Wednesday, July 29, 2015

Pricing Process appears to be a Top Secret Strategy

A couple of weeks ago I published an article called Pricing Professional – The time has come. The piece outlined the need for distributors to consider how they run their business and develop a new position. We hit on why the person who typically handled ‘pricing tasks’ was likely more of an administrator responsible for loading the prices of income purchases rather than a margin building professional. We pushed for distributors to consider the impact of a true pricing process and the qualities of the person best equipped to make the pricing process work.

Somewhere along the way, we touched a nerve. Building a pricing process is a viewed as a top secret strategy. While a number of our readers commented, it seems no one wants to go on record with their plans. Here is a sample of the way the emails began:
“Hope things are going well. While you'd probably prefer I comment directly on the post I really don't want our competitors to know we're doing this. So feel free to use the info here without disclosing the source or location.”

But not everybody was concerned about their competition. A couple were concerned about the reaction of their suppliers. One made this point:
“Many of our suppliers don’t understand all of the work that goes into selling and making their products work. Every time they bring us into an opportunity, they recommend prices that are way outside of the range we feel needed to make a decent profit. If we go outside of their suggested 15-16 percent range, they push back with stories of our need to grow their sales more aggressively.”

One was concerned with push back from their selling team:
“Management has given us the responsibility of raising margins, but they will quickly cave when a salesman comes back with a story of this or that competitor having a lower across the board price. We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account they deal with. This will crush our efforts to make pricing stick.”

One distributor executive shared this story from a previous life:
“My previous employer had an entire team developed to establish pricing levels. It was a company-wide effort that crossed over all of the branches so it was impossible for the team to really track the efforts. I, like all the other branch managers, gave the program lip-service. We acted like were engaged, but basically our job was to grow the gross margin as a total rather than improve the margin. Without detailed measures, we could go fight the other battles and continue with the old version of letting sales set the price.”

But all made the point to say, their current version of price process worked. The reports went something like this:
“We went live with Strategic Pricing Associates just a little over a year ago. Based on offline conversations with others already using SPA, we decided to apply our pricing process to all of our customers except our top 100 accounts. In our old culture, it was acceptable for both outside and inside salespeople to set their own price. It took us a while to get this changed. Originally we had a team of three people who spent nearly an hour at the end of each day reviewing the pricing exceptions made by our salespeople. We constantly reeducated and argued. After a month or so, everyone knew the new program had teeth. We still find ourselves discussing price issues but not nearly as often. And, our GM is up dramatically, over 2 points…”

“Our management team attended a two day workshop at Texas A&M last year on this subject. We came back and did the customer stratification and changed some pricing matrices but just from giving the customers a label and allowing salespeople to react to that we have raised our GM by over 60 basis points in less than 6 months. I guess what I'm saying is this really works and we fully expect to get 100 basis points this year and at least 50 next year. In addition if we reach our goal this year everyone in the company will benefit financially. The pressure the inside people exert on the outside people for margins is great to see.”

Over the past couple of years I have talked directly to over 50 of Strategic Pricing Associates’ 350+ clients. A good many of these have been “on the record” conversations, even more were enthusiastic about the results but not ready to speak to the world in general.

Nearly all have seen marked improvement in their Gross Margin levels; ranging from just south of two points all the way to four with one pushing five full points of GM improvement. One of the critical differences seems to be the level of engagement of the distributor’s top management. The second comes in their selection of a pricing professional. Companies who select a pricing leader with strength of conviction, leadership skills and organizational clout gain and hold onto more gross margin gains than their counterparts (who still perform quite well just not as well.)

When asked if the whole process is worth it, one president of a 40 Million dollar distributor made this comment, 
“Our gross margin is up 2.4 points. Do the math. There is nothing we could have done to add a million bucks to our bottom line faster than assigning one of our top guys to the post of Pricing Czar.”

Top Secret Strategy?
With results like these, I can see why pricing strategy might be considered the secret sauce of distribution profitability. Those employing advanced pricing strategies are quietly building their cash reserves for future purchases, systems improvements, building upgrades and establishing shareholder equity.

If they are your competitor, there is a very good chance you’ll never learn of their strategy from shared customers. Why? After speaking with all of these folks, only one reported an issue with customer push back. And, that one was a customer put into the wrong category via clerical error.

How can normally price sensitive customers miss a margin move of this magnitude? The answer falls with price sensitivity. A small subset of the products sold by the typical distributor carry a great deal of price sensitivity; market conditions set the price. The rest are purchased based on availability, ease of doing business, customer convenience and bundled services. Most distributor salespeople price everything at the same low margin levels as the few products with price sensitivity. By doing such, they are giving away huge opportunities to increase profitability.

Returning to the pricing professional, allow me to ask one question: Who is responsible for driving gross margin improvement at your company? If this is such a top secret that even those within your organization don’t know who it is… It’s time for a change.

Thursday, July 16, 2015

People always ask me about salaries...

A recent article in Industrial Distribution covered a couple of points on salaries.  I thought it was worth sharing.

Grads from Texas A&M's Distribution program are getting multiple job offers and that impacts starting salaries:

Another top-notch university, Texas A&M, has an outstanding industrial distribution program and on its website points out that every student in its ID program had a job at graduation. Many of those students were offered jobs in sales engineering and sales management. The graduates received an average of three job offers, and the average starting salary was $52,000 with some receiving up to $70,000.

The article quotes the Wall Street Journal on sales compensation:
Sales reps who peddle technical and scientific products earned a median annual wage of $74,970 in 2012, more than twice the median for all workers, according to the Labor Department. A competitive hiring market for science and tech workers is part of the reason, but employers also say young workers are uninterested in sales — a field they perceive as risky and defined by competition.

Note the comments on younger workers and their perception of risk. Many of us who have worked on commission or have worked as entrepreneurs for years have a difficult time understanding this phenomenon. We must remember, college campuses are filled with urban legends of students being victims of commission schemes.

One further point. Work done by Brent Grover points to an investment of around $150,000 to bring a
salesperson up to the point of generating a profit for their company. Making a hiring mistake can be costly.

Read the full stories here:

Salespeople salaries 

$150,000 to profit generator


Wednesday, July 15, 2015

Are you a Solution Seller, or Did You Stumble into the Buzzword Trap?

Buzz words bug me. A decade or so ago everybody suddenly became a “value-added" sort of guy. Every salesperson I talked with for more than 20 seconds managed to find a new place to insert the words “value-add," yet most couldn’t define the value they were adding. Even fewer had any idea as to the worth of their “value” to the customer. And, only one in every thousand could manage to prove their value in dollars and cents.

Long ago we suggested a break from the whole value-added selling hyperbole and laid out a plan for value-metric selling. You can read what I said back in 2011 here

Value-metric selling added definition and focus to the extra services distributors provided along with their products. We suggested then and still believe providing services or some other value to the customer equation without thinking (or at least considering):

• Does the customer even want the service?

• Does the customer place any value on the service?

• Is the value the customer places less than or greater than the cost to provide the service?

• How much would it inconvenience the customer if the service was not available?

• Can the inconvenience be measured in monetary terms?

• How much does the service cost us to perform and are we making enough gross margin to cover our expenses and still make a profit?

• Should we be compensated for the service in some way above and beyond the gross margin generated by the sale?

Sorry I may have gotten carried away. 
Let me step down off my soapbox and blast another distributor buzzword:  Solution Seller.

Just like “value-added” from the turn of the century, “solution selling” has developed a life of its own. Even the guy who sold my wife a new Buick tossed the phrase out a couple of times. And, with no intention of bashing an otherwise great sales guy, he really wasn’t selling a solution. He was there to sell a vehicle (and I played a cameo role as the evil purchasing guy negotiating the deal.)

The point of all this is to define what might actually be a solution sale and perhaps the various degrees of solution selling. Below is a graphic derived from The Challenger Sale: Taking Control of the Customer Conversation, which is a book I highly recommend. Let’s walk our way down the road from product seller to solutions seller with a few comments along the way.

Pure product sales
Don’t get me wrong there is nothing wrong with selling a product. Strangely, it has been my experience that solutions only guys in the world of engineering services daydream of a time when they can sell a product. Product sellers are often educated in not only the major nuances of their products but in trivial features as well. Constantly on the vigil to avoid commoditization, they often know precisely why their product is better than a dozen or so competitors.

Silo based product sellers develop such in-depth expertise on a given technology or product set they are sought out in the market place. Great examples for the retail world might be the camera stores of days gone by, where the seller knew every factoid imaginable of the topic of cameras. Customers were attracted to the knowledge and purchased accordingly.

In the world of industrial automation a number of silo based sellers have emerged centered on expertise in Programmable Controllers (PLCs), electronic drives, motion control and machine vision. Further, I believe the value each of these silos has diminished over time as the general population of the market has learned the product. The camera stores have largely gone away and I believe there is very little/limited future in being a silo-based product seller.

Product bundling provides customer convenience. Supermarkets provide a form of product bundling. It is quick and easy to do “one stop shopping” but I am not entirely certain the practice ranks high on the solution scale. Taking the whole thing one-step further, I wonder how many distributors providing this bundling practice still struggle to get their inside sales teams trained to the point of making the right product suggestions? One would imagine this would be an advancement in product bundling.

A quick review of our industry demonstrates most of those claiming to be solution sellers are actually wrapping advice and service around some product group. Definitely some solution work going on here, but the practice seems as if it could easily be challenged or replaced by another competitor.

Hopefully you see the escalation of quality of the solutions. Along with each step, comes a bit of competitor proofing. The more advanced the solution, the greater the value to the customer.

Time and space here does not allow me to go into each of the various levels of solution selling. You can look into these as you move forward. However, there are a couple of points you should consider:

• Customers are willing to pay more for solutions that increase their ability to make more money, so understanding your value is even more important.

• Advanced solutions are customized and developed specifically for the customer.

• Advanced solutions make you competitor proof.

• Finally, salespeople who master the solution sale have been proven to be nearly three times more effective than the average seller.

Wednesday, July 8, 2015

Pricing Professional – The time has come

Over the past decade, modern distributors have implemented massive organizational change. Most were driven by customer needs and market demands while a few others were based on shifts in the behavior of our supply partners. But, I believe the time has come for us to consider our own needs. The time has come to build a position which benefits the shareholders of the wholesaler.

For the next few moments, let’s review some of the new positions and faces around most distributors.

Enter the Professional Salesperson
Based on any objective view, salespeople have become more professional. Rather than the back-slapping, good ole boy relationship builders of our fathers’ day, salespeople are positioned to add measurable customer-focused value. Instead of carrying stacks of catalogs and the latest jokes, today’s sellers bring technical know-how and professional problem solving skills.

Distributor sellers manage their calendars better, orchestrate teams of support people and often understand bits and pieces of the customer’s business better than the customer. In many instances today’s seller has a technical degree and on-the-job experience equal to any of their customers. In most situations, customers see them as peers, and in the best of cases as trusted professional advisors.

The inside sales group has evolved as well. Without great fanfare and sometimes without notice something happened back in the 1990s. The inside department morphed from its traditional role of training ground for outside sales recruits and elephant’s grave yard for folks who couldn’t make it, to a professional team focused on assisting customers in their
selection of the right products for their applications. Today, distributors search for high caliper people who can contribute to the selling effort from the inside position. The job isn’t necessarily a stepping stone or a training slot; it’s a profession with compensation and status levels designed to attract the right kind of people.

Based on research for “The Distributor Specialist: Customer Champion, Profit Generator” in 2007 over 70 percent of all
distributors employed a specialist. For most the position was a new add. These product specialists armed with in-depth knowledge of new technologies are viewed as highly professional. And their abilities to steer customers through complex decisions before and after the sale often impact the customer’s own decision making process.

Clearly all of these customer facing roles make the distributor business look different than early in most of our careers. But, changes have not been limited to the customer facing side.

In a combination back office and customer side move, distributors have upped the professionalism of their warehouse and logistics teams. Customer tolerance for shipping errors has dropped to nearly zero. The cost of fixing shipping and the resulting billing errors has escalated. In response, many progressive distributors have both installed barcode/location systems and raised the wages they pay “out back in the warehouse.” It’s not uncommon to see warehouse managers with backgrounds that include years in a manufacturer’s central distribution center. Further, the distributors establishing professional systems in the warehouse report improvements in efficiency of their operation.

Why the improvements?
Distributors rarely do anything without cause. In all of the instances defined above the changes have been gradual and designed to meet market dynamics. And, because making each step in a more professional direction equated with a good return on investment to the distributor.

Now is the time to consider creating a new professional. The Pricing Professional.
Many readers may be thinking, “I already have a pricing person.” However, a closer consideration of activities performed by this person has more to do with loading cost-centric pricing into the ERP computer system and very little do to with setting a company-wide official price for the products going out the door.

Considering the concept of matrix pricing was a major topic of discussion during my very first distributor management training in 1991, one would wonder why the pricing profession didn’t evolve further over the past couple of decades. Reviewing hundreds of distributor organizations, experience dictates the following:

1. Many ‘customer sell prices’ are not maintained on distributor’s ERP systems encouraging sellers to use cost up pricing.

2. Cost up pricing generally settles on some ‘magical’ number which often does not reflect the value provided by the distributor.

3. Distributors lose mega bucks because their sales team neglects to consider incoming freight and other acquisition costs on specialty lines.

4. The wholesale industry struggles with eroding margins.

5. Most distributors don’t really know if the margin erosion phenomenon is a product of the economy, the market or their own actions.

At the same time, the typical Strategic Pricing Associates’ client gains two points of additional margin often impacting
their bottom line by over 50 percent. Many clients drive even more gross margin improvement. Armed with this justification, there is economic reason to devote some thought to the need for a pricing professional.

Assuming there is room for pricing process improvement, let’s look at the current state of the current pricing person. Depending on the distributor,

Until now, there was little training for “the pricing guy.” Often, they come from one of four backgrounds, each with their own special set of issues. Let’s take a moment to explore the strengths and weaknesses of each.

1) Inside sales guy moved to pricing administration
The inside salesperson typically has some understanding of how the sales process works. However, they often lack the clout with outside sellers to push back on pricing decisions. Worse yet, they sometimes are calloused to the cost up pricing techniques which push margins in a negative direction.

2) The IT department staffer assigned to pricing
Information Technology skills generally allow this type of person to easily pull data and reports from the system and upload new pricing files. What they lack tends to be good commercial understanding of customer situations. Speaking in broad generalities, many times they have almost no previous experience ‘holding their ground’ against more aggressive sales personalities.

3) Purchasing people migrated to pricing authority
When moved to a pricing role, people with purchasing backgrounds often have no clout with the sales team and often shy from the conflict of handling price level pushback from the sales team. Further, in many instances their previous background makes it easier to focus on the correct buy price rather than customer sell price.

4) Clerical workers plugged into pricing administration
For many distributors pricing administration is passed to a talented clerical person as a parking spot until some other use of their talent is discovered. Many times the position becomes a game of musical chairs. The chief issue here is this: most clerical types lack the resources and training to actually make decision. Instead, they simply keep number up to date and run reports for someone else within the organization.

Until now, there has been no real training path for the pricing professional. Certainly, consultants are willing to help establish a process but once the consultant leaves, things gradually slide back to mediocrity; many times initial margin gains are lost and the process must be reenergized.
Six Sigma Master Blackbelt Greg Preuer, of Strategic Pricing Associates has designed the first course designed to apply time tested Six Sigma methodology to pricing. Those who study with Greg will learn not only how drive the pricing process but how to sustain the gains and automate the process. They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement. They will learn each of the following steps:
• How to design and design goals which are consistent with their company’s pricing strategy.
• How to measure and identify characteristics critical for pricing success.
• How to analyze the current situation and steps along the way.
• How to design an improved alternative which moves closer to the desired result.
• How to verify that actions taken create the right results.

Is all this worth the effort?
Imagine what two additional points of margin does for the typical distributor. In an industry were financial returns hover in the three to four percent range, adding an additional two percentage points increases profitability by 50 percent (or more). What’s more in an industry where companies are valued as a multiple of earnings, these extra bottom line results increase the company value by the same factor.

I think it’s worth the effort.

Thursday, July 2, 2015

The Cost of Improving Efficiency

Many of the readers of this group are involved in the sales of automation and machine guarding products. At times we all get wrapped up in setting goals, driving results and the business side of our work. But, I believe we have a higher calling. The things we do make the world a better place by improving efficiency, creating better and cheaper product for the consumer, eliminating tedious/back breaking labor and making the work place safer.

We are the very small percentage of the population that understands how dangerous an improperly controlled or unguarded robot can be. Further, we understand the technologies available to minimize accidents. We often encounter those who see robotics and machine guarding as a government sponsored nuisance without real value. Occasionally, we see maintenance technicians and engineers disable safety equipment to expedite their work.

It’s easy to lose heart and become calloused to the world around us. But, we have a mission greater than just making money. Recently, a young worker lost his life in an automotive facility. He happened to be working on a robot. The investigation isn’t finished. Nobody is claiming any negative intent. However, this young man is gone.  

Why am I writing this? Last weekend I returned to my hometown for a reunion with friends. One of the friends served as a mining safety expert. As we talked, he mentioned the improvements in equipment guards and it touched home; my grandfather was killed in an accident while operating a dooley-twin coal drill. My friend told me this would be impossible today. With a little luck, this kind of accident will be eliminated in the future.

And, in the interest of safety, be careful out there and enjoy your 4th of July.

Wednesday, July 1, 2015

13 times You Should Never Discount

A quick review of the Profit Reports generated by several knowledge-based distributor associations reveals a few undeniable facts:
• Distributors sell thousands of SKUs
• Distributors sell to thousands of customers
• This equates to millions of customer/product combinations

Another point dwells just below the surface. While it is harder to spot without lining up the reports over long period of time, our research indicates the typical distributor discounts more when times are good than when they are bad.

You would think that margins would go down in tough times and up in good times, but the preliminary results indicate just the opposite. Perhaps times of economic growth cause us to loosen up our grip on pricing mechanisms. Maybe we get just a little sloppy. Or, perhaps our customers rev-up their negotiating strategies. Still, we find ourselves discounting.

As we say here in Iowa, "let’s put some lipstick on this pig."  Our customers don’t think poorly of us because we discount. They have even put a kinder name on the beast – they call it “leveraging the relationship," “customer concessions” or “rollbacks."  You can thank Wal-Mart for that last one.

They reason - their size, industry sector, quantity of purchases, advanced ordering techniques, or plushness of their office carpet somehow justify a price slightly lower than
your norm. In extreme cases, we have discovered situations where customers insisted on discounts because of clerical error. Really, the inside sales person made an error in a one-time quote and the customer insisted on the price for the next 12 months. My guess is, if times were tough, the distributor sales manager would have fought and argued to get the money back, but what the hay-- times are good.

Other times, we discount without the customer’s assistance. In these cases, our purchasing department makes a special buy. Instead of putting the extra margin in our pocket, we get discount drunk – dishing out special deals to everyone who crosses our path. Don’t believe me? Next time copper takes a jump, watch electrical sales guys fight to sell their customers copper wire at last week’s older and lower copper price. That’s a form of wacky discounting that seems to only happen in distributor-land.

I realize these discounting practices have been going on for a very long time. Further, old habits are hard to kick. But join me for just two minutes while we talk about the 13 situations where you should never discount.

1) Never discount to make your quota or goal.
There are salespeople who really do try to end their years with a bang by offering some amazing discounts. This strategy seems to be part of the American lexicon. Just listening to radio or TV for a couple of hours you will most likely hear ads touting end of the year (month or week) discounts from car dealers, appliance stores and carpeting outlets. Remember, these people sell on price. When knowledge-based distributors get sucked into this mentality – they lose. Don’t be tempted to offer up an end of the year deal… ever.

2) Never discount on emergency stock.
Good wholesalers hold onto certain items “just in case." Here’s a quick example. A number of companies in your area use gigantic fuses to protect their plant’s electrical system from catastrophic failure. This almost never happens but you decided to keep a couple of these fuses around as a customer service. It’s emergency stock. When the emergency rolls around, price should not be an object of discussion.

3) Never discount on your exclusive products. 
There are products where you are the exclusive supplier. If you happen to be the only source for the product, why would you offer a discount? It doesn’t make sense.

4) Never discount spare parts.
Really, you already sold the solution. It has provided the customer with years of solid operation and finally something must be repaired. Why would you discount these parts? Providing a special price here really won’t guarantee you future business. It will guarantee you less margin.

5) Never discount a modification to an existing product.
An existing product needs to be modified to work with new equipment. Adding the modification extends the life and the serviceability of the product, discounting is not needed.

6) Never discount weekend or after-hours deliveries.
It’s totally amazing that distributors will go to the trouble of opening their doors for after-hours pickups or weekend deliveries then succumb to a request for a cheaper price. Say no to discount requests here. If the customer really wants a lower price, ask them to wait until Monday. If they won’t wait; you shouldn’t cut your price.

7) Never discount on parts required after troubleshooting.
If you or your distributor specialist help the customer figure out what is wrong with their existing product and helped establish the solution, say no to requests for a discount.

8) Never discount after the fact.
One negotiation ploy purchasing types have learned is the request for a lower price after the product is installed. They will ask nicely and you should respond nicely as well. Sorry, but we cannot do anything about the price now.

9) Never discount on a first time sale.
If your price level is right (and it should be,) this is wrong. We have heard of companies offering a “welcome to our business” discount. Here they unilaterally provide a discount to customers who have placed their first order. In our opinion this sends a message – everything we sell is priced high, so always ask us for a better price.

10) Never discount to someone who is slow pay.
Unfortunately some of our customers are slow to pay. This fact alone most likely justifies a higher price. I ask sales managers repeatedly, why discount?

11) Never discount a safety related product.
We’re not talking about the consumables sold by Safety Distributors here. Instead, think of products which impact workplace safety. Things like machine guarding, particulate monitors and other products. Safety shouldn’t be purchased on price. You shouldn’t sell it on price.

12) Never discount to convince a customer to return,
This one may sound strange, but when you offer discounts to convince an ex-customer to return to the fold, you are in essence sending the message that you are willing to match any price on the planet. It’s a reverse auction on steroids.

13) Never discount without getting something else in return.
When you come to think of it, this really isn’t discounting – it’s called negotiating. When you are absolutely forced to make some type of price concession, get something of equal value in return. Freight, long term commitment, other products which are not discounted or payment terms all can offset a lower price. As you do this, remember whatever you’re given in return must have a value.

We don’t want to discount our time together…
Many people inadvertently discount because they are unsure of where the pricing should be. In the world of wholesale distribution, this puts pricing responsibility on the shoulders of someone who should be concerned about helping the customer create real value.

Salespeople, customer service reps, counter sales folks respond to customer need when pricing levels are systemized and maintained properly. Pricing expert David Bauders of Strategic Pricing Associates recommends that his clients to establish a management-level Pricing Czar. This person bears the responsibility of establishing company price.

We recommend three actions to virtually every client we work with:

1) Build a process around sales activities.
There is no such thing as an informal process. If you lack metrics, coaching points and the ability to train on your process, you need to reevaluate your process.

2) Pricing responsibility belongs in the hands of somebody besides the line sales team.
I am not saying you don’t need the sales team’s input. I also believe in aligning gross margin with sales compensation. But unless there are some rules and some separation, your sales team will give away margin. It’s too prevalent to argue away.

3) Unless you understand the value you provide to customers, you will have a tough time with the first two – Measuring and understanding the value you provide makes you price proof.

Call on us if you want to argue these points. We would love to be proven wrong.

If you are a distributor specialist involved in the pricing process – we would like to interview you for some research we are conducting.