6 Simple Changes That Lead to Higher Profits
When I tell distributors I meet that our customers are making 2% to 4% or more gross profit improvement through price optimization, they sometimes respond that price optimization sounds too hard for them. Sometimes they think that it just isn’t possible in their business. Maybe price optimization works for really large companies but how can an SMB-sized distributor make money when there are so many other issues they face on a daily basis?
The truth is that profit improvement is available to anyone ready to make a few simple, systematic changes.
1. Fix your customer and product segmentation
Very few distributors are happy with their current customer and product segments. Often, product segments simply follow basic line cards without regard to profit or volume. Maybe they set up their customer segments based on industrial categories (e.g., electrical contractors, hospitals, cash customers, etc.) or geographies (e.g., our Dallas branch, the Pacific Northwest, etc.) or worst of all, size (e.g., small, medium or large). These segments fail to provide meaningful pricing guidance because they are not based on real, profit-driving behaviors and attributes.
Two customers who are in the same industry might buy from you for different reasons. One could be price sensitive or looking to buy large quantities for a price break while the other doesn’t care about price as much as your convenient location. Just because a particular customer is small to you doesn’t mean they couldn’t increase their spend with you if you understood their business and priced them correctly.
Similarly with product segmentation, it’s important to look your sales data when segmenting your products. Many distributors simply group products together based on how their manufacturer lists products. But your customers are willing to pay different prices depending on availability, brand recognition, niche requirements, their own client preferences and more.
Unfortunately without epaCUBE, many distributors think segmentation is too hard to do on a regular basis if at all. Many have tried segmentation once with lots of data in unwieldy spreadsheets and the experience was so painful that they never did it again. Using epaCUBE Segment Optimizer, you can analyze, adjust and create new segments in a matter of minutes, so there is no excuse for having weak, poorly designed and unprofitable segments.
2. Employ data-driven pricing
You are making pricing decisions every day. Are those pricing decisions profitable or not? Are they planned out or random? Too many distributors make pricing decisions based on the whims of sales reps, rumors of competitive pricing or customer complaints. That can be a race to the bottom in terms of profitability. Just because a customer brings in a competitor’s flyer, how do you know if you should match that price? Was it an outrageously low loss leader? Would the customer buy from you anyway because you have better service? Data-free pricing only leads low profits and too many unanswered questions.
Sometimes distributors make broad-based changes to their pricing records in an attempt to correct out of date pricing; however, they then have no way of measuring the success of these changes.
The good news is, you can get started immediately with data-driven pricing with epaCUBE in a matter of weeks. We have many built-in best practices and profit plays that immediately help you identify simple pricing changes to make to drive new profit on a daily basis. The epaCUBE performance scorecard gives you clear reporting on the success of all of your pricing changes.
3. Reduce or even eliminate pricing overrides
I’m always surprised how many distributors allow their sales reps to override pricing on almost every sale. There are sometimes opportunities to win deals based on price discounts, but those opportunities are very rare. Statistical analysis of price discounting shows that a 1% price discount kills so much profit that you’d need to increase your sales volume by 20% just to break even. With that math, most distributors would be better off eliminating pricing overrides altogether.
The real reason reps override your pricing is that they don’t trust your pricing matrix in the first place. Why don’t they trust your matrix? Because it’s out of date and wasn’t based on data in the first place. When you get your matrix right, you prices are more systematic and drive profitability based on your corporate strategy, not on thousands of individual data-free pricing decisions.
4. Make Pricing Your Core Competency
Why in the world would you take the most important element of your profitability and customer relationship and turn it over to a consultant or company who doesn’t know your products and your customers? I’ve lost count of how many distributors have been burned by pricing consultants – I just met a CEO at a trade show who told me that a well-known consulting company had them priced 40% over market. Consultants make changes to your pricing based on their own black-box methodology based on simple segmentation. The prices are almost always wrong unless you have a very simple set of products and markets.
You don’t have to go it alone, either. With epaCUBE, you get the best of both worlds. You get industry-leading price optimization software with a team of experts who meet with you regularly to make sure you are constantly and quickly driving new profit improvement. Instead of waiting months for you pricing consultant to suggest incorrect pricing, you can apply your own knowledge of customers and markets and use epaCUBE’s statistical guidance to improve profit on a daily basis.
5. Get a handle on your pricing contracts
Offering individual pricing contracts can help you win strategic deals. But how often do you go back to analyze and manage those contracts? Our studies show that about 60% of the individual pricing contracts a distributor offers essentially turn into permanent price discounts because they are never changed. Why is this such a huge issue for distributors? Things change, vendors raise prices, economic factors increase your costs and inflation continues at 2-4% every year. If you haven’t updated a pricing contract in two years, you are probably underwater by at least 7% on that contract. That means for every $1MM of sales you have locked into old pricing contracts, you’re losing $70,000.
There’s no need for that profit loss with epaCUBE Contract Manager, which allows you to track all of your contracts, set notifications and make sure they are priced profitably using the power of epaCUBE Profit Optimizer.
6. Keep score
How can you expect to improve your profitability if you’re not tracking the impact of your pricing decisions? If you don’t have a way to track the impact of price changes, both individually and collectively, it may be too late to make adjustments by the time you realize you are losing profit on bad pricing decisions. Profit isn’t always about raising prices or increasing volume. You need to know the score to continuously improve.
How often have you attempted to strategically correct pricing and never know the success or results of those changes? We offer our users a Performance Scorecard that allows you to track the most important measures of your pricing success in one easy to understand screen. You can instantly view profit increases week over week, progress in reducing pricing overrides week over week, actual dollars added per week as well as the expected benefit of deeper price analysis on your total sales. While pricing managers, sales reps and branch managers often love to drill into various levels of detail with products and customers, executives like the two-minute overview of pricing successes the scoreboard provides.