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Over the years, we have dedicated a lot of this column’s space to the topic of pricing. It has been, and, in our view, will continue to be one of the most critical areas of focus for the high-performing wholesaler. Proper pricing is what allows wholesalers to make fair profit (fair to the seller, and to the buyer), fair returns on the owner’s investment, and for some employees, fair contributions to profit sharing programs. As we mentioned last month, however, the world of pricing is changing faster than ever before, and we think the rate will accelerate in the near future. Here are some thoughts on the topic:
1. Manage your pricing: As we have recommended for several decades (well, one of us has been making recommendations that long), you need a pricing manager. We set the “no brainer” point at about $20 million in sales; this is where it is a slam dunk that you should have a full-time pricing manager. At less than $20 million, you still need a pricing manager, but you may not be able to afford a full-time person. The key for a part-time pricing manager is to make sure that the pricing job comes first above all other tasks. (This is often a problem with part-time pricing people since, for some reason, pricing falls into what Stephen Covey calls the “Important/Not Urgent” group of tasks in a business.)
2. Pricing is never done: Pricing is not a task, but a continuous process since product costs and the market are continuously changing. There is always much to be done and few companies ever reach the point of diminishing returns on their pricing investment.
3. Formalize your pricing process: Few companies have proper records that define the why and how of the pricing in their computer system. Often, the why and how is stored in the remote reaches of an individual’s head where they are very vulnerable to loss.
4. Get the “right price” into your computer system: The pricing manager’s single most important task is sending the sales team into the field with what we call the “right price.” The right price is the highest price you can charge while having the customer feel that they were treated fairly in the transaction. Most customers think of an item’s price as a range of acceptable values. Depending upon the product, the range can be pennies at one end, or can be dollars or even tens of dollars at the other end. When you fail to understand the breadth of elasticity for an item and set your price at the low end of the acceptable range, you leave money on the table. This is money that could have been yours without angering the customer. The pricing manager’s job is to determine the acceptable range and then to set the customer’s price at the upper end of that range. This price should be readily available in your computer system for use by your team.
5. Data will be the differentiator in coming years: Knowing what the competitor’s price is, knowing the value proposition they offer, and knowing where you need to be on an apples-to-apples basis gives you tremendous power in setting and defending your prices in a competitive market. When a customer challenges you with a price, you may be able to determine if their price is legitimate or if you are in a good old-fashioned game of liars’ poker. You may also be able to determine which competitor’s price it is and how you need to respond.
6. Good data is the key: There are several huge caveats here: a) GOOD data will be the differentiator, not just any old data; b) The pricing data in your computer system often provides very little insight into the actual right price and thus must not be considered to be good data…the data in your system only tells you that the price offered was low enough to sell the item on a given day. It provides no insight into where the competition is and what the right price was for the situation. It does not indicate how much money was left on the table. It does not tell you whether your sales person tried a higher price, gathered verified competitive data from the customer and then adjusted the price to meet the market, or if they lost their nerve when the customer made a frowny-face and dumped the margin 5 or 10 points; c) Secret-sauce computer algorithms cannot put lipstick on the piggy data that is in your system. Some of them simply use the data to identify the smaller mom and pop customers, and selectively raise their prices. This works okay until they figure out that they are getting dinged. (We would argue that the reason some of them work is that a pricing lockdown is required.)
7. Sell your pricing to your team first: Rich has done pricing seminars to get teams on board with pricing for years. In this time we have learned that if your team is not confident that your computer pricing is current, market-based, thoughtfully-created and fair to both parties, you have lost the war. They will override it to what they guess is fair, or, at worst, sabotage it in the selling process. The idea is to convince them to offer the computer price to the customer without judgment. Also make sure they know that when the price is wrong (even in the best run companies some customer pricing is wrong or out-of-date) they must provide the market data to get the computer price changed for this customer and for other customers who may require the same pricing.
8. Sell at the right price: After the price has been set and the team has been sold on the validity of the computer price, you must insist that your team use the customer’s pricing in the computer system. When a customer inquires about a price, the response must be the system price.
9. The sales feedback loop is critical: One of the most important reasons you have an outside sales force is to keep your finger on the pulse of the customer, the markets and the competitive forces at play in the markets you serve. In some cases, the data would suggest otherwise. Most companies will observe that their house accounts enjoy better margins than accounts with assigned sales people. Of course, this is not the whole story, but we think the relationship with the customer must yield proper margins and information, otherwise the high expense of an assigned salesperson may not be warranted. Most customers have a small number of hot button items, not product lines like copper; not categories like couplings and elbows; individual SKUs. Ideally, the assigned sales person should know the customer’s list of favorite SKUs and what the customer expects to pay for the item in dollars and cents.
When a customer pushes back on a computer price, the discussion should be focused on what the right price needs to be and how that price was determined (who is offering that price) and getting corroborating documentation in support of the price. We often hear that sales people simply give away a 5 or 10 percent discount, which yields a 5 or 10 POINT margin loss.
When a sales person can get this valuable information, it must be fed back to the pricing manager so the data can be folded into the overall pricing structure for the customer and maybe for the type of customer.
10. All overrides should be evaluated and folded into the feedback loop: As a part of the feedback loop, whenever the computer’s price is overridden to make a sale, there should be a conversation between the pricing manager and the salesperson. Often the salespeople are offended by this conversation because they think the company is restricting their authority to discount as needed. In some companies, this may in fact be the case, but we think the intent should be to understand what market forces caused the pricing adjustment. Then to determine if the computer’s price needs to be adjusted or if the sales person needs some additional coaching, with the understanding that they can discount as needed to meet verified market pressure, not because the customer simply frowned at them or said, “BOO.”
If you are thinking, “we have lots of overrides every day so this is impractical,” it is often a red flag that your computer price is not credible or that your sales team has pricing trust issues and needs additional training.
11. Outside sales is a demanding job when done well: Some have, however, devolved into order-takers and that is a minor part of the job that is often better done by inside sales or your webstore. As we interact with sales people in our industry, it is disappointing to ask them what products are hot button items and listen to them “fake it.” They complain that their company has a pricing problem and they boast that their close ties with the customer are the lynchpin of the relationship with their company. Yet they don’t know where they need to be on the customer’s critical products. They are the customer’s best friend and cannot get the customer to talk about where you need to be on their hot buttons. They know the names of the customer’s children and they don’t know what products the customer loves and favors. The reality is that most customers are tuned into a small number of items’ pricing - like a couple dozen or less SKUs. They buy a very small number of items on a regular basis - like a couple hundred distinct SKUs. Occasionally, a good outside sales person will say, “this item is a hot button in our market and I need to be at $1.85 to be competitive.” It doesn’t happen often.
12. The future of pricing isn’t pretty and it’s not that far away: The internet is bringing lots of changes to our industry. You must have a webstore to allow existing customers to easily order online. You must realize that pricing is becoming much more public. Amazon and others are serving up their pricing to just about anyone who can punch a keyboard. This is, in our opinion, moving toward a more retail-style pricing model that will change our industry. Plus, Amazon’s 2016 net operating profits were in the 2 percent range, so its pricing plan seems to echo the country western song that says, “I’ve got friends in low places.”
W. W. Grainger, a distribution company that we have admired for years and that we own shares in has been getting hammered recently as its online focus has seemingly been at odds with its year-in-year-out gross margins in the 40 percent range. It looks as if its online customers have discovered some competitors are happy to provide similar products at margins less than 40 percent. The jury is out on how it will end for them, but we’re guessing their future margins will be impacted.
13. Use the internet to gather competitive data: As the internet provides greater access to information to customers about a competitor’s pricing, it can also provide information to you. After you know where they are, you can position your pricing where it needs to be given the value that you provide versus the value that your competitor provides.
So, your assignment for this month is to get a real good pricing person in place and task them with building and formalizing your pricing structure. We’ve recommended this to wholesalers for 35 plus years. Thus far, we’ve had people ignore our recommendation and tell us that they regretted not having done it, but we’ve never had a wholesaler try it and tell us they regretted it.