As business owners and managers, we constantly find ourselves staring down an endless series of levers to pull, buttons to push, and dials to turn to optimize our businesses. No matter how fancy we get through, and how many moves we make, the biggest impact we can make almost always comes down to one of the most fundamental pieces of our business model — our pricing!
According to McKinsey, even a 1% increase in pricing will translate to an 8% increase in operating profits.1 It should come as no surprise then that Warren Buffet has famously called pricing power “the single most important decision in evaluating a business.”
“The skeleton in the closet is the sales force. No one trusts what they’re doing, particularly the pricing desk. These guys are winging it based on a commission check. They’re your chief obstacle [to getting] the prices you deserve.”2
The problem? Every industrial distributor seems to think their pricing is their secret sauce and every salesperson has a “perfect recipe”…most of which turn sour sooner rather than later because the pricing process is not replicable or scalable. Some people like Michael Dunne, research vice president for price-optimization and sales-automation technology at Gartner, believe the issue starts with the sales force:
For me, a much better explanation comes from Scott Sinning, Director of National Pricing at Graybar:
“Pricing is fascinating because it requires us to navigate across functions, think strategically, act tactically, persevere through inevitable setbacks, and lead change.3
So what exactly makes pricing such tricky topic to tackle?
Why Pricing is Even More Challenging Than We Think…
The simple answer to this extremely loaded question is that pricing is a target that moves incredibly fast. In fact, it is probably a better analogy to say that pricing is like 30 moving targets, all running at full speed in different directions.
Your pricing strategy can (and should) be different if you are quoting a long term contract, a long list of materials for a bid, or one line item over the phone. At the end of the day, someone has to make a decision on how to make money or lose money, but how many of those individuals have the right data to prepare to handle the real volume of those decisions?
For example, let’s say a typical mid-sized distributor called “Fasteners 2020“ has 1,000 customers. Let’s also assume they have an average number of active SKUs at around 5000 SKUs and at least three quantity breaks (few, medium and many)…when you run the math on that you get a whopping 15 million possible combinations that need to be priced properly!
Even the most disciplined pricing gurus among us can attest that those numbers would make it extremely difficult for any owners, finance managers and sales managers to deliver an optimal experience for every customer and their business bottom line — if they don’t have the right data.
So, What Are We Going to Do About It? So, What Are We Going to Do About It?
When it comes to tackling the issue of proper pricing as distributors, there are really four paths we can take to simplify the guesswork of optimizing for 15 Million+ combinations:
- Do nothing — Believe it or not, this is a common solution distributors select, and understandably so. The initiative of setting these prices is just too complex for many to grasp and instead they opt for a simple GM% guideline. While this may work in the short term, we all know it is not a viable solution for any business in the long run, because any new hire will have to learn all the tribal knowledge (the secret sauce) and that sauce won’t taste as good as the market changes.
- Do the work in house — Many distributors feel that their pricing decisions are too important to trust to a third party and opt to spend hours carefully considering these many little decisions for each of their product lines. While admirable, this tactic not only can cost you massive amounts of time, it can also be incredibly subjective and difficult to prove the validity of decisions until after they have been made.
- Bring in an expert — Often, businesses take the route of augmenting their organization with a fractional pricing specialist, who will bring their own tools to analyze data and help with price-setting. These experts tend to have deeper insights into best practices using predictive tools which reduce your learning curve, but the question then becomes “how long would you need to rely on a third party rather than being in charge of your own decision-making?”
- Build a better pricing engine — Using tools (and teams) like Intuilize, you can enhance your org’s capabilities to better utilize the data you have in your existing systems such as your ERP to instantly see pricing improvement opportunities. This path requires little-to-no business risk, low-level investments, and allows you to retain authority over your pricing while being able to spot growth and optimization signals in few clicks.
The Answers Are Already Waiting in Your ERP
Almost all distributors have an ERP system already in place, but the number of distributors using the pricing capabilities these systems offer is shockingly low. There are plenty of reasons for this — they do not know the capabilities are there, they simply haven’t thought about how to use them, the implementation seems cumbersome, they think the business is too complex for the tool — there are endless reasons to not use it, but there are even more opportunities waiting if you do!
At Intuilize, we help distributors tackle this EXACT problem all the time, and time after time we hear how much simpler the solution is than our owner/manager partners were expecting.
By utilizing the built-in capabilities of the ERP you have, you can set and provide pricing to your customer with a few clicks while replicating most of the price guidelines you have today. This method takes all of the guesswork out of your pricing strategy and execution meaning your team saves time, and more importantly, you can control your win rate.
Are you prepared to tackle pricing in the era of data-driven distribution?
Simply put, if you’re running a $20 Million fastener distribution business, you might very easily be leaving $200,000 on the table simply by not using your ERP system pricing feature.
As a business leader, you’re always driving to make your company more profitable, so it might be time to take a look at which of the four pricing paths above your business is currently taking, and whether you need to start letting your data do the driving for you!
About the Author
Nelson Valderrama is the CEO of Intuilize , which specializes in helping Mid-size distributors transform data into profits . Nelson has dedicated his career to help business uncover hidden competitive advantages and unleash the power of data in the new Digital Economy. For more information contact him by email firstname.lastname@example.org or visit www.intuilize.com
1 McKinsey and Company. The Power of Pricing. McKinsey Quarterly, Feb. 2003
2 Banham, Russ. The Price is (More) Right. CFO Magazine, June 2011
3 Professional Pricing Society , September 2018