Many distributors’ plans for better pricing have failed to keep up with technological changes that may make the process less manual and a little more “automatic.” Changes in business system capabilities have made it easier for distributors to reduce the burden on salespeople in making pricing decisions critical to maintaining customer profitability.
“Distributors customarily delegate the pricing responsibility to salespeople without delegating the proper tools and information so they can do a great job,” says Brent Grover, managing partner at Evergreen Consulting, a firm focused on the wholesale distribution channel. Grover presented a two-part MDM Webcast series on pricing in June.
Technology has advanced, and many of those pricing decisions can be made using existing business systems. But it requires effort on the part of distributors to tune their ERP systems to optimize their strategic pricing capabilities. “I feel comfortable in saying that in most wholesale distribution companies they underutilize the ERP system,” Grover says. “Without strategic pricing, you could be leaving a lot of money on the table.”
Using a process that requires salespeople to determine discounts and premiums manually by customer leads to inconsistency and creates outliers, he says. Using your ERP system to make the process “semi-automatic” creates a structure that is “consistent and efficient.”
A Four-Part Continuum
The problem with working manually is that there are many layers to ensuring your strategic pricing plan is optimized. “And all the parts work together,” Grover says.
It is a four-part process: transaction analysis, refining the pricing process, tuning the pricing engine, and sales training.
For transaction analysis, the concern is what your customers are actually paying for different SKUs. This helps you answer the question: What are similar customers paying for similar items? Less important is what your competitors are getting paid, Grover says.
“We never know what competitors are really charging anybody,” he says. “And even if we analyze our lost sales, we never know exactly why we lost the sale. The customer may say it’s the price when there are other reasons, as well.”
Analyze the transaction history on a rolling 12-month basis, and do it regularly throughout the year. “If you’re not willing to make an ongoing commitment to this, it’s probably not worth the effort because if you relapse, it’s no fun,” Grover advises.
Refining the pricing process and making it semi-automated will make “routine pricing more routine,” Grover says.
Assuming the ERP system contains the most up-to-date information, a salesperson should be able to conduct a search by entering specific parameters – customer segment, customer size, product segment and price sensitivity – and the system should return the discount or premium level based on existing contracts or similar customers.
But the pricing engine also must be tuned for this to be effective, Grover says. The pricing engine is the hierarchy the ERP system uses to sift through the data contained within the “library.”
That hierarchy should move from the most specific to the most general. The computer takes the information provided and references data using that hierarchy. If there are existing contracts for a specific company, the system will return that price.
But if it’s a new customer, or an existing customer requesting a new SKU, the system will look for prices for that customer segment, or failing that, a general price range for that SKU, and so on. The idea is to limit the outliers by aligning prices in an orderly way rather than “on the fly,” Grover says.
Finally, effective sales training is necessary to implement and carry these efforts to the customers. (MDM will present more on pricing and sales training in the July 25, 2010, issue.)
Once you’ve gone through the process of fine-tuning your ERP system for optimizing strategic pricing, how do you get that updated information to the salespeople in the field?
“We have to think about smart phones,” Grover says. “These are the tools we put in the hands of our salespeople. So how can we put pricing on their smart phones?”
One important piece to making sure salespeople have the most up-to-date information is to ensure they are receiving daily updates made to the existing price and product list on the ERP system, according to Grover.
“We don’t have to actually interact with the company’s ERP system (to do pricing lookup in the field),” Grover says. “Instead we can use a program we’ve written using a SQL server, for example. And that program can be accessed from a computer or a smart phone.”
Most ERP systems are already equipped to handle this, Grover says. One of the biggest challenges, though, is getting the customer segmentation correct.
“We find that as much as 20 percent of those fields are not populated at all,” he says. It’s an existing function that simply isn’t being used, and when it is, the information isn’t as good as it could be.
“It’s a data scrubbing and cleansing task,” Grover says. “It does take a little effort.”
The full webcast series on strategic pricing is available at www.mdm.com/webcast-downloads. Part 1 looks at how to implement strategic pricing using your ERP system; Part 2 covers how to train your sales team to effectively implement strategic pricing.