, 'We don't discount, but you can make some choices to reduce your cost if that important to you.'"
Target price by product group. To do that, it's important to understand the value of the product you are offering, Saunders says. What are the majority of people paying for the product? Be fair to your customers. "We see examples all the time, where we ask distributors, 'How do you justify to this big customer that this small guy who just walked in off the street got a better price?'"
Remember: Price is not the only thing that drives a purchasing decision. Product quality, service quality and brand image play a part as well. "Unless you can differentiate on the first three, you're going to end up negotiating on price all the time," Saunders says.
Manufacturers can work with distributors to educate salespeople on the value of their brands. "Help them articulate the value and what the brand is