Reinvigorating revenue streams is a priority for distributors right now, but it’s important to pay attention to the sacrifices that come with certain tactics. These include over-discounting to bring in sales and going above and beyond in service — at a loss — to retain customers.
These aren’t pricing strategies; they’re panic responses. A good pricing strategy has intention and structure, and it doesn’t put margin on the back burner, even for short-term quick wins.
Before you make your next move, you must develop an intentional pricing process that your people can use to make decisions in the “next normal.” This means getting strategic about pricing and supplying your teams with the appropriate tools, training and support to execute. Having a process will help your people make confident, consistent pricing decisions that result in healthy margins.
A good pricing strategy:
- Has pricing management to unify all pricing influencers
- Uses data to provide pricing recommendations
- Has controls built in to prevent harmful, reactionary pricing
- Considers suppliers, customers and inventory at once
- Emphasizes high-quality customers versus a high volume of customers
Reinvigorate your pricing strategy with these six steps:
1. Assemble a dedicated pricing team.
The most effective strategies involve a designated, cross-functional strategic pricing team that is accountable for designing, implementing and continually examining the process. This team should be led by a chief profitability officer or pricing manager who oversees strategy, defines pricing drivers, and ensures proper training and implementation.
A pricing team increases the likelihood that your frontline people will adopt new processes, tools and technology because they will have the proper training and support to put them in play.
2. Balance the value of suppliers, customers and inventory.
Suppliers (How much does it cost?), customers (Who do you sell to?) and inventory (What do you sell?) are interconnected and nearly always affect one another. Take a balanced approach to these three value creators and consider how an action in one will impact the others. For example, you typically can’t reduce inventory without affecting both your supplier management (volume rebates) and sales teams (customer service and potential margins). Actions that tip the balance could lead to customer dissatisfaction and panicked responses like price reductions. A strategic pricing process, particularly one that requires approval for major price changes, will help you maintain balance.
This juggling act may seem tedious, but our experience has taught us that distributors who understand the importance of managing complexity are better positioned for sustained, profitable growth.
3. Use data to segment customers.
Broaden the view of what drives pricing for your frontline people so they will have the information they need to make great pricing decisions. As it stands, they may only have visibility over the cost of goods sold and the gross margin. However, each customer type comes with a different value and cost of its own.
Use data to segment your customers into types, such as core, opportunistic, marginal and service drain. Assign pricing rules and suggestions to the different types and determine a user-friendly, actionable way to deliver this information to your teams. Then, train your teams to use that information to shape their daily interactions.
4. Stop automated chaos.
Many distributors have an automated pricing formula that calculates customer price using the cost of goods sold. This easily leads to inconsistency because there are several factors affecting procurement costs in the first place. Further, if your purchasing team gets a discount on a bulk order, that discount will enter the equation and result in a lower price for the customer. With this formula, your prices are unstable and you lose earned savings.
Set a cost lock for a set amount of time to create consistency in customer pricing. Revisit your cost lock after that period to see if adjustments are warranted.
5. Test and refine your pricing process.
As confident as you may be in your strategy, testing it will help you find its flaws and improve it before you roll it out across the board. Choose one or more pilot locations that are representative of your overall business to apply your pricing rules. Perform what-if analyses to understand margin implications. Discuss results with your frontline members and adjust price rules if necessary.
6. Educate your team and review performance.
Educate your tactical pricing team about best practices and their significance. Provide guidance to help users with their day-to-day pricing decisions. Review goals periodically and adjust according to business conditions. Learn from missteps (if any), and integrate your learning in the pursuit of achieving pricing goals.
As you can see, strategic pricing involves managing complexity, observing performance and continually learning and enhancing your strategy. It may seem difficult, but the effort you put in will have some of the greatest returns for both short-term and long-term profits. In NAW’s Pricing Optimization: Striking the Right Balance for Margin Advantage, my coauthors and I offer best practices for creating a pricing process that is tailored to your business needs and company characteristics. With research from more than 70 actual wholesaler-distributors, you’re sure to find a strategy to help you create pricing integrity and end margin erosion.
