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The Wholesale Distributor Sales Team Pricing Challenge

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Most wholesale distributors and many manufacturing companies task the sales team with setting or adjusting prices on a customer by customer basis. In most cases, a centralized pricing system where a pricing structure is maintained for field use does not exist. Instead, many distributors rely upon the skill, experience and judgment of the individual reps for pricing management.

The challenge is that even though each rep has unique insights into the marketplace and customer needs, each rep may be applying their skill and experience differently with differing results. And, no mechanism typically exists that allows reps to share their experience across the organization.

Capturing the experience of a team of sales reps is no easy task. However, by beginning with historical pricing data, analysis can be performed that provides visibility to company wide price performance. Visit this page on pricing analysis to learn how to begin analyzing historical pricing data.

What Is Market Based Pricing for Wholesale Distributors and Manufacturers?

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There are a number of methods that wholesale distributors and manufacturing companies use to set prices. One of the most popular is a cost plus approach where a desired margin is applied to an item to arrive at a price point. This approach supports profit margin attainment but comes up short in considering market or customer willingness to pay.

Other approaches gauge prices to competitors. This is potentially one of the most dangerous methods as we may not fully understand the competitors pricing strategy. This can lead to inappropriate price reactions that can unknowingly create price wars. Most price wars are started unintentionally.

Value based pricing, on the other hand, does a great job of factoring the economic benefits of each selling situation in order to capture the most value in the form of pricing. While it is often the preferred method of strategic pricing, it has limited application in complex pricing environments that contain a large number of SKUs, customers and markets.

Market based pricing is directly applicable to these complex pricing environments commonly experienced by wholesale distributors and manufacturing companies. Market based pricing uses historical pricing data from your business to determine what the market or customer is willing to pay. Think of your sales data as marketing research. It essentially is a collection of “win” data that reveals what customers are willing to pay. When we analyze this data it begins to tell a story on each SKU, customer and market combination with real evidence of what prices will be acceptable at a point in time.

For example, we have 20 similar customers in a specific market buying the same item and they are each paying $30 per unit. Then, we have two additional customers that are paying only $18 per unit. The 20 customers paying $30 per unit provides evidence that this segment of buyers is willing to pay the higher amount. Logic would then dictate that the two customers paying only $18 per unit would be willing to pay $30.

Most wholesale distributors and manufacturers don’t realize the power that they possess in their historical pricing data. Using this data to make market based pricing decisions is a sure fire way to improve profit margins and sales close rates.

Wholesale Distributor Pricing ‘Must Haves’

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With the majority of distributors placing pricing power in the hands of the sales teams it is most important to provide the necessary structure to support price performance. Sales teams are in a unique situation to impact financial performance. Consider the three profit drivers: sales unit volume, price and cost. Sales teams can impact unit volume and price assuming that they have the authority to either set or adjust prices.

With this level of power consider how we are managing the sales force to achieve the highest price performance. Here are three key management tools to measure and control sales team pricing performance.

  •  Include a price performance requirement in the sales team job description. Raise the level of awareness on the importance of better pricing by stating it in job descriptions. Reps will know it is a key measure. And, after all, what gets measured gets managed.
  • Set price performance goals. Set a goal for each rep to achieve that is focused on price level attainment. Create a modest price increase goal that requires action by the rep. This too will raise the overall level of awareness of pricing performance.
  • Measure price performance. Create routine price performance measurements and reporting that provides feedback to the sales rep. Monthly, quarterly and annual reports send a strong message on the importance of strategic pricing.

These are the most fundamental tools to better pricing management through the sales team. However, we find few companies that take these important steps.

Wholesale Distributors and Pricing Strategy Complexity

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Wholesale distributors inherently operate within a complex pricing environment. Pricing complexity is simply defined as a high number of SKUs, customers and markets or channels. Consider the firm with 10,000 SKU items, 1,000 customers and five different markets or channels. The number of possible price combinations is 50 million. While it is unlikely that 50 million prices will actually be required in commerce it points to the potential complexity that exists in a wholesale distributor environment. Wholesale distributor pricing strategies can become complex as well.

Many manufacturing companies face similar challenges with pricing complexity. However, two different situations exist that create complexity. The first is the firm that has a large number stock-keeping units. Like distributors, these environments are complex due to the large number of products, customers and markets.

Alternatively, made-to-order manufacturers have a different but just as challenging situation making it difficult to compare products and their price points.

When sales reps are tasked with setting or adjusting prices it is easy to see the challenges in arriving at the best price for every selling situation. Now consider additional factors like competitive pressure at your largest customer and the risk of missing the pricing target increases significantly.

When we put the front line sales team in the position to influence prices without sufficient price guidance we are basically sending them to battle without sufficient weapons. Most often, sales reps will retreat on price in order to close the sale and result in leaving money on the table. Or, in fewer cases, unknowingly overprice the deal and lose the sale altogether.

What if each sales rep could leverage the collective pricing experience of the entire sales team?  Here in lies the solution for managing complex pricing environments. Faced with a new pricing event, we want to compare it to similar situations from the past. A wholesale distributor pricing strategy will focus on managing complex pricing environments using invoice pricing data to identify optimal price points from historical transactions. The objective is to put pricing power in the hands of the sales team that increases sales close rates and lifts profit margins.

How to Best Use Cost Plus Pricing Strategies

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The most effective way to capture the highest profit margin and achieve your revenue goals in B2B markets is to price products and services to value – that is, recognize and communicate the economic value they deliver to your customers. We have discussed this approach through many of our past newsletters.

Still, using a cost plus pricing methodology – applying a desired margin to a product cost to arrive at a selling price – also has merit when the approach is applied strategically. If used alone, a cost plus pricing methodology leaves gaping holes for margin and revenue leakage. However, our pricing consultants find that incorporating it into your broader pricing strategy can be a smart move, provided you limit its application to the management of low-margin business.

How should you use cost plus pricing?

Use it to set price and margin floors. Say a distributor has 30 different product groups, each with a desired target margin. Those target margins are the goal, but they won’t be attained in every instance. Discounted prices will erode margins on some transactions, causing price realization to often fall well below the target. That’s why margin floors – the absolute minimum margin levels you are willing to accept – are an essential element of your pricing strategy.

Ask yourself: How far below the target are you willing to go?

One of the keys to controlling margin leakage is to establish a margin floor for each product group within each market to prevent low- and negative-margin transactions. These limits essentially say that you will not, under any circumstance, sell below this level. Business that falls below the margin floor is unacceptable.

Of course, your margin floor will vary depending on the product group and its cost structure, price sensitivity, competitive environment and a host of other factors. When you are managing thousands of SKUs whose costs may be changing on a regular basis, it can be difficult to monitor every transaction. But setting margin floors using a cost plus approach helps keep your business profitable by preventing transactions from slipping below your threshold for minimum profit margin.

Pricing consultants often see a half-margin-point improvement by setting margin floors with a cost plus approach. That’s $100,000 in margin improvement on $20 million in revenue. While we recognize that this approach is simple, it is an effective tactic for grabbing some margin improvement quickly (assuming that your costs are accurate). It’s also relatively easy to sell to the sales team and customers because no one really expects you to sell at a loss or a ridiculously low margin.

Is Your Pricing in Line with Your Delivered Value?

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Does your offering hit the value target? Are your customers getting all they need at a price that results in solid value? These are questions that businesses ask our pricing consultants every day.

Value is all about the balance between the price of your offering and the benefits it delivers to customers. Perceived value is key. When an imbalance exists between delivered benefits and price, you have three options for re-establishing balance: (1) Lower the price to bring balance back in line, (2) Increase the benefits to be in line with the price, or (3) Adjust price and benefits together to achieve a value balance.

How do you know if you have a value imbalance? Our pricing consultants find that the most common way is to talk with your customers about value. Customers actually like to talk about their needs and what they value, so these are easy discussions to initiate. Most often, these discussions are conducted within the framework of market or pricing research. This type of research is different from customer satisfaction as it focuses on the potential gap between benefits offered and price.

Here are three key efforts that should be included in value-based research:

  • Gauge Perceptions - Perceptions are more important than reality. Never mind your offering’s actual price; ask customers how the offering impacts their business. What financial gain do customers realize from your offering? How does it help them increase revenues, reduce costs or reduce risk? These are the pillars of business value: At least one should be delivered in every offering.

 

  • Understand the NBA - And we don’t mean basketball. What is the Next Best Alternative to your offering? If the customer stopped using your offering, what would they use in its place? How does the alternative compare in benefits and value to your offering? Ask your customers: They will almost always be up front and honest about alternatives. Then you will know exactly how your value compares.

 

  • Talk Price - You can talk about price without talking about price. The word “value” is a great surrogate for price. Ask customers to rate the value of your offering on a numerical scale. If the rating is low, it is a strong indication that an imbalance between benefits and price exists. If the rating is very high, you may be leaving money on the table. Either way you will know the action you can take to remedy the situation. Remember that you can adjust benefits or price to bring value in line.

Having value discussions is critical in new product launches as well as in realigning existing offerings. Often, we find that opportunities for product versioning surfaces when we learn that different segments of users have different needs and value products differently.

Go ahead: Talk with your customers about value. They will thank you for it.

Why ‘Bigger is Better’ Pricing Isn’t Better

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Have you seen the commercials on TV where a group of young children are interviewed by a man about what is better? In one version the kids are asked if they would rather play basketball in a big fancy stadium or a small driveway. Naturally, the kids say they would rather play in the stadium because bigger is better.

Often times in business the thinking is the same. Bigger is better. But should this really apply to our approach on how we design our product offerings and how we price those offerings? Consider the situation where a distributor of healthcare products offers a bundle of services to help their customers market their products. The bundle contains 10 different components that are all designed to assist the customer move more product through their location. The problem for the distributor is that this bundle of services is selling slowly and the distributor believes that the bundle is lacking value.

To remedy the situation, the distributor adds more components to the offering in an attempt to boost the value. Now we have a bigger and better offering that would certainly entice customers to buy. Right? Not necessarily.

In this real world situation the distributor added more benefits to the offering but failed to understand the differences among its customers. Not all customers are created equal. That is, different customers have different needs and require different solutions. Of course, we are talking about segmenting the marketplace but also segmenting our pricing by differentiating our product offerings.

The answer for this distributor was not to add more components to a single bundled package but to divide the package into separate offerings or versions. Different versions  are designed to appeal to different market segments and allow us the opportunity to set different prices. Prices that are targeted for different segments and will allow us to sell more and capture more margin. It also allows us to compete more effectively when the competitor offers a single solution.

All too often we see businesses trying to compete in a complex market with a single offering that tends to getter bigger over time as they try to be all things to all customers. This usually drives the price down to the lowest level in order to appeal to all segments and leaves money on the table. Or, if higher prices are set, sales are lost to the lower end of the market. We see automakers remedy this situation with a wide range of offerings across a range of price points each designed to appeal to a market segment at a price point.

Bigger may be better when selecting a venue to play basketball but smaller may be better when designing product offerings and price points. Are you trying to do too much with your single offering?

5 Signs That Your Pricing Needs Help

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Managing prices in an organization can be complicated. If you have a large number of SKUs, a lot of customers and a variety of markets or channels, things can get dicey pretty quickly. Take, for example, even a small distributor with 10,000 SKUs, 500 customers and three markets: The number of price permeations could reach as high as 15 million if you consider all of the possible combinations of SKUs, customers and markets.

While it is not likely that different prices would be set for every possible combination, the challenge of setting an optimal price for each transaction remains. The advent of pricing technology and science helps to manage complex price environments. However, several other factors should be considered when evaluating the effectiveness of your pricing management program. The five signs below are a starting point to consider when assessing your pricing management effectiveness.

·          Leadership – Is anyone in your organization paying attention to pricing and profitability? We don’t mean the administrative tasks that occur every day. What’s needed is someone to keep a focus on pricing and project a constant light on pricing challenges and opportunities. We know a CEO of a $400 million company who reviews price quotes on a daily basis as a way to keep the organization focused on price performance. Someone at your company should be leading pricing discussions and oversight.

·          Education – Have your financial, marketing, sales management and executive team members attended any training or read any books on strategic pricing? Educational materials and programs are becoming more plentiful and accessible as strategic pricing management is being adopted at an increasing rate. Have your management team members attend a pricing training program or read a book to begin discussions on how to move forward. In terms of books, we like “The Price Advantage” by Marn, Roegner and Zawada. If you are considering training programs, PricePoint Partners offers a variety of options. [link to web page]

·          Sales Team – Does your sales team have the authority to discount, change or set prices? If so, you are likely leaking a significant amount of profit margin through your pricing. Without adequate price guidance, sales teams will use discounting as a quick way to close sales. We know of one manufacturer who allowed sales reps to discount up to 10%. Management later discovered that the entire business was being sold at 90% of list price.

·          Monitoring – Are you monitoring price performance on a regular basis? Without price metrics, you won’t know when your pricing is headed for trouble. Set up some basic metrics and monitor them on a regular basis. For starters, identify your key products and track the average selling price. You can even set up metrics by region or sales rep. You may be surprised to learn that your highest-volume reps may be at the lowest margin.

·          Cost Plus – Are you using a cost-plus pricing approach? Cost-plus is great to insure specific margins, but it doesn’t take into account the market or customer price sensitivity.  The result will be lost sales where your price is too high or money left on the table when a cost-plus calculated price is too low. Instead, moving toward a value-based pricing strategy or applying pricing science to determine price sensitivity will help you arrive at optimized prices that will close more business more profitably.

Pricing should be managed with the same vigor as finance, marketing, sales or any other business function. After all, pricing has more potential impact on profitability than any other profit driver. Improved pricing management is worth an investment of time and resources. Start your journey to price improvement by addressing one of the five signs listed above, and you will be on your way to higher margins and a stronger competitive position.

4 Steps to Avoiding a Price War

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Price wars come in different shapes and sizes. Some are very acute with a focus on one product or service while others are across-the-board attacks on a broad range of products. Some may be concentrated into a narrow period of time while others may be protracted over several years. Regardless of the specific characteristics of a price war, it is almost always started by accident – often because someone misread competitive actions or misjudged market conditions.

Because pricing has such powerful leverage on profit margins, price wars can be extremely destructive to a firm’s financial performance. Consider the company with an EBIT of 8%. An erosion of just 2% in price realization will drop earnings by 25%. Price wars can be equally destructive to the profitability of an entire industry when all participants respond with price reductions.

Our pricing consultants find that the best defensive strategy to a price war is to avoid entering or initiating it altogether. Here are four steps to preventing or avoiding a price war:

·          Avoid tactics that force competitors to respond with a lower price. Understand and communicate your differentiation in benefits and minimize the focus on price. It’s easy to sell on price, but this is a shortsighted strategy that generally does not yield long-term benefits to you or your industry. Keep your messaging focused on real economic benefits – in other words, the value your product or service delivers. Be sure your sales team is well trained on selling economic value, too.

·          Understand your competitive value position. Have a clear and objective understanding of how your offering compares to the competitive offering in terms of delivered value. Are you using a higher-value product to compete with a competitor’s lower-value product? Do you feel pressure to drop the price of this product in order to compete? Don’t try to force one product to compete in all situations. Often, the best strategy is to create another product version with reduced benefits to compete at a lower price level.

·          Avoid misreads of competitive and market developments. Each competitor often believes that the other company started the price war. Avoid knee-jerk reactions in response to a competitor’s lower price, instead taking the time to understand the reason(s) behind it. Is this an isolated incident, or is there a longer-term pattern? Oftentimes, a company reacts due to anecdotal or isolated field information when, in fact, the best response would be no price cut at all.

·          Leverage market niches. Identify product, market or channel niches that may be too narrow or specialized for competitors but where you have the capability to excel. You will in essence be removing yourself from the fray, which will give you the opportunity to price your offerings as you deem appropriate.

Engaging in price wars can be detrimental to all parties involved. The more we talk about price, the more the customer focuses on price and the harder it is to communicate real economic benefits. Instead, emphasize value. Be thoughtful and deliberate in your messaging and your pricing. This value-based approach will drive profitability not only within your own organization but throughout your entire industry. 

Contact our pricing consultants for more information about pricing strategies and price wars.

Finding Your Pricing Power

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Warren Buffett has stated: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Does your company have pricing power? Sure, it does. Almost every business has some. Even businesses that believe their products are just a commodity likely have pricing power somewhere in their structure. The question is where – and how do you tap into it?

The key is to be strategic in identifying your pricing power. Our pricing consultants have seen few businesses that have pricing power across their entire range of offerings. Look for narrow segments or even specific transactions within your business where your offerings can support slightly higher prices. Remember, even the smallest increases in price can have a dramatic impact on your bottom line.

Here are three key areas where you may have pricing power. Think about your business as you consider each of these potential areas of opportunity:

·          Avoid Cost-Plus Pricing – Instead, measure the economic value that your offering delivers to customers. Is the price in line with the economic benefits your customers enjoy? It’s worth the time and energy to analyze the economics that your products deliver. Be sure that your sales team is effectively communicating the economic value and that customers recognize the value.

·          Price Elasticity – What is the price elasticity of your offering? If prices were increased by 10%, how much market share would you lose? Or would you lose any at all? Historical pricing data taken from your invoices can be used to measure price elasticity. Don’t assume that just because you raise prices you will have a drop in volume. Every product is different, and each has its own price sensitivity. Price elasticity can help you identify products with pricing power.

·          Power Through the Sales Team – A significant amount of pricing power can be lost at the point of sale. Sales teams often struggle to capture full price due to their inability to sell value. Rather than articulating the economic benefits that will lead to higher prices, sales reps too often grab discounts to quickly close a deal. Train your sales team to sell economic value, and you will be able to leverage your pricing power with more customers.

In fact, our pricing consultants find that you can leverage your pricing power in a variety of ways. High-value products, small customers with little buying power, and situations with little or no competition all present opportunities for leveraging pricing power with minimal risk.

Want to forgo the pre-price-increase prayer session? Harness the strength of your pricing power, and make those price improvements with confidence!