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Your price is too low . . .

 . . . and other things you've never heard before

by Frank Hurtte

Prepare yourself for a phrase never before uttered. Listen closely, because I will be the first person on this planet to tell you, “Your price is too low.”

Don’t adjust your glasses. You read that right. Based on our research, distributors are giving away hundreds of thousands of dollars every year. But, I’d wager the family farm that you’ve never heard that comment once. Not from a customer, not from a supplier and probably never from one of your own sales team. Unfortunately, you may be hearing just the opposite – your price is too high.

Why you’ll never hear “your price is too low”
Selling lower price is easier. When salespeople struggle, the first thing they do is lower the price. Low prices makes up for a lack of customer knowledge or product expertise. Lower prices open doors. Low prices are the “cost savings and value creation” of the unwashed masses.

When a purchasing guy scratches his head, takes a deep breath and launches into his best win-win tone of voice, I guarantee you his next sentence won’t be “Your price is too low.” After you stay up late into the night researching a customer issue and then spend half of the next day supervising the fix, don’t expect to hear it. Instead, your salesperson will likely hear, “You know, Pat, Distributor XYZ has that product in their catalog for less. But because I like your face (I mean great service), I’ll let you have the order if you can sharpen your pencil.”

Salespeople continue to reinforce the price-is-too-high myth. Go out with a group of salespeople and buy them a few beers. In the conversations that follow, nobody ever lost an order because they were late for appointments, provided lousy service or didn’t do their homework. Instead they’ll say either, “The guy down the street bombed our price” or “Our management, vendor, specialists or purchasing department put us at a price disadvantage.”

All of these little gems bleed through your organization. Before anyone realizes it, every price is gauged as too high. Including the prices for the product and technology groups you are charged with driving.

Why specialists need to get involved
Many people assume this pricing issue belongs with their management team. This is a mistake. Last month, I took some time to clean up some old files. Tucked into one box were a couple of folders from a distributor conference I attended in 1991. The No. 1 issue outlined in an internal memo created for my co-workers was pricing policy. Identified nearly 20 years ago and still an issue for distributor management? Distributors appear to be too busy to tackle the issue, but I am firmly convinced that specialists hold one of the keys to future success.

In the Jan./Feb. issue of Industrial Supply, I identified four topics every specialist must address as we roll into a post-recession economy. Pricing lies squarely across three of these:

• The rise of the CFO – the need for value-based selling

• The coming margin squeeze – pressure on all prices

• Impending line expansion – selling more to existing customers

Based on these arguments, we’ll demonstrate why specialists need to become involved in the pricing mix. The real question becomes, how can specialists make a difference?

How can specialists drive pricing?
First, let’s address the outward facing issues. Incredibly, distributors lag behind in understanding their real value. This plays a factor in pricing attitudes.

To illustrate, allow me to ask a rhetorical question. How much would you pay me to give you $100? There’s no risk, no strings, just a pile of crisp new one dollar bills. Would you pay me $50? How about $75, $90, or $99? Now, let’s change the question ever so slightly. How much would you pay me for an ink pen that came in a box along with that same pile of 100 dollar bills? Would you argue that you can buy a pen down at the local Staples for $2 or would you still fork over $50, $75 or $90? Let’s assume I was selling the pen and didn’t know there were 100 dollar bills in the box. Would I be concerned about the price of a pen down at the office supply store? You bet.

What’s the point of all of this? Specialists add value for their customers and supply partners alike. Specialists tend to be used for product lines that can add the maximum customer value. They work with customers to solve process problems, improve output, eliminate waste, reduce energy consumption and reduce maintenance downtime. Just as surely as the stack of crisp dollars contains value, so does this problem solving. Train your sales team to demonstrate your value and customers will reduce their backward price pressure.

As much as consultants like to pontificate on the subject, customer-generated pricing pressure is only the tip of the pricing iceberg. Just like icebergs, only 10% appears above the surface. Like the Titanic of old, our biggest concerns lie out of sight beneath the selling surface.

Help your team understand margin
Don’t assume for even a moment that your team understands the right margin for your product line.

Whether we admit it or not, every company has its very own “safe margin.” It’s counterproductive for me to spout out some number but you know what it is: 15, 20, or 25 percent. Salespeople use this price if they don’t understand the right price. It’s the safe price. Provide information to fill the void. Explain your market situation. Describe the difference between a supported product and a commodity product. Make sure to explain why it’s fair for the customer to pay more for your stuff.

If you perform the work of a rep and a distributor in the marketplace, you deserve a higher margin. If the product requires some kind of configuration, setup or programming prior to installation, you deserve a higher margin. If you have worked to create a special bill of materials to solve a customer issue, all of the materials on that BOM deserve a higher margin. Your team – especially customer service and inside salespeople – won’t understand that unless you tell them. Stress fairness. Salespeople tend to be driven as much by “fair and right” as by commission.

Differentiate big orders from small
When a customer negotiates a gigantic order, some price play is common. Sometimes supply partners view the order as strategic for market share or as an industry breakthough, and lower the price. That’s reasonable. But, here’s what can happen. The inside salesperson gets a quotation request and wants to make sure he or she handles it properly. The salesperson sorts through your business system for past prices, sees the low price and uses it to make sure to “get the order off the street.” The price soon erodes to this new totally unjustified level.

Establish what a large order might be. Better yet, insist that you become part of the approval process for any volume-based pricing changes. You already know the details around most large orders. Requests for large sales quantities are either a red herring or a communications breakdown within your sales process. Check out both.

Monitor quotations and invoices
I am not suggesting that you personally review every single line item for your product or technology group. There probably aren’t enough hours in the day. But most business systems allow exception reviews. If your product regularly sells for 28% to 30% gross margin, it might be easy to review every order that falls below, say, 22%. As you review these half-dozen or so orders a day, you will recognize special contracts, large orders and mistakes.

Experience dictates that mistakes happen in clusters. Either it will be a single salesperson (read about Hobbs in our article in the Jan.-Feb. issue), a branch where your product isn’t totally understood or a new sales manager struggling to understand the business. Once recognized, the problem can be fixed for the price of a cup of java in the breakroom and sometimes a little training.

Look for WAYs to fix mistakes
One issue that seems to haunt the pricing side of the business comes because distributors never fix old pricing mistakes. Sell something at an artificially low level once and the customer seems to keep that pricing from now until Methuselah’s birthday.

Maintain a list of customers with non-standard prices. These can be reviewed periodically for margin raising opportunities. When might these come around? Here’s a partial list. Look to improve margins whenever:

• The customer’s usage drops
• A period of 120 days occurs without a sale
• The customer changes some buying habit
• A series, revision number or catalog change occurs
• The supplier raises the price to you

Ultimately, we are all concerned about company profits. But the question remains, is this pricing stuff worth the time, trouble and torment of making it happen?

Our industry operates on very thin profit margins. For instance, the National Association of Electrical Distributors reports the median net profit margin for its members bounces around the 2% range. That’s $2 of profit for every $100 in sales.

Consider this: pricing expert David Bauders of Strategic Pricing Associates (SPA) says the typical distributor applying SPA’s pricing architecture improves profitability by two to four percent of sales. Whether your own company applies Mr. Bauders’ process (or not), specialists can make a difference. That difference may double the bottom-line potential on your product group. How cool is that?

Frank Hurtte of River Heights Consulting has developed a unique training system for distributor specialists. Reach him at (563) 514-1104 or frankehurtte@riverheightsconsulting.com.

This article originally appeared in the March/April 2010 edition of Industrial Supply magazine. Copyright 2010, Direct Business Media, LLC.

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