Can You Afford Declining Margins?

\"\"2016 seems to have been the \”year of pricing\”.  A number of distributors either discussed, or undertook, pricing initiatives this past year. In many instances it was a desire to reverse an industry trend … eroding margins. Others recognized that if they invested in eCommerce they needed to ensure that the price shown on their website was the same that the customer received at the counter or when they called inside sales. Some initiated the strategy based upon a recognition that they needed to make more money.
And in some cases senior managers realized that their pricing had declined just … \”because\”. \"inmates_running_the_asylum\" In other words, \”the inmates had taken over the asylum\” or \”salespeople made up their own pricing.\”
Regardless, pricing has been a topic of discussion for many distributors.
Some claim it\’s to \”meet the market\”, others say their salespeople are \”not good on overcoming pricing objections.\”
However, the drive to reduce price because a customer \”asks\” is beginning to be reversed by some distributors.  These distributors are:

  • Recognizing customers expect pricing consistency across branch locations, salespeople, and order methodologies
  • Proper matrices improve productivity and profitability
  • Price override reports, when properly communicated, do help correct errors and, more importantly, adjust behaviors
  • Increased commission models to increase gross margins typically don\’t work
  • Price management is a sales management issue (and sometimes supported by a pricing group or purchasing management for setting up pricing systems)

Recently we had a distributor ask us if we had a sales training program to help inside / counter salespeople overcome pricing objections.  While we don\’t, we commented that managing, and maintaining pricing has been a challenge for years and that counter and inside salespeople have had the luxury of being able to do adjust pricing to accommodate their customers.  We commented that leading distributors are realizing that this cannot occur moving forward, especially due to eCommerce, and they have seen the amount of profit that they are losing.  These companies are

  • Minimizing overrides, except for commodities, through either technology and proactive communications
  • Locking down their pricing
  • Reviewing their matrices to address customer specific issues.

Further, from a training perspective, the challenge is that distributor salespeople “hear” it for a day and then migrate back to their old habits.  Institutionalizing process change enables them to “blame it on management.”  Inevitably, when they look at price overrides on a customer and SKU basis they realize 1) it is small dollars and 2) how much they cost themselves (if they are commission-based.)
Also, we suggested engaging these salespeople in a discussion on “why” they are override price, in a group setting, which can generate an interesting dynamic.  And part of the conversation should focus on \”what is \’your\’ value-added and are you \’worth a tip\’\”.
Many salespeople defer on price and client conflict when they don\’t have conviction in the value of their offering. Leading salespeople, and frequently these are also the top revenue and GP$ performers, know their customers, manage their expectations and sell the value of their company, hence commanding appropriate margins.
Improving your pricing for stock business as well as optimizing your SPA pricing (and utilization) are essential to improving overall profitability.  The project market is vulnerable to the vagaries of the marketplace.  Stock and SPA pricing are much more manageable and should be predictable. If you don\’t have the internal resources to review and implement a price management / profit optimization strategy, there are resources that can help.
Worst case scenario … the increased profits can pay for increased healthcare or technology costs!
While price management isn\’t easy, it is easy to race with your competitors to the bottom and leave your business with ever decreasing profitability. But can you afford to play that game?
How are you fighting to improve your profitability?

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6 thoughts on “Can You Afford Declining Margins?”

  1. In my mind, most distributors need help with the whole pricing issue. Here’s why: It required more than a management pep talk, the issues of pricing science are complex, the work requires a high level of confidence to pull off. That’s why I recommend using a price process expert. David Bauders and his Strategic Pricing Associates team are the best in the business. I recommend them to every single client.

  2. Pricing has been an issue for years. The legacy practices of allowing salespeople to negotiate prices has contributed to loose pricing policies which are largely fueled by fear of losing an order. The artificial margin enhancement programs have contributed to it in some ways as well e.g. SPA’s, Buying group rebates, direct manufacturer rebates, co-op funds, liberal RGA policies, etc. It is feasible for a distributor owner to sell products at near break-even and make sizable profits, personally, from his/her annual rebate deals. That’s not a solid business strategy.
    When Grainger, Home Depot and even Amazon have dramatically higher margins, in the same geography, to the same customers… it should be obvious that margin erosion is an internal problem; not a market one.

  3. The problem occurs when distributors fail to identify where sales are led by price and when they’re led by their other offerings (service, stock, support, etc). Once one single customer demands lower prices that impression can then expanded to cover all customers. Between this mindset and the habit of overriding, price tends to be one of the first giveaways to get the order, often unnecessarily. A twofold approach is required – identifying where price sensitivity exists and changing the internal sales mindset.
    No price review can be compete without including evaluation of SPA contracts. Manufacturers have made the mistake of giving away their price unnecessarily in order to grow revenues, but distributors replicate those mistakes. The opportunity to fix SPA pricing can be even greater the opportunity to fix regular into stock pricing. That’s why we at Jigsaw Systems target both SPA’s and stock sales.

  4. Simple………Too many people in the ED channel have the capability to set prices and to few people in the ED channel properly manage that critical function. Where it is actively managed, margins increase and/or are much higher. And most of those “too many people” think it is wrong to charge their “loyal customers” more than a 20% markup, no matter what the reason.

  5. Good points in the article, however pricing pressure and margin erosion is nothing new.
    These challenges have been a main stay for decades.
    The formula to combat these issues is not complicated.
    Distributors can remain profitable and prevent margin erosion in two simple ways.
    1) Hire the right people who know how to sell on value and compensate them based on profitability
    2) Train their inside sales and account managers how to defend their brand and margins.
    The key threats to profitability include:
    1) National or regional distributors who “make a statement” in their respective market by taking anything and everything off the street. A national distributor that starts with a G comes to mind when it comes to this practice.
    2) National or regional distributors who are focused on top line growth in order to meet unrealistic forecasts.
    3) Smaller distributors who have nothing to offer other than price.
    4) Distributors who have no training program for defending price or brands
    5) Any distributor that has a dysfunctional management team.

  6. I believe you are correct, David when you mention those salespeople who sell value to their customers.
    I believe the NAW recommends a customer stratification analysis as a precedent to the distributor’s pricing project. The reason: it’s difficult to price appropriately unless you understand where each customer aligns with respect to cost to serve, margins, loyalty and buying power.
    More effective and supportable sales strategies can be implemented once the customer stratification model has been built. Obviously individual sales people and their sales managers can price and sell more profitably when working with eyes wide open about their individual customer relationships.

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