Sunday, April 30, 2017

Applying Black Belt Principles to the Pricing Process

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Looking back at American manufacturing, a New Renaissance took place in the latter two decades of the 20th Century.  It started slowly, but by the mid-1990s, companies large and small began to apply principles tied to lean manufacturing and the related quest for continuous improvement.

Coming out of the movement was the “Black Belt.”  Initially, Black Belts worked entirely within the manufacturing process; leading teams through what was once viewed as the hazy world of plant floor work and material flows.

By the turn of the new millennium, the concept had been pushed to other processes. Things like order flows, procurement systems and even human-centric processes were scrutinized.  Similar to the manufacturing world, massive improvements were made.  Companies enjoyed new found efficiencies and gained a competitive advantage.

One person saw the advantage of putting the same principle to work on the pricing process.  Enter Greg Preuer of SPASigma.  Greg was certified as a Master Black Belt DMAK by General Electric.  He saw an opportunity to apply the same Black Belt methodology to the pricing used by companies.
The goal:  better pricing programs.


Pricing is a big deal
In an age when most companies find themselves facing competitive pressures, pricing policies have fallen into disrepair: special pricing abounds, discounting has grown rampant and operating margins have been pushed and squeezed.  Here’s where Six Sigma (Black Belt) efforts come
into play.  Black Belts work to understand and leverage each specific customer’s willingness to pay a price slightly different from their peers.  Simply put, they focus on already existing price sensitivity variances between customers.

Most companies rely heavily on their sales teams for what little direction they may have.  But the reality of the situation is very few sales teams have the proper training or tools to determine price.  Because they place priority on closing the order at any cost (or price,) they tend to underestimate the proper price level.  With this approach in mind, it’s no wonder that pricing has fallen in to disarray.  What sales teams crave is an advanced scouting report on what each specific customer would be willing to pay for every (specific) product in the portfolio; real data that kills the guessing game they currently must play.  

Nowhere has this been felt more directly than in the world of wholesale distribution.  Unlike the manufacturing world, distribution is a low margin business.  Wholesalers serving many industries survive on margins equaling just a couple of points.  There is little room for error.

One wholesaler described pricing in his organization as a visit to the wild west.  Lone Ranger salespeople set pricing for their customers mostly without firm understanding of costs associated with handling or servicing the customer.  Gross margin numbers are used for the same customer regardless of order size or difficulty in providing the products.  Reviews of the pricing used by hundreds of distributors reveals sell prices using familiar numbers which predictably end in zero or five.  Profitability suffers.

Enter the Pricing Black Belt
First, we must define precisely what a Pricing Black Belt looks like.  The Black Belt would serve as the company’s pricing leader. Maybe he leads a team, perhaps he operates as a team of one.  Either way, his job is to manage and control systems pricing, with the goal of profitably growing his business which translates to sales and gross margin percentage going up simultaneously.

Second, the Black Belt is dedicated to using analytics to improve performance.  This is not about “gut level feelings” or years of operation in a “data free” environment.  This need for analytics calls for skills based around spreadsheets and access to raw data from within the company’s computer system (ERP.)  The Black Belt is turning your company’s “big data” into a road map to drive margin improvements.

Finally, the Black Belt will drive profitability through ongoing improvement in the pricing process.  A well-tuned pricing process tracks the thin line between gross margin growth and competitive market pressures.  It’s an ever changing equation.  Raise the price too much and customers turn away; lower the price and bottom lines suffer.  Strangely, most companies still rely on guesses and untested assumptions.  Analytics, which could provide sound direction, are either untracked or not well understood.  Analytics combined with the knowledge/wisdom of how to drive organizational change are the cornerstones of the Black Belt process.

Become a Black Belt in Pricing
Until recently, gaining the right Black Belt Pricing skillset was a long and wandering journey.  No direct pricing specific training existed.  Instead, a person learned Black Belt skills in some generalized program and then, via lengthy personal trial and error, applied the newly learned knowledge to pricing.  The journey was costly in time, effort and lost opportunities.  By the time skills were properly developed, the newly minted Black Belt may have been reassigned to another task.  SPASigma has changed all of that.

SPASigma has developed a unique program for Black Belt Certification in Pricing.   Applying web-based technologies, prospective Black Belts go through a combination of formal training and specific skills building exercises.  

Here’s where the unique part comes in.  Quoting Greg Preuer: “While most formal Black Belt training uses case studies pulled from academia, we apply exercises using the student’s own company’s data.  We’re talking about real actions with real people and dynamic environments.  It’s not just busy work to flesh out the course material, our exercises are tasks developed to make an impact on your companies pricing organization.”  The Black Belt makes a real impact even before certification is achieved.

The course is done online with SPASigma’s Learning Management System (LMS,) which allows even the busiest student to make it through the class and exercises.  Add that to how the work applies directly to their current role in pricing, and the time is doubly valuable.

Who should become a Black Belt?
Mr. Preuer is a straight shooter.  During a conversation we asked the question.  Here is his response:  “Anyone who has been tasked with building, maintaining or improving their company price process would benefit from the Black Belt concept.  If you are leading a team somehow tied to pricing, the work of the whole team would step up a notch.  And if you are moving from a simple doer, (following the direction of others) and preparing to lead, this is for you.”

What are the benefits?  Greater margin, a better bottom line and improved market position.  This is important to every company.  For distributors, who operate on then profit percentages, improving gross margin drives bottom line performance like no other action.  For a $50 Million dollar distributor, a one point improvement in Gross Margin percentage means $500,000 in bottom line gains.  And to me, that seems well worth the thousand dollar investment in Black Belt training. 

Thursday, April 20, 2017

Fee-based Services – Are you convinced?

Both my iPad and my iPhone could fit in here!
True confessions: I started my career working in this industry back in 1977.  No, this isn’t going to be some old-timer’s story of the good old days.  Instead, it’s a personal observation of four decades of selling styles.  While going through an 18-month factory training program designed for future sales engineers, I was force fed massive amounts of product minutia and drilled on maintaining my trusty new leather bound “Day-Timer” calendar.  Since I was destined to become a “Sales” engineer, I had the opportunity to attend some of the best sales training programs a big company’s money could buy.  I was ready to soak it up like a sponge.  

Prehistoric Sales Techniques
The state-of-the-art selling technique of 1977 can be summed up in two words: features and benefits.  After the aforementioned training, I became a master of features and benefits.  In a time before massive competition and the ensuing price squeezes, it worked.  The recession changed things.

Many folks don’t recall the “big recession” of the Carter
Administration and the 1980s, but it was bad. On a personal side note, of my top 25 accounts in 1980, seven went belly-up and the others struggled to survive.  Along the way, customers discovered they could put price pressure on everybody.

While this turmoil struck the nation, a new selling strategy emerged:  Value-Added selling. The brand-new concept was simple; provide extra services to your customers along with the products sold.   The concept spread like wildfire.  Over the next decade, distributors broadcasted value-added messaging far and wide.  The concept worked.
The Trouble with Value-Added Selling
Into the 90s Value-Added selling grew in its importance to distributor sales efforts. Along with the popularity came a game of one-upmanship where distributors matched their competitors and raised the bar with even more service.  For example, logistics based distributors experienced special emergency deliveries that became emergency deliveries plus put away programs. Soon this was raised to emergency delivery, put away and consignment.  On the knowledge-based distribution side, product training, troubleshooting, configuration and even panel assistance were all “thrown into the deal.”  

Sellers spread the concept from a few key customers to every account with a warm body and a modest purchasing budget.  Why?  Sales managers and distributor leadership pushed the point at every sales meeting.  Many a distributor’s motto was “nobody provides the level of service we do.”  This further propagated a macho image around throwing in free service with orders large and small.  It became a free service bonanza for customers; distributors fared well for a while.

As we eased into the latter half of the 90s, strange things happened.  First, our service-addicted customers wanted more.  Second, the cost of providing those services began to rise.  This mix was further exacerbated by trends in American manufacturing organizations toward “right sizing” to achieve operational efficiencies. Demand for distributor services outpaced gross margin gains.  

Fast forward to the present, as more qualified baby-boomer type employees leave customers, the demand will further accelerate.  Meanwhile on the distributor side, companies discover the cost of technically qualified people to be expanding at a rate nearing 30 percent.  

Simply stated, distributors can no longer take the posture of providing free service to all.  

Fee-based Services: The Gross Margin Offset Model
Often when distributors think of fee-based services, visions of managing a “stable of engineers and technicians” send them crashing into oblivion.  It’s not uncommon to hear horror stories of distributors who decided to open a systems integration business only to find themselves walking through a minefield of management, scheduling and project related issues.  They lose tons of money and vividly share their experiences within their network of friends.  That’s not what we have in mind.

In this model, distributors simply begin charging for services they already provide.  While one would expect some natural customer pushback, this needs to be viewed as a good thing. Let’s explore this a bit more deeply.  Most distributors provide training in some form.  While most offer free training as a marketing tool and service to their customers, a recent survey done by Plant Engineering Magazine indicates over 50 percent of a broad spectrum of manufacturing companies budget for necessary additional training for their teams.  

Complimentary training sessions are frequently viewed as potential day-long advertisements for products.  Instead of 
channeling training dollars to the distributor, they head to a training company or technical college.  Since the training company and/or tech school provide generic and often outdated training materials, the distributor still ends up answering brand specific questions… for free.   I am open to arguments as to why the distributor can’t charge for this service!


Training is not the only service worth considering.  I selected it because everyone understands the nature of training and it crosses over several distribution industries.  The same argument could be made for product inspection, programming assistance, troubleshooting and a host of other technical services currently provided on the house.  

What about Customer Pushback?
A couple of paragraphs ago, I made a bold statement about customer pushback, it is a “good thing.”  Let’s explore this topic.  First, distributor financial guru, Al Bates of the Profit Planning Group shared an important point, “More than a third of a distributor’s customers are costing you 45% of your profits…”  Currently, you are giving free service to customers who contribute nothing, nada, zippo to your bottom line. Some of these customers are too small to channel enough business your way.  Others have made a conscious decision to partner with others.  They probably still need some of your services, so why shouldn’t they pay?  Consider this point, your best customers are subsidizing the costs associated with your worst customers.

Clarifying the situation positions you to re-explain the importance of your services and to have frank discussions about the cost of the services you provide.  If they continue to buy a la carte, they can expect to pay for service.

For your top customers, the story is slightly different.  Setting a price on services provides you with two things: a firm foundation for setting your value and an opportunity to gage how important the service is to the customer.  Let’s drill into these points separately.

Setting a foundation for your service value – This creates a negotiation point.  Again, let me illustrate with training. Consider what happens when the customer places a large order and asks for price concessions.  If training is free, you find yourself discounting the price.  However, if training is a fee-based service, it becomes part of the bargain; as in, “buy 100 units and I will throw in five slots in our future training class.”  

Gaging the importance of a service – Recalling earlier conversation on the machismo attitude of sellers toward services, it’s not uncommon for sellers to provide expensive value-add extras to customers who neither need nor value the service.  For instance, we uncovered a situation where a distributor made daily deliveries to an industrial facility.  Many of the orders went into plant stores where a rush was unnecessary. The daily receiving work was customer hassle. The result was expensive service (to the distributor) tied to no value to the customer.  Attaching a fee opens the door to better understand what’s important to the customer.

Expect Seller Pushback
The Value-Added, free service giveaway has become a selling crutch for distributor sales teams.  Most recognize neither the cost to deliver nor the actual value of the service to the customer.  Cerebrally, they know people and equipment cost money, but emotionally, sellers don’t believe their service is a good deal for customers even with a fee attached.  Expect some convincing arguments as to why the customer in “their territory” can’t/won’t pay.  Some will even try to short-circuit the system.

Many of our salespeople have technical backgrounds.  Some are already distracted from selling activities; overly involved in providing services better provided by others in specialist or administrative positions in the organization.  Further, many times they spend their time with that subset of customers unwilling or unable to pay for the service by way of the gross margins they generate.  Fee-based services provide a tool for focusing their efforts.

Let me convince you…
I started off with the intent of convincing you to consider moving to a fee-based service model.  Allow me to list five points to consider.

  1. Customers need our services.  Whether free or fee-based, distributors have unique skills which are in short supply.  The demand exists.
  2. Some customers consume more service than their business (and gross margins) justify.   They still need our service.  Fee-based service improves their profitability to your organization.
  3. Key customers need and already rely on your services.  Tying service to a fee positions you for better price negotiations and allows a place to increase revenues.
  4. Sales teams improve in their skills to segment customers.  Now there is a clear management driven differentiation between targeted customers and those who don’t truly justify your efforts.
  5. Your company develops the revenues to build new and improved services.  Better services further endear you to existing customers.  You have extra money to invest in demo equipment, formal training and new people who drive sales forward.


One more thought…
There is magic in being viewed as the expert in your field. Customers see you differently.  They openly share
information with experts; outlining their issues and the financial drivers just under the surface.  Experts are more than just another salesperson.   Amazon and other online distributors will never be positioned to deliver the customized services you provide.

Top quality and localized fee-based services help your customers increase efficiency.  Fee-based services allow them to be more competitive in their market space.  Your services are your customer’s competitive edge.  It makes sense for you to be compensated.
  



  

Sunday, April 9, 2017

Price Increase: If Not Now, When?

The economy is expanding. Noting comments from economist Alan Beaulieu, of ITR Economics (view more here,) the 2017 economy looks like a great year for growth. The forecast calls for a bright, sunshiny sky with 3.7 percent growth. It’s been a mighty long time since we’ve enjoyed this type of up cycles.

Now is the time for distributors to raise their prices. Join with me as I outline why and where to look for price increases.

Why we’ve got low margins today…
Downward pressure on margins is the universal distributor complaint. New competitors, supplier sales teams setting prices at unsustainable levels, the internet and customer pushback are all finding their way into the discussion. Further, in spite of some major productivity advancements, operating costs continue to rise. One distributor, who closely monitors operational costs, commented costs have risen nearly 25 percent faster than offsetting gross margin gains over the post-recession era. Clearly, we need to do something.

When times are tough, margins get another squeeze. During “The Recession,” many suppliers instructed their field teams and distributors “not to let price be an issue” while grabbing what little business was available. We responded. Pricing levels extended on projects and ongoing flow business took a gross margin nose dive for manufacturers and distributors alike. The problem lies in the fundamental difference in the distributor and manufacturer business model. The distributor slice of the total “supply chain” gross margin is much smaller than that of their supply partners. For example, Manufacturers make 45-60 percent gross margin and the Distributors receive 20-30 percent. Simply put, we distributors have less wiggle room.

Once The Recession ended, we found ourselves stuck with the lower prices and lower margins. On the customer side, customers discovered new base-line low prices and latched onto the savings. With this fact freshly planted in their minds, many pushed/negotiated to extend the lower level.

Experiencing growth after the economic storm, our industry ramped up. New salespeople were added and many of them used low price to leverage their way into accounts. This resulted in more low prices and free service giveaways to grow their new territories.

Why we’ve got to do it now…
While there was a definite period of growth in the years immediately following the big economic storm the last few years have been mostly flat. The economy has moved but it was definitely slow growth. While most distributors have only been able to maintain their sluggish margin position, reports from nearly every sector indicate faster growth on the horizon for the next year and a half.

Good times are the right time to ask for a little more. Fortunately, most of our customers are out of their own financial crisis. They no longer need to squeeze their suppliers just to survive. The new sellers pumped into our territory are mostly settled into position. They have discovered enough accounts to justify the meager commissions needed to survive. More importantly, customers are busy. They, along with their purchasing/procurement departments, are relying on you for expanded services and dependable deliveries, not record setting prices.

If ever a time existed to push margin to a new level it is now. The window, however, is narrow. Business cycles, by their very nature, move from great to poor. According to economists, this growth spurt will extend into mid-2018. Time is short. We cannot and should not procrastinate our plan.

What should we do now?
The following is a prioritized list of actions which will enhance margins. By the way, we have prioritized them based on how quickly they can add real and measurable margin dollars to your coffers.

1. Review all long range pricing contracts.
Strangely, many distributors have long term pricing agreements without expiration dates. The customer asked for
longer range pricing stability and the distributor pushed competitors out of the way with a pricing agreement. Some of these are well crafted, while others ask the question: Exactly when will the distributor ever be able to execute a price increase?

Any agreement over one year old is ripe for a price increase, regardless of your current margin. With exception given to a limited number of commodities, it’s just not reasonable to assume the cost of anything has remained the same for over a year. I recommend a proposed price increase of 2-3 points here.

When establishing new agreements, put in openings for new price increases in the future. Ideally, these would be tied to a six or twelve month cycle.

2. Review all quantity driven pricing agreements.
In this type of agreement the customer commits to purchasing large quantities in return for deeper discounting. Our experience indicates customers almost always overestimate. Further, customers with strong purchasing/procurement groups are often trained to overestimate. They don’t see this as lying because if the sun, moon and stars all fell into perfect alignment, they really could buy a million bucks worth of your stuff.

When the customer has vastly exaggerated the purchase quantity, ask them to allow you to increase shipments to reach the number. They will almost never agree to this condition. Once they disagree, ask if you can extend a nominal price increase. Again, 2-3 points is a reasonable request.

3. Review all Manufacturer extended Special Pricing Agreements.
These pricing agreements negotiated trilaterally with the manufacturer, distributor and customer. Typically, distributors raise the price only when the manufacturer raises the price. Sometimes, the manufacturer price increases are not passed along to the customer. This needs to be addressed as soon as possible.

Whatever the manufacturer’s increase, move the gross margin up at least full point. To illustrate, the manufacturer increases the distributor price by 2.75 percent, the distributor increases the customer price by 3.75 percent.

4. Pre-plan for Manufacturer price increases.
Some customers require a 30-day notice prior to price increases, other do not. For those without this requirement, I suggest moving distributor price forward on the first day the price increase is announced. The distributor gets added revenue for a short time and the money improves margins.

5. Get a pricing process in place as soon as possible.
Let’s be realistic. I attended my first distributor Branch Manager training session in 1991. We devoted a day to the concept of matrix pricing. Each of the 30 some attendees vowed to go home and create a matrix to maximize their revenues. Two decades later, only two of the attendees had anything worth talking about.

Developing a pricing process is tricky and difficult. It requires a combination of product skills, analytics and manpower. These skills are in scare supply. It won’t work without assistance. Even if you get “cranked up” and start working full time tomorrow, the uptick will be over by the time you perfect things.

I recommend Cleveland Ohio’s Strategic Pricing Associates for a pricing process. Why? First they have experience in the distribution world. This translates into the right tools to pull data from your computer system and run the analytics. They do the heavy lifting and you only provide feedback on products, customers and supplier types. The typical distributor employing their work gets a 2 point improvement in gross margin over 90 days. You’ll see results before the end of the growth cycle. In addition, the distributors we’ve seen using their system fair better in the down turn, too.

6. Get some negotiation training.
If you haven’t noticed, items 1-4 all require a bit of negotiation. It’s a travesty to note that most distributors completely overlook the whole negotiation thing. They lull themselves into a state of false security with three misconceptions.
• Our customers don’t or won’t negotiate with us.
• Our type of selling doesn’t lend itself to negotiation.
• Our salespeople already know how to negotiate.

Let’s examine these concepts.

If any of your customers have a purchasing person who is a Certified Purchasing Manager, Purchasing Professional or any of the related credentials, they have not only been trained in negotiation, they have taken a refresher course in the subject in the past 18 months. They are constantly negotiating with you. The problem is, you are unaware of it.

Distributor style selling requires an ongoing relationship beyond those in other fields. The normal sales approaches taught in generic classes likely won’t work; however, negotiations are still present. See the comments above. Unless you rely on standard terms and standard pricing on 100 percent of your sales, you are being hit with a constant barrage of small points which add up to big dollars.

If you do the research, you’ll notice SPASigma is the only company offering up distributor-centric negotiation training. If you haven’t seen this great video on the topic, you need to. 

If you don’t raise your margin now, you might never pull it off…
Good times can distract us all from what’s important. Many distributors operate under what we in Iowa call the “Make hay
while the sun shines” mentality. We are so busy taking care of business, we fail to carry out the truly strategic actions needed for long term sustainability. There are few things more strategic than fixing our margin situation. Now is the perfect time.

Let our motto be….
Good times are here. We’re in this for the long haul. The next cycle will arrive sooner than we think. Time isn’t on our side. Prepare now.