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.
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.
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.
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.