This article looks at the growing market for pricing software in distribution.
For many distributors, managing inventory through software was a significant shift in how they viewed the strategic use of technology. Next up: Pricing.
Thanks to economic uncertainty and volatile costs, pricing is top of mind for many distributors right now as a strategy to preserve and expand gross margin. "The way I think of it is this: In the old days, distributors learned how to manage their inventory using computer systems," says Tim Reynolds, president of Tribute Inc., a software provider to fluid power and hose distributors that also provides a pricing function. "If you have 20,000 SKUs, you can't do it in somebody's brain. You have to have a system. Now inventory management is really quite sophisticated, even in very small companies."
He says the same can happen with pricing. "To really do the market analysis and get the pricing correct for each item and customer – that's what strategic pricing is about."
Very few distributors have jumped feet first into software designed exclusively for pricing analysis. The cost and time required to set up complex enterprise pricing solutions is still prohibitive for many smaller and mid-sized distributors.
Instead, smaller and mid-sized distributors are starting small, using simpler, less comprehensive pricing software or add-ons to their current systems that analyze pricing on a surface level. Some distributors have built pricing systems in-house within their legacy systems.
"What we are seeing is increased competitive intensity as the economy tightens," says Brandt Hurd, director of sales engineering at Zilliant, an enterprise pricing software provider. "These guys want to grow their revenue and preserve bottom-line profitability."
Creating a standard off-the-shelf package is difficult in pricing, says Jon Ladle, president of on-demand pricing software provider Advanous, due to differences across distribution verticals. "But we are not a long time away from figuring that out."
"Some of the advanced algorithms and pricing optimization techniques for large distributors will be able to moved into a downstream-type model once distribution as a whole gets its arms around what a typical pricing package looks like," Ladle says.
Hurd says Zilliant is working to develop a more efficient solution that will go downscale. "I think there's still a cutoff today of $200 million or $300 million before the economics make sense," he says.
"But maybe just a year ago, the cutoff was $1 billion. "More and more, distributors with sales of $100 million and up are starting to show interest, Ladle says. "You see large distributors as early adopters, and hopefully it will trickle down from there, but we need to do more education on what is out there and what the software is capable of."
Simplifying the Process
The enterprise pricing software solutions use complex algorithms to help distributors determine the best price for a particular product to a particular customer. "What we do with the software is make sure that we can extend the insight from these algorithms to the front lines," Hurd says.
Systems will typically provide one market-aligned price or a series of prices, depending on the distributor's needs. The sales rep will start at a recommended point and will be told not to go below a floor-level price.
Despite the complexities that go into the calculations, the idea is to simplify the process at the distributor level -instead of providing analysis that a sales rep has to interpret. Sales reps often don't see anything different on their screen than before ¬– except for the numbers. Some training is necessary though so that salespeople understand what is going into the prices they are seeing on their screens.
Hurd is optimistic for growth in the distribution industry. “Pricing is black and white, and the returns and gains in profitability are measurable,” he says. “In tough economic times, this sector of the software space is rising above others because people are very pragmatic about where they spend their software dollar.”
The key for distributors is ensuring they’ve chosen the right package for their current pricing needs. “Distributor margins are so thin that they have to be very certain when they go sign a contract to spend hundreds of thousands or even millions of dollars. They want to make sure the returns are there,” Ladle says.
“Pricing in particular involves a lot of facets, so they have to feel committed to it and comfortable that they can get this implemented. Once they make that decision and make that commitment we believe that can be a game-changing event for them.”