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Three Greatest Pricing Challenges for Wholesale Distributors

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As the wholesale distribution industry experiences widespread industry consolidation, vendor reduction programs and growth in online commerce, industry participants are finding it increasingly difficult to compete for available volume and margin. While costs have been vigorously managed by most firms and sales volume gains continue to be pursued aggressively, the hunt for margin improvement eludes many distributors.

The opportunity to lift margins exists within the framework of strategic pricing management. How price decisions are made can dramatically impact margins and revenue. While most distributors have yet to leverage pricing, the ones that have embraced it have realized margin gains of 1-3%. A data-driven approach combined with an effective implementation program will achieve such results. 

Over 83% of all middle-market wholesale distributors in the U.S. are leaking 1.0 to 3.0 margin points as a result of ineffective pricing methodologies. For a $50 million distributor, that equals $500,000 to $1.5 million in lost profits that could be reinvested in the business or returned to stakeholders. Several factors contribute to this margin loss.

First, wholesale distributors inherently operate within a highly complex pricing environment. The large number of SKUs, customers and markets creates complexities that necessitate the use of pricing-specific technology. Consider the firm with 10,000 SKU items, 1,500 customers and five different markets. The number of possible price combinations exceeds 75 million. While it is unlikely that 75 million prices would ever actually be required in commerce, this example illustrates the level of complexity that exists in wholesale distributor environments.

Second, front-line sales teams are responsible for pricing execution without the necessary tools, skills or information to deliver optimal price performance. Many distributors rely on the sales team to adjust or even set prices on an item-by-item basis without the necessary supporting data to determine a true market-based price. Individual reps each have their own approach and subjective input, which results in pricing inconsistencies within market segments and product offerings.

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 retreat on price to close the sale, nearly always leaving money on the table. In other cases, reps may unknowingly overprice a deal and lose the sale altogether.

Finally, centralized pricing analyses and pricing processes are often absent and prevent the opportunity to compare pricing outcomes among similar transactions. Historical pricing data is a powerful asset that, when combined with pricing technologies, can be used to determine market-based prices and lift profit margins. The application of centralized pricing engines is extremely effective and can be relatively low-cost.

What if each sales rep could leverage the collective pricing experience of the entire sales team?

Herein lies the solution for managing complex pricing environments. Faced with a new pricing event, we want to compare it to similar historical pricing events. The focus is on strategies for managing complex pricing in wholesale distributor environments using invoice pricing data to identify market-based price points from historical transactions.

The objective is to put pricing power in the hands of the sales team to increase sales close rates and lift profit margins.

How to Win Price Increase Negotiations with a HUGE Customer: Case Study

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High-volume, high-visibility customers know they have negotiation power. That shouldn’t stop you from initiating price increases with them when they are warranted. Suppliers tend to back down under the pressure of negotiating with their biggest customers, and who can blame them? Rocking the boat on price issues sometimes puts your company at risk of losing the business.

But take heart: It is absolutely possible to raise prices, no matter how large your customer. This case study will show you how one specialty tool manufacturer’s strategy and tenacity earned them the price increase they truly deserved.


BACKGROUND

A manufacturer of specialty tools, 427 TOOL (alias), is about to initiate a price increase selectively applied across their business. Many accounts will see increases; the amounts will vary depending on the various levels of price sensitivity among items, customers and markets.

The customer, BIGWERKS (alias), is 427 TOOL’s third-largest customer, accounting for well over $2 million in sales. 427 TOOL has been serving BIGWERKS for over 15 years. The volumes are steady, but margins are diminishing. The last price increase accepted by BIGWERKS was in 2007. Since that time, 427 TOOL has attempted to execute price increases on two separate occasions with no success. BIGWERKS made the process grueling by intentionally prolonging any price increase discussions until 427 TOOL finally gave up.

Compounding matters is that the purchasing personnel within BIGWERKS seem to be constantly changing. Interruptions in relationships between sales representatives and buyers prevent any continuity in discussions, which has made it difficult to achieve price negotiation goals over extended periods of time. At this time, prices have remained unchanged for seven years and have now fallen below market pricing. Obviously, this has negatively impacted margins at this account for 427 TOOL. The 427 TOOL sales representative, Roger, is preparing for a long and drawn-out negotiation process.

THE PROCESS BEGINS

September 2013

Roger has scheduled a meeting with the buyer at BIGWERKS to present the price increase. The average increase amount is 3.5%. However, increases are applied selectively to individual items, and not all items will see an increase. Additionally, Roger has prepared a summary of rebates, trade show participations and other supporting services that 427 TOOL has delivered over the past several years to demonstrate the added value the company has provided to this important customer.

BIGWERKS buyer, Justin, listens attentively at first but quickly starts pushing back, challenging the rationale behind the increase. Additionally, he begins to paint a picture of growing opportunities for 427 TOOL in the future. Suggesting that larger opportunities lie ahead for the supplier is a common tactic used by buyers to move the discussion off of the increase. Many sales representatives react to this discussion; Roger does not. He knows the discussion is intended to divert attention away from the increase. He is committed to getting the increase and stays focused.

October 2013

BIGWERKS looks to solidify their position with 427 TOOL by offering a long-term supplier agreement. The agreement includes descriptions of promotions, rebates, trade show participation, warranty allowances and the like. There is no mention of the price increase in the agreement. 427 TOOL pushes back on signing the agreement, and BIGWERKS says that the agreement is not related to the pricing discussions. 427 TOOL signs the agreement but continues to push discussions on the price increase. Looking back, 427 TOOL admits they should have delayed the agreement until the price discussions were resolved. This minor setback, however, did not negatively affect the final outcome.

December 2013

Roger schedules another visit to discuss the price increase with BIGWERKS. At this time, the buyer asks for more supporting information to justify the increase. While they will provide information supporting cost increases of incoming materials, 427 TOOL’s policy is to not provide total cost information to customers.  Roger delivers the cost increase information, and further discussions are delayed by BIGWERKS until the new year.

January 2014

Discussions start heating up. Roger is holding tight on the price negotiations. He continues to communicate with Justin to maintain momentum in communications and send the message that 427 TOOL is not retreating on this issue. It has been five months since negotiations began.

Justin shares a critical revelation in one of his telephone calls with Roger: He tells Roger that BIGWERKS really does not want to lose 427 TOOL as a supplier. This knowledge instills renewed confidence in Roger and spurs him to continue on his path.

Then Justin reveals a surprise. He states that BIGWERKS corporate has mandated price reductions from all suppliers in 2014. Is this a real mandate or just an attempt to offset the increase? Roger recognizes that BIGWERKS is trying either to thwart the increase completely and actually get a price decrease, or to use the mandate to negotiate a non-increase. Roger will not settle for either of these options. He and the management team at 427 TOOL are committed to getting the increase. (Management commitment is a key component to any price improvement initiative.)

Roger presses on relentlessly for the price increase. Intense discussions continue over a two-week period. Justin announces that the BIGWERKS division vice president will participate in the next telephone discussion. Roger decides to add to his own horsepower and invites 427 TOOL’s president to participate in this phone conference.

The conference call lasts nearly two hours. 427 TOOL holds their ground on the increase, not wavering from the initial amount. BIGWERKS makes no offer to counter and insists on no increase. Interestingly, BIGWERKS is fighting to protect its reputation on not accepting price increases. They believe that if word gets out to the supplier base that they accepted an increase, other suppliers will attempt increases as well. Their unwillingness to counter is also noted. They are desperately defending their reputation on no increases. At this point, it’s all or nothing.

Committed to the increase, 427 TOOL continues to hold their ground and insists on the increase in whole. Finally, after nearly two hours of negotiation, BIGWERKS accepts the full increase, with only one caveat: that the increase will go into effect in June so that BIGWERKS has time to get the new pricing into their systems. 427 TOOL is happy to oblige.

WHAT JUST HAPPENED?

In a word, commitment. Sometimes it takes fortitude to get what you want in pricing negotiations. 427 TOOL hadn’t been successful in executing a price increase at BIGWERKS in seven years. This time, the supplier committed to getting the increase and showed the tenacity to not back down. BIGWERKS, based on prior experiences, believed that 427 TOOL would eventually give up. When they didn’t, the tone was set for a new pricing relationship between the two companies.

The commitment to executing price increases at large accounts can be significant. Below is a summary of time and resources that 427 TOOL incurred during the process:

  • Number of meetings or telcons           Approximately 12
  • Time commitment                               Estimated 40 man-hours
  • Amount of increase                            $90,000
  • Time to create pricing schedule          5 hours
  • Return on time invested                     $2,250 per hour

As Roger pointed out during our interview, the price increase goes straight to 427 TOOL’s bottom line. Other than sales commissions, the increase has no other costs extracted.

Each customer and each negotiation is different. In this case, reinforcing 427 TOOL’s position on the price increase was effective. Other situations may call for different strategies. Holding the line on increases, however, is a proven approach. It takes some courage and fortitude to execute, and it may mean bringing senior-level managers into the fray, but in the long run, it sets the groundwork for a more profitable long-term relationship. 
 

Setting Strategic Pricing Goals

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In nearly every business there are performance goals of many varieties. Consider sales goals, cost reductions goals, margin goals, production goals, quality improvement goals and the list goes on. Rarely do we see a company with pricing goals. That is, using pricing as a strategic initiative to improve revenues and profit margins.

For many manufacturing and wholesale distribution firms there is a low level of awareness of strategic pricing and related goals. Strategic pricing uses data to determine price points on a transaction by transaction basis. (This is the very short definition of strategic pricing.) Think of using your historical pricing data as a reference point to help determine future prices. Using this data helps to create a pathway forward in price setting and ultimately price improvement that drives revenue and margins.

While many manufacturers and wholesale distributors may not be applying strategic pricing there are still opportunities for setting pricing goals. Pricing goals can be derived from actual increases in prices, reduced discounting, or stopping price leaks. Price leaks include freight allowances, excessive discounts, waived small order fees and the like.

Addressing just one of these areas and setting measureable price improvement goals is just one way to draw a focus toward strategic pricing and get your team to start thinking about pricing from a strategic standpoint. Then, of course, the key is to measure actual performance versus the set goals.

When is it Too Long Between Price Increases?

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When was that last time you increased your prices? Many wholesale distributors and manufacturing companies make it an annual event and create a pricing culture within the industry to expect timely increases. But for some companies, the time between price increases is just too long.

Take for example, the specialty chemical manufacturing company that waited 10 years to increase prices for one of its largest accounts. By the time the increase was applied costs had risen significantly enough to reduce margins to negative levels in some cases. The overall profit level of the account suffered and became a drain to the bottom line.

But, perhaps, even more damaging was the expectation created on the customer’s part that price increases just weren’t part of doing business with this supplier. In essence, the manufacturer taught the customer that price increases just didn’t happen. And, the customer firmly pushed back when the supplier finally executed an increase.

Buyers know which suppliers will increase prices and which ones don’t. They know which ones to push back on and which ones they need to accept. You can determine which list your company will reside by the frequency of price increases and the regularity.