Pricing is probably the most important aspect of your customer relationship. Yet surprisingly, many distributors approach pricing as an afterthought. Pricing influences your brand, your profitability, your share of wallet and competitive position. Who on your team is in charge of your pricing strategy?
In our work with distributors, we found five predominant approaches to pricing.
Pricing Team 1: No One in Charge
“I’ve just always had my product team set up pricing as cost-plus or list-less based on what our vendor charges. Of course, we give discounts to good customers I play golf with.” – A distributor who is losing a lot of money
Many distributors give little thought to their pricing strategy other than to toss out some random discounts to customers they like or when they need to win a large deal. They assume that all customers are the same and that the market has an expectation around price for all products. This simply isn’t true. A customer’s sensitivity to price changes is often quite varied based on their usage of the product, their own customers’ needs, their relationship to your business and many other factors. If you don’t pay attention to these cues you are leaving money on the table.
Pricing Team 2: The Owner on the Weekend
“I’ve run my business for 15 years and I have the best feel for what prices to charge.” – Another distributor who is losing a lot of money
You know your business but do you have the ability to keep up with constant change in your markets? Your competitors are using epaCUBE to drive new profits and increase share of wallet and are taking business away. Your gut feel for pricing is no longer a sufficient match for sophisticated data-driven analysis and optimization.
“I do the best I can, but I can’t hire a pricing manager right now. So I stay up all night and all weekend running data through spreadsheets.” – A distributor who is tired of losing a lot of money
Some distributors are trying their best, but without the right tools you spend way too much time making decisions that are too late to make an impact. They wade through a sea of sales data trying to figure out new profit opportunities, spending hours on what epaCUBE can do in minutes.
Pricing Team 3: 100 Different Sales Reps… 100 Different Price Managers
“My sales reps hear what’s going on in the market.” – A distributor who is in a race with other distributors to the very bottom
Are your sales reps making their own pricing decisions without guidance? Are your pricing overrides through the roof? Do you even know?
If you allow your sales reps to make their own pricing overrides, you are throwing your profit away. You may think that the sales rep is the closest to your customers and competitors so they have a feel for the right price. But if you’re allowing your sales reps to make data-free decisions about pricing, most will choose the easiest path toward lower profit in order to get a sale done faster. This isn’t a knock on sales reps, it’s simply human nature.
How often does this kind of story happen inside your company? A buyer comes in and claims they’re getting a discount from another distributor. Your sales rep doesn’t push back, does a quick lookup in your ERP system on your cost and agrees to give it away. Or maybe your brother-in-law came in this morning and got a particular item at cost so now that price is defaulting in your order entry system or at least defaulting inside your sales rep’s head. Sales reps tend to have biases toward lower pricing, believing things like, “I can only get 10% on this item.” Without sophisticated data analysis, how would they know any different.
Allowing your sales reps to override pricing is not only an admission of defeat around your pricing matrix, it is like having 100 different pricing managers making random decisions about your most important factor in profitability.
Pricing Team 4: An Out-of-Touch Consulting-Dependent Organization
“We hired a well-known pricing consultant that works with other members of our association” – A distributor who is more comfortable with some other company’s data-free guess than their own
There is only one way for a pricing consulting firm to be successful – they must create a dependency inside your organization and they must conduct their analysis of your business in the easiest, laziest, most cost effective way they can. Those two factors are the main reason that such companies keep their methods inside of a “black box,” pricing methodology that they don’t like to share. If you saw what was really going on inside that black box, you’d realize it was the simplest and most ineffective of all pricing strategies (probably simple size-based or small, medium, large). Then you’d realize you could do it on your own with little effort, ending the dependency they’ve built in your organization and ending their income stream.
An outsourced pricing consultant service can only go so far to help with the basic math of price optimization. Maybe you started with the attitude that, “it’s better than nothing,” but found there was little to no measurable benefit after some initial small wins. There is more to pricing strategy than just crunching numbers. An outside consultant cannot know your markets, strategy or tactics like you. Pricing strategy requires proper segmentation. Not all small customers should be treated like small customers. Just because a product is in a price sensitive sell group doesn’t mean you couldn’t break it out for special pricing. Pricing consultants can only work with the data you give them. If you give your consultant bad segments, you’ll get bad answers.
Bottom line: why in the world would you outsource the most important element in your customer relationship and profitability?
Pricing Team 5: A World-Class Team of Professionals from Inside and Outside the Business
Data-driven analysis of pricing is the fastest way to drive new profits. It requires you to develop an optimal pricing strategy, implement effective pricing processes, measure and control pricing and aligning your technology with your pricing strategy. It needs to be led by your team with the application of the knowledge of your customers, products and markets. Fortunately, epaCUBE makes it easy with industry-leading priced optimization software and a team of distribution pricing professionals you can rely on to speed your ROI and provide guidance when necessary. With epaCUBE, you really get the best of both worlds. You stay in control of your pricing with easy-to-use software and you have access to our experts for guidance, best practices and profit plays. No black boxes, no data-free guesses about price and continuous profit improvement day after day.