How Does Your Pricing Measure Up?

This headline may be a question at the top of your mind as you think about how to improve your business performance. You’re leading a growth-oriented distributor and want profitable growth in any economic environment but are challenged by tightening margins and evolving customer expectations.

You want to improve pricing to grow margins, enhance customer service, and boost sales productivity, but you’re not sure what to focus on to achieve industry-leading practices and results.

Pricing is a special challenge for distributors because of several complex factors, including high SKU counts, large numbers and types of customers, and constantly fluctuating manufacturer costs that must be managed. Plus, the sales team is often primarily responsible for setting and negotiating prices, with little to no support and a lot of manual effort. These factors lead to profit leaks that add up.

There are always things to do that will make your distribution business stronger, and pricing is worth the effort financially. A study published by global consulting firm McKinsey & Co. asserted that pricing is “distributors’ most powerful value-creation lever.” They found that a 1% price increase drives more to the bottom line than an equivalent increase in volume or reduction to COGS or operating expense. With that in mind, the ROI is there if you invest in improvements no matter where you stand today.

Here are 5 practical and proven ideas to consider when you’re ready to prioritize pricing.

1) Visible CEO support. The visible support of your CEO has obvious benefits in establishing executive focus and accountability. It signals to the organization that pricing is a top priority and that management expects it to get done.

Success requires a sustained commitment to see it through because resources will be needed and organizational cooperation across departments is key. Pricing projects require a willingness to adapt to positive change, especially for the sales team who typically owns it. The CEO’s leadership will help to keep everyone aligned on the big picture and to overcome old habits and pricing practices.

Pricing should be an element of your strategic plan given its power to fuel profitable growth. Deciding to make it a top CEO and executive team priority is a key first step.

2) Think like your customer. Pricing can improve your customer’s buying experience. Think about how many calls, emails, and texts your sales team responds to every day for routine price and availability checks and written quotations. Every dollar of your revenue is priced by someone, and distributors manage a high-volume of transactions. The sheer amount of time and effort required is substantial. The more you streamline the internal processes to deliver a fast and fair price, the more likely you’ll win a greater share of your customers’ purchases. You’ll also gain order entry efficiency and sales productivity, making for more satisfied employees and customers, which is a competitive advantage in today’s market.

Price reflects a value exchange between a buyer and seller – you provide a product and service, and your customer pays you money. Your customer is willing to pay for the perceived value you provide compared to their other alternatives. It’s important to get this right because distributors succeed by nurturing long-term relationships built on trust, and fair pricing is one of the pillars that supports repeat business.

3) Define your goals and measure progress. It’s a truism to say if you don’t know where you’re going, you won’t know when you get there. It’s important to define a few key goals you want to achieve and then track the numbers to stay on course. A pricing project will offer many improvement opportunities, but a risk is that if it isn’t managed with specific goals in mind you’ll potentially try to take on too much too soon and it will fail.

By spending time upfront aligning executive expectations about the goals, metrics, timing, and resources needed, you’ll avoid getting stuck and frustrated later.

Some common high-level pricing measurements are gross margin rate and gross margin dollars. Other indicators of progress are the percentage adoption of your system price guidance or, inversely, how frequently your sales team overrides the system price. Understanding the details of your pricing methods and sales behaviors will give you the insight needed to improve margin results.

Another measurable improvement is to identify core pricing and cost processes and find ways to streamline and automate routine and recurring tasks, which will benefit your sales team’s productivity and operational efficiency. Measure what matters, focusing on speed and accuracy.

4) Support your sales team. Ask your sales team how they feel about your pricing and the support they need to sell more profitably. In my experience, when a pricing improvement is done with the sales team and not to them, the results will be much better.

They deal with pricing every day and talk with customers to win orders. Their perspectives are critical to designing a better way. Don’t be afraid of a little healthy tension, discussion, and debate to reach the best solutions. Always make sure the process is respectful and includes voices from around the business.

Pricing projects are all about change management. It truly requires support and involvement from almost every department in your company. Take the time to gather stakeholder input and build it into the plan. If pricing is deemed to be stuck in just one functional silo or disappears into the back-office, then it won’t work. Old habits are hard to break unless you can communicate a better way that improves performance and satisfaction for everyone.

5) Invest in the people and tools to do the work. A common problem for distributors is that even though they realize pricing should be improved, they don’t have the in-house bandwidth or experience to lead it. In those cases, pricing will likely be added to the responsibilities of a busy executive to provide a home for the functional leadership role. However, this doesn’t always mean it will get enough attention or that the executive has the expertise to proactively lead the effort.

Identify someone to lead your pricing function to ensure that your strategy, people, processes, and technology are aligned to get results. They should be able to communicate clearly, develop trusting relationships across departments, and especially collaborate with sales leadership. Look for the experts in your midst; chances are there’s someone with the knowledge, experience, and passion to do it. If you don’t have anyone in-house, consider hiring an outside expert with industry experience to start framing the plan and moving forward until you can recruit full-time candidates for this important role.

Another common problem is not having the tools needed by your people to get the work done. The good news is that there are a variety of software and data analytics firms that support the distribution industry. Specific processes to automate are pricing optimization (for stock sales since directs and projects are a different deal) and rebates. Rebates for distributors mean managing manufacturer special price agreements (SPAs) and volume incentive agreements. All of these can represent big dollars that either add to your profitability or slip through your fingers due to leaky manual processes. Once you’ve decided on your strategy and know what you want from a technology solution, you’ll find a variety of options to evaluate that can integrate with your ERP system.

Whether you’re managing pricing today with spreadsheets, a matrix in your ERP, or have implemented third-party pricing software, there’s always room to improve no matter where you stand now.

After considering these ideas, how does your pricing measure up? Does it have visible CEO support and are you providing a better customer experience? Do you have goals that are measured? Are you supporting your sales team so they can win more business? Do you have the people and tools in place to make it happen? The bottom line is, if you’ve made pricing a top priority, you’re on the right track. If you want to improve results faster with lower risk, I hope these points will resonate and guide your next steps to success.

INDUSTRIAL SUPPLY MAGAZINE

The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.