Frank Hurtte: Strategic Pricing
You can’t cheerlead your people to pricing success.
In spite of what leadership gurus tell you about constant encouragement and the importance of repeating your message until they get it, it’s simply impossible to cheerlead your people to success in pricing. Think about it. You’ve probably heard the “Power of One” presentation until you’re blue in the gills.
Distributors by the hundreds periodically pick up on this message and share it with their teams. Trust me, some have repeated the message so many times their salespeople can recite chapter and verse. But, they still lack any kind of sustainable success.
The sad truth is the deck is stacked against you from the start. Customers are constantly pushing backwards against your price. Sometimes this happens because the purchasing guy is classically trained to ask for a better deal. For those doubting my “classically trained” comment, Google “purchasing negotiations training.” While our sales teams are busy learning how to add customer value and solve complex customer issues, the procurement departments are learning how to negate our value message.
Further, most of the time customer requests for lower pricing are met with little resistance. Our sales team have actually reinforced the behavior. It’s like feeding table scraps to the family’s new puppy —give in once and the dog becomes a beggar for life. We’ve taught customers a lesson — ask and you shall receive.
Sales people are encouraged to build tight customer relationships. In the trenches, this translates to conflict avoidance at all costs. They believe it’s their duty to “cave in” to any enquiry about budgets or price with, at the very minimum, some type of nominal discount. No discussion of the value added by their company, no push back with the price being fair for both companies and no knowledge of the true market price is tossed out. It’s ask and you shall receive. They turn their eyes to the ground and say, “Hey, let me see if I can come up with something a little better.”
After the relationship has matured, they may actually succumb to the “good guy syndrome” and naturally provide their favorite customers with the best price on the planet — because that’s what friends do for one another. Research across over 350 distributors indicates small customers are treated to the same pricing as the biggest company on your customer list. Why? Because that’s what good guys do.
Flat rate pricing just won’t die. Every company has some comfortable margin. If you don’t really know the real margin, just add some magical percentage. Let’s be specific; if you happen to be an electrical wholesaler you probably have hundreds of items marked up 20 percent gross margin every day. But don’t judge the electrical guys; every industry has a magic percentage.
What makes it worse is that only the person pricing the order knows your cost — certainly not the customer. Supply partners lament that they can’t give their best distributors a higher gross margin because in a year they give the extra points away, allowing the margin levels to drift back to very near that magical point.
Delusional thinking kicks in. Distributor salespeople will cross their hearts and swear they know the market. After all, they have been in this industry for 10, 15 or 25 years and their experiences give them some super-human ability.
We’ll drill into this in just a moment, but for now let us propose an easy experiment for you to try. Print out your 50 highest selling items. Then ask your sales team to give you the market price for each. Experience dictates that even your smartest will score a less than passing grade.
You must have a real process to drive your pricing plan forward. What’s real? Your process must have documentation, training, measures and coaching points. Skip one of these and it’s not really a process. Pricing process is no different, except for one major point —the number of pricing permutations is enormous.
The typical distributor sells 10,000 SKU’s to 5,000 customers; that comes to 50 million pricing permutations. Remember those super-human abilities? Forget them — no normal person can keep track of that number in his or her head. Further, the number doesn’t lend itself to spreadsheets and other home-cooked plans. I have nothing against your people, their skill sets or training, but the number is just too big.
You need a powerful analytical tool, something that harnesses the power of advanced proprietary algorithms with powerful hardware. Analytics become a cornerstone of your metrics and measuring points.
Armed with management tools which provide exceptions to the pricing plan and levels of adoption of the plan by market, branch and salesperson, the distributor can begin to make progress. The analytical measures provide coaching moments with real data. Imagine sitting down with a salesperson and saying, “Your current pricing system compliance is 62 percent. What can we do to bring more customers onto the system?” Or, in a periodic review of numbers, being able to tell a salesperson, “If you would have used the system 95 percent of the time you would have earned $4,397 dollars more in commission this quarter.”
Advanced management tools further drive the pricing plan forward. After the initial coaching honeymoon comes to a close, data from which to make hard management calls grows in importance. Quick reports allow the manager to easily segregate those who provide great pricing “lip service” from those who produce real results. This allows for better long-term employee reviews and heart felt talks about their future with your company. Ultimately, compensation plans can be tailored to drive precisely the right behavior in your business.
A quick scan of the industry reveals a dozen or so pricing related books by some pretty credible distribution experts. When I think of my own career, I first encountered someone talking about the importance of building a “pricing matrix” at my first distributor training program in 1991. The whole thing made sense, but in spite of multiple attempts, things fell apart. The concept seems easy, but implementation leads to sales force push back, lots of excuses and, after a short blast of hope, things return to normal.
After a great deal of research on the topic, and seeing pricing systems at work with my own clients, I believe David Bauders and his team at Cleveland-based Strategic Pricing Associates (SPA) are the state of the art in distributor pricing. Here’s how I came to this conclusion:
Experience
Not only do these folks have over two decades of experience, they have experience in our industry. Their system is in place at over 350 distributors, ranging from large to very small. Their distributor client base is broad, but a large percentage of them fall in lines of trade serving contractors; organizations in the HVAC, building materials, PVF, electrical and safety industries are very prevalent.
Data Driven
SPA uses data from their clients’ own sales history
to derive optimal pricing levels. SPA uses a proprietary computer algorithm designed to build conclusions based off previous transactions at the client’s
business. In days of old, just accessing all this data would have required an army of IT staff. SPA has developed a system for “porting” data from the major ERP business systems manufacturers.
It’s a Process
I am big on real processes. These guys meet the checklist by providing documentation, training, metrics and coaching/management points. Their process speeds the implementation. After interviewing nearly 20 percent of their client base, I believe their claims of a 90-day implementation process.
The Interaction of Processes
Did I say I was a process guy? My observation with Strategic Pricing Associates’ clients is massively improved customer segmentation, stronger understanding of customer types, improved understanding of the value the distributor provides to customers and, even more importantly, it helps them understand the need to
continually adapt their business model. For instance, our work with distributors for our book, “The Distributors Fee-based Services Manifesto,” indicates that wholesalers with a pricing process are three times more likely to charge for some of their services.
The Money
I get paid to help River Heights Consulting’s clients make money. Clients who put the SPA process to work typically add two full points to the gross margin of business run through the system. And, while most of my clients have large chunks of their business which are quoted jobs, contracts and negotiated project deals, they still find themselves running a substantial chunk of their sales through the SPA pricing process.
Improved margins don’t require extra trucks, added salespeople, extra infrastructure or any of the other expenses associated with “growth.” Most times, over 80 percent of the extra margin goes straight to the bottom line. For many distributors this is like doubling their profits.
Finally, my clients like making more money, increasing their equity and growing their business. That’s far better than cheerleading along the road to Nirvana. CS
Frank Hurtte, founding partner of River Heights Consulting, speaks, writes and consults on knowledge-based channel issues. Hurtte’s latest book, “The Distributors Fee-Based Services Manifesto,” is now available on Amazon. Contact Frank at frank@riverheightsconsulting.com, 563-514-1104 or visit riverheightsconsulting.com.
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