Tuesday, March 31, 2015

A Pricing Tale: Old Joe

Last week, I had the pleasure of addressing the sales team of a fast growing distributor. The topic was sales process and aligning with major industry trends. The group numbered in the mid-twenties and included salespeople from local territories throughout the central portion of the U.S. Prior to launching into my talk, I asked the group to give me a quick introduction outlining their position and background. As we moved through the first few members of the group, it was clear this team had deep product knowledge and understood their customer-base well.

About half way around the room, we came to Joe. As Joe introduced himself, I could see the way the other members of the team deferred to him. Joe was the Senior Inside sales person and when he outlined his industry experience it was impressive to hear the side comments from the group. Joe was THE go-to guy for any tough application or technical question. He exuded customer service from every pore of his body. You could tell Joe was rough, tough and ready let you know if he disagreed with you.

The talk covered a variety of topics ranging from targeting accounts and building a data base of customer-centric information to best practices in bringing manufacturers into accounts. As I moved through the presentation, I made a mental note to gauge Joe’s reaction. Early on, I asked his opinion on a couple of topics and, well, I felt like Joe was falling under my spell. Carefully considering each of my major points and then slowly nodding in agreement, I was feeling pretty good about the outcome of the whole presentation. But things were about to change…

I talk about the power of a solid, scientific pricing process in every presentation I deliver. Why? Because a good pricing process delivers to the bottom line. My clients experience better return (ROI) from money spent on pricing than any other investment; but that’s not the story here.

As I talked about best in practice pricing strategies, I could see old Joe’s face get stiff. His body was rigid, he crossed his arms and this person, who was so friendly, went from receptive to closed. I would have been blind to not see it. Furthermore, I was 100 percent certain everyone else in the room was feeling the bad vibe as well.

Sensing I was about to “lose the room” I asked Joe his opinion on pricing strategy. Joe shrugged and said, “From where I sit, standardized pricing, or whatever you want to call it, is destined for failure in our business. Our customers are tight with their money. They don’t want to pay more, they want to pay less.”

Going around the room, the group largely agreed with Joe with a couple of notable exceptions. One salesperson noted that some customers are willing to pay more when the product is in stock. Another guy stated repair parts were not price sensitive; especially when the customer is trying to hold out on replacing a whole system. Within a few minutes, we had a dozen or so examples of times where a
“standard” price would work. Everyone was on board, but Old Joe looked shaky.
I knew we needed to talk.

One-on-One with Joe
Clearly this isn't us talking.
I charge a higher fee to wear a tie.
Shortly after my presentation, I had the chance to talk to Joe one-on-one. Seated in a cozy spot in the hotel lobby, Joe shared his story and laid out his concerns:

Joe has been in the distributor side of the business for well over 20 years and worked with tools in the industry prior to moving to distribution. He’s been around the block, seen everything once and can give recommendations on products not even listed in the catalog. Since moving into the inside sales role, he has developed a following of people he calls “his customers.” They know him, a bit about his family and he knows them just as well. Further, even though a good many of these customer contacts are called on by outside salespeople, they pick up the phone and call him with their orders.

So far, so good. But then the story headed down a typical path.

Joe reiterated, “My customers are cheap.” When I asked what that meant, he said they called him because he was willing to “work with them on the price.” Before I could ask, he went on to tell me how sometimes customers called him when they were not happy with a price given to them by another member of the team. He called this “saving the order.”

A few years ago his company made a failed attempt at building a pricing process. Basically, this approach put a set margin on all products based on customer type. This is an approach my friend David Bauders calls peanut butter pricing. According to Joe no attention was paid to “real market price” or customer price sensitivity. After a number of months of battling one price change after another, Joe convinced his management team to go back to the old way with price points based on salesperson input and a guideline of cost plus 18 percent.

Interrupting his story, I asked Joe if some customers deserved to pay higher prices. First off he replied yes, but then I asked if there were times he provided small customers with the same price as the largest of accounts. Joe answered to the affirmative, he often allowed small customers to take advantage of the “special pricing” offered by manufacturers to handle the very large guys. He felt like this was fair because they were loyal to him.

Joe, are you a bargain basement discount house or a quality service provider?
This wasn’t a trick question. I really wanted to understand Joe’s feelings about himself and the company in general. I sat back and listened. Joe let loose with a deluge of stories about “walking a customer through the repair process”, finding impossible to get parts, staying late to meet a customer who was in a down time situation and generally providing fabulous service to customers.

When I asked if he had ever lost a customer due to service, the answer was a resounding NO. And, he could relate tales of customers who left because of price who found their way back because of poor service. When asked how he responded, Old Joe said he offered to match the competitive price then strived to give even better service.

Clearly, Joe (and the rest of the team) were a high service organization. But along the way, he couldn’t escape from the fact that people continued to ask him if “he could do better” on price. His opinion that they worked in a price driven market was largely based on these constant requests for a deal. They begged and nice-guy Joe gave them a treat.

As we ended our conversation, I asked Joe if he had ever held firm on a price. Without hesitation he told me sticking to a firm price only happens when the customer hasn’t purchased an item in several years and wants the historic, maybe even ancient, price level. I asked what happens then. He tells the customer prices have gone up, but uses the same cost plus a percentage strategy. And, he always gets the order.
Pricing process and guys like Old Joe…
In my travels around the country, guys like Joe are common; great product skills, fabulous customer service and a skewed vision of how pricing impacts their employer. Over the years Joe has been conditioned to believe, everyone wants a deal. Why? Because he has conditioned his customers to always ask for a little better price.

How has Joe conditioned his customers? They ask once and he caves in. Next go around, they hint that the price is a little more than they thought, and the price drops again. After a couple of go-arounds with the Joes of the world, customers think it is part of the deal. Just like a trip to the flea market, except with top notch products and world class service.

After two decades in the business, Joe has conditioned his customers and convinced himself. But hope exists. Little by little, Joe’s company is setting limitations on precisely which product prices can be over ridden without management approval. For example, exclusive product lines are no longer negotiable. The same applies to products where the company carries deep stocks of repair parts.

Joe will continue to grumble. He will test his management team’s commitment to improving the price process. He will need training, coaching and management, but I believe his actions (if not his views) will change with time. And the result will be higher margins and greater results for his employer.

A couple of final thoughts…
The idea of improving distributor gross margins has been around for a very long time. One of the very first training sessions I attended as a fresh young branch manager 25 years ago covered “the power of one.” Remembering back, the half-day session included the massive impact one measly percent in gross margin had on a distributors bottom line. There was no how to except to cheerlead your team to higher margins but putting up posters and continually reminding everyone of “the power of one.” The plan flopped only to be replaced with a dozen more pricing fads.

In order to build a real pricing process, a distributor needs advanced analytics, solid documentation, training and a means to measure and manage their team. Very few distributors (read that almost none of them) have the expertise to do this alone. Joe’s company tried and missed the mark, and the road to pricing success is littered with other distributors in the same situation.

We recommend David Bauders and his Strategic Pricing Associates team to our clients (like Joe’s company) for five reasons:
1. They apply scientific analysis to data from the distributor’s own work. No assumptions, no national averages, just a scientific look at what’s happened in the past.

2. They have documentation to steer a company through the application of pricing recommendations. Everybody in distribution is busy. The SPA program involves only a couple of weeks of attention to bring it live.

3. SPA has the resources to help train the distributor’s people. This includes pricing people as well as guys like Joe.

4. The SPA system has the measures and management tools required to change behavior.

5. David Bauders has been doing this since 1993. With something like 400 distributor clients and over 20 years of experience, they can help anticipate and address issues.

Now allow me one more statement. I have seen the results up close. The Strategic Pricing Associates process works. Typically, distributors add two points to their gross margin. Two points that pass almost straight to the bottom line. For most distributors, this is like a 50% increase in profit.

Friday, March 20, 2015

Distributor Etiquette Hate Mail

It’s not often that I get real, honest to goodness “hate mail”.  Apparently, our thoughts on Distributor/Supplier Etiquette
have touched a nerve.  The strange part of the whole thing is this:  We are only posting on distributor/channel oriented groups.  These groups are focused on those who are either a) distributors or b) manufacturers who go to market through distribution.  They should be friends or at least tolerant of one another.
Yet in the past week, I have received emails and/or anonymous posts which contain things like this:

“Frank, you are a distributor apologist.  You claim to be open minded but your writing continues to indicate they can do no wrong.”

Taking excerpts from several other notes, we find a similar type of attitude.  Distributors are described as follows:
The remnants of a day gone by with no place in the modern age.

Lazy, to the point of not being willing to introduce new products or handle warranty claims…

Unwilling to carry inventory except on their biggest lines…

Slowly dropping their commitment to training new people…
Completely different to deal with then in my younger days…

Going even further, here is the entirety of one of the best (worst) posts on the state of distribution:
The problem is that MOST distributors today are going through the same LEAN supply chain consolidation as most industry. Other than their fast moving mfg, they are extremely and increasingly risk averse to carrying inventory. This creates a ton of pressure on the supply chain. In my opinion, most distributors create little value, even though they talk about it quite a bit. They add margin, drop ship a good lot, and do less and less of what they are supposed to do which is to have products in stock.”

For the record, I believe distributors are neither partners nor customers.  They are often an extremely efficient and effective “instrument” for getting product to market.   Many suppliers would struggle if they were suddenly charged with carrying the massive accounts receivables load for all of their customers.  A good many suppliers would struggle to get customer attention if their product was not packaged with the product of another manufacturer to create a solution. 
In the current model, power house supplier get preferential treatment.  Most of them command greater respect with their distributors.  Perhaps this person is upset because they are not a high power supplier. 

By the way, I love hate mail almost as much as I like emails of praise.  Drop me a line if you think I am getting prematurely senile.  

Friday, March 13, 2015

More on Distributor Supplier Etiquette: The Supply Partner Side

Distributors: customers, partners or something in between?
The Supply-Partner side of the Etiquette Story

The whole etiquette issue is not one sided. Over the last couple of weeks we have received several calls and comments on the topic: What part of distributor/supplier etiquette bugs you the most?

This week I would like to hit on a point made by a couple of folks on the supplier side. To launch the topic, here is a comment many great supply-partners feel throws a wet blanket on the partnering equation.

“Don’t forget, we (Distributors) are the customer.”

As I think back in time, I realize I might have used this line a few times myself. Reflecting on the subject, I see both sides of the argument. Speaking for distributors, I can see some validity in the point. We write checks to the supplier; often paying with much greater rapidity and regularity than those who finally end up with the product. I struggle to recall a manufacturer who extends anything other than 30 day terms. Yet, most Fortune 500 companies have unilaterally declared their own buying terms of at least 60 days. How can they do that? Because, they really are the customer.

Distributors may be the customer in other ways. After they buy the product they are often stuck with a plethora of widgets that don’t exactly fly off the shelf. Increasingly, distributors are bundling services and products, building sub-assemblies and, in many industry segments, creating turnkey solutions for those who later buy the product from them. This, too, sounds a lot like a customer.

However, the argument breaks down from there. If distributors are customers, they are a special type. Typically, there is a contract defining the scope of the relationship which doesn’t exist with “garden variety” customers. The supply-partner can walk away from other customers, without legal implications. Distributors operating in many states are protected from no fault termination by 1950s franchise protection laws. Further, distributors are given special pricing, marketing support and often, intellectual property not shared with common customers.

Somewhere along the way, distributors associated as customers, become something more. When things work well, and for most distributors and their major supply-partners it does, the relationship looks more like (and I hate to use an over worked term) a partnership. At times, even the best partnerships are strained and the distributor/supply-partner rapport is often put under stress.

A few years ago Michael Marks co-wrote a book called, Working at Cross Purposes: How Distributors and Manufacturers can Manage Conflict Successfully. The work describes the differences in the business models of distributors and their Supply-Partner manufacturers. The business models generally mesh well, but human nature tends to cause us to dwell on the conflict part.

This brings me to my last point. Distribution is a business model not a way of life. For some of us who are second or even third generation wholesale distributors, one point must be revisited often. The most successful business models change with conditions. Distribution today doesn’t look much like it did when my dad launched his distributorship in the early 1960s. Companies filling the ranks of his line of trade have evolved to the point at which they hardly resemble life at Hurtte Oil Company.

What does all of this mean? Well, the day we become merely customers instead of distributors is a day we may be skating out onto some mighty precarious ice. Distributors will exist only as long as we can provide services to the customer more economically, more efficiently and better than the supplier can using a direct model.

Are we customers?
I don’t believe so. We are a highly efficient, cost effective, low maintenance channel to market. And as long as we keep our competitive edge by being more nimble than manufacturer’s organization, we are special.

Distributors demand respect. Savvy manufacturers know that when distributors change brands their customers follow along. The last research paper on the topic points to something like 78 percent of the customers moving to the distributor’s new partner over a three year period.

With this in mind, perhaps the statement might be: Distributors aren’t customers, but the real customers “belong to” the distributor.

What do you think?

Monday, March 9, 2015

Guest Blogger Steve Earley: Strategic Planning - 10 Essential Steps

Once again, we welcome guest blogger, Steve Earley who shares his thoughts on Strategic Planning.  Do you have something great to share?  Let us know and you could be featured here as well.

Everyone has heard the old axiom that states “failing to plan is planning to fail.” Most business leaders intuitively understand this and have every intention of creating a strategic plan for their company. However, all too often one of the following occurs:

The leader lacks the requisite experience in creating strategic plans and/or believes it too expensive to hire an outside consultant to assist. Therefore it never gets created.
Other issues take priority and the planning process is delayed, or in some cases never happens.
A plan is created but without specific actions items and appropriate accountability. This scenario leads to failed execution and the plan is likely only to be resurfaced when the next plan is to be developed.

The plan is not communicated throughout the entire organization, never gaining the needed buy-in nor commitment, and again leading to diminished execution.
If you have ever gone through a planning process and experienced any of the above, you may indeed question whether the work to create a plan it is really worth all the effort.

But all the data show that creating a comprehensive strategic plan that is well communicated and executed will greatly enhance an organization’s success and results.

Cross Company has a long history of creating and executing strategic plans. We have re-engineered our business and, in the process, produced results that have generated increases in our ESOP stock value well above the S&P 500 Index over the last 35 years. Since the 2008-2009 recession, we have seen a robust 57% growth in organic sales, set record profits, record ESOP stock values and built an incredibly strong balance sheet with no debt and significant cash reserves. We firmly believe we would not have achieved these results without solid strategic plans that were executed very well.

The following will provide a well-tested guideline in how to create and execute a comprehensive 3-5 year strategic plan.

Strategic Planning - 10 Essential Steps
#1 - Hire a Facilitator
The first lesson to be learned is that the Owner/CEO/President should never facilitate the strategic plan process. Doing so biases the plan, inhibits open discussion and/or dissenting opinions, limits creativity and innovation and makes the process seem like “work.”

Leading an effective strategic planning process and corresponding discussions requires training and experience. A good facilitator will have proven methodologies to stimulate thinking, discussion and group interaction. They will have systems for capturing the notes, data and relevant information and tools to assist in the creation of the plan and its corresponding actions. They will know how to keep the team engaged and energized throughout the entire process.

Of course, the facilitator will meet with the business leader to get an overview of the company, understand its business challenges and obtain the leader’s views and desired outcomes. But they will also suggest how to get inputs from others in the organization to help gain buy-in.

Finding such a resource is not difficult nor does it have to be expensive. Many speakers at trade association meetings are well schooled in strategic planning processes. You can also do a Google search and find consultants that specialize in strategic planning. And depending on which state your company is based, there may be federal and/or state subsidized agencies that have these resources as well. These agencies often have proven professionals with great skill sets available for a fraction of the price you would normally pay a consulting firm.

At Cross Company, we have utilized two such state resources to assist in developing our strategic plans: the Small Business Technology Development Center (SBTDC) and the NC State Industrial Extension Service (IES). We believe we received the same level of quality that you would expect of an expensive consulting firm for about one quarter of the cost! If your business is in the state of NC, I recommend them highly!

#2 - Get Inputs from All Stakeholders
One mistake that many companies make when developing strategic plans is to involve only the senior leadership of the organization. We have found it extraordinarily valuable to engage associates at all levels of the organization. In fact we crafted surveys that we sent to all associates and also our external Board of Directors to gain their perspectives and feedback on a number of issues such as:

Our current direction and value proposition.
What is working well.
What can be improved.
Future challenges and threats.
Opportunities we should pursue.
Suggestions and ideas to consider.
What we should not change.
The survey was formatted to also allow for freehand comments after each question and/or section. We got 88% participation and received over 25 pages of freehand comments.

This provided the management team and facilitators valuable information in advance of our planning session. We wanted and respected their input, and they appreciated having a part in developing the plan. Including them made it so much easier getting buy-in and engagement in executing it.

#3 - Conduct an Offsite Retreat
Developing a comprehensive strategic plan requires focus and a lot of mental energy. It is work that can be exhausting at times. Therefore, it is best to convene the planning session offsite. It doesn't have to be held at an expensive venue, but the team needs to be away from distractions and the daily business whirlwind.

The planning team should be together for the entire time. They need to be able to focus their energy on addressing the future challenges and opportunities for the business and crafting strategies that will allow them to achieve the goals of the plan. Allowing for some social time and nice dinners in the evening can work wonders to stimulate creative thinking, generate team building and recharge the batteries.

Our offsite retreats are typically 2 ½ - 3 ½ days with the team arriving in time for dinner the night before the planning session begins. When possible, we like to allow a half day for recreation/team building in the middle of the retreat which helps maximize energy levels when it’s needed most - during the last day of the planning session.

#4 - Thoroughly Assess Your Business
If any marketing research is needed to obtain information to be considered, be sure to get that done in advance of the planning retreat so that the team can assess the data beforehand.

At the retreat, the team begins by assessing the current state of the business, its value proposition, its competitive position and factors impacting the business. The facilitator will lead the team through a series of exercises to:

Identify external influences on the business (e.g. government regulations, disruptive technologies, competitive threats, market cycles, economic factors, etc.).
Complete a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats).
Complete a competitive analysis.
Document assumptions being made as part of the plan.
Agree on, and prioritize issues to address in the plan.
These exercises force the team to wade through a lot of information and at times can feel like no progress is being made. Don’t worry! This work is invaluable and will later make sense to everyone.

#5 - Establish Major Goals, Objectives and Key Performance Metrics, a Long Term Vision and a Mission Statement
After the business assessment exercises have been completed, the next step is to identify the major goals that your strategic plan will address. These major goals are the high level, overriding and critical initiatives that must be addressed in the plan. It can be one goal, but certainly no more than three or four. Any more than that will be nearly impossible to attain in a 3-5 year period. Examples of these kinds of goals might be:

“Deploying the most effective business model.”
“Attracting and retaining talent, and developing organizational leadership capacity.”
“Assessing our business technology platforms and implementing the systems to achieve our strategic goals.”
Next, the team must establish specific objectives/key performance metrics with completion dates. Typically there are 4-5 and usually include some financial targets. Some examples might include: sales/revenue targets, profit targets, stock value performance, market penetration objectives, acquisition targets, customer satisfaction metrics, eCommerce initiatives, etc.

After the major goals and objectives have been agreed upon, then the team should develop a mission statement (or agree/modify the current one). This is harder than it sounds because the mission needs to be a succinct statement of the company’s value proposition and differentiates you from your competitors. It should also be easy for everyone in the organization to remember!

Finally, the team or the CEO should develop a long term vision for the company. This should be what is commonly referred to as a BHAG (Big, Hairy, Audacious, Goal) and have a 10 year horizon. This is more important than most leaders think. The BHAG helps sell the plan to the organization and creates energy around it. It is especially effective when associates see that progress is being made and that the organization is getting closer to achieving the vision. That in itself creates more energy to make it happen.

#6 - Develop Strategies and Action Plans
Now we finally get to the meat of the planning retreat. Having reviewed all of the information and agreeing on vision, mission, goals and objectives, it is now time to determine how to accomplish all of this.

Depending on how many people are on the planning team and how many goals have been established, it may be best to break the group into smaller teams to develop specific strategies to accomplish specifically assigned goals, and to expedite the process.

Then once the strategies have been outlined the teams should develop specific actions to implement the strategies. These actions/tactics should be very specific, have a date for completion set, and have a team member assigned responsibility for getting each action completed.

These action plans are the desired outcome of the planning retreat. It is rewarding to see the satisfaction and pride the team members exhibit after this action plan process has been finalized.

#7 - Draft a Plan Summary
It is likely that during the planning retreat the planning team will have assigned more work than can be accomplished in the specified time frame, or that they front-loaded the plan with too much to be done in year one. Therefore it is necessary for the CEO or the team to review the plan a few weeks after the retreat to determine what might have been missed, and more importantly what should be eliminated. Once this has been done, it is time to draft a plan summary that can be presented to all stakeholders. This is another important step for several reasons:

It lets the entire organization see the outcome of the planning process.
It lets them see how they individually and collectively influenced the plan.
It creates buy-in and excitement.
It energizes the planning team members and reinforces the importance of their hard work. They become even more committed to executing it!
It provides the opportunity for feedback to ensure all the key issues are addressed in the plan.
It allows the plan to be tweaked and finalized.

#8 - Create a Plan Summary Capsule
Not many companies do this but we have found this to be an extremely valuable way to gain further buy-in from the entire organization and also provide a mechanism for on-going progress updates.

At Cross Company we put the key elements of our strategic plan on a 8 ½ x 11 sheet of paper, have it laminated and then give every associate a copy. We then let them know we will provide them regular updates and ask them to hold us/management accountable for executing it to the best of our ability.

#9 - Review Action Plans Regularly
So we have crafted a plan, communicated it throughout the organization and have gained buy-in. Now is when the wheel meets the road - it’s execution time!

We have developed a discipline to review our progress on all action items of our strategic plan at every management meeting. This forces team members to focus on getting assigned actions completed when due, and/or allowing us to further tweak the plan based on new developments or information. What we have found is this rigor ensures execution of the plan.

#10 - Provide Ongoing Updates to All Stakeholders
Be sure to let everyone in the organization knows how you are progressing with the plan on a regular basis. Doing so creates enhanced management team focus on executing the plan, and also creates trust from the rank and file. Even if the plan is flawed or things are not going as planned, letting everyone know the facts builds confidence that management is on top of things.

Obviously if things are progressing nicely, the updates create confidence, energy and pride throughout the organization. Why wouldn't you take advantage of the opportunity to do this?

I cannot imagine trying to lead a business that does not have a strategic plan. Yes, it is hard work, takes time and isn't easy. But if a company does not have an idea of what it wants to achieve and a corresponding plan for doing so, what are the odds that it will succeed?

Steve Earley is the CEO for Cross Company - a company comprised of 4 technology groups ranging from Hydraulics, Instrumentation and Automation to Integrated Solutions. Cross Company applies technologies to improve machine and manufacturing process performance. Cross Company is 100% Employee-Owned.