If you’re managing a decent sized distributor, you’ve probably been approached by at least one consulting firm to talk about pricing. The concept sounds good on paper: use a few targeted price increase campaigns to improve gross margin and profitability. Easy Money.
Here’s the fundamental problem: distribution is a messy business. We’re not a retailer, where a single IT platform controls the store. Nor are we a manufacturer, where only a handful of people touch pricing and customer service. Control is generally decentralized, leaving pricing decisions in the hands of an individual sales rep. The entire sales force often controls pricing.
Pricing is ultimately a human act: claiming part of the value you create in the market. If you want to transform pricing strategy at a distributor, you need to change the company’s mindset. This often goes beyond systems, processes, and spreadsheets. Thus improving pricing requires you to improve the quality and focus of the customer conversations behind it.
A good distribution pricing consultant should start by looking at your target market and value proposition. The goal is to find the unique points in the distribution channel where you have a competitive advantage – and optimize your business around that.
This analysis is often best done at a customer level. Look at your most profitable accounts. Can you identify specific customer situations and features which justify your higher margins? This often involves helping the customer solve a specific problem or getting a particularly good cost on a key product. Either way, you have an economic basis for earning a higher profit.
This analysis has several implications. First, if you are creating higher value for a customer, you should charge for it. A strategic pricing consultant can help you better align your prices with the customer’s willingness to pay. This will immediately increase your profit margin.
Your assessment can also serve as a roadmap for investments in commercial excellence. This could include digital capabilities to enhance the customer experience, new product offerings, or supply chain efficiency. The effects of these can often compound, giving you the opportunity to become the market leader within a niche. This is especially true if you have identified a gap in the market that a competitor doesn’t occupy today.
On a similar note, you can glean actionable insights about which customers to invest in – and which prospects you need to abandon. Your analysis of existing customers will identify a few great customers, many lackluster ones, and few prospects where you lack any real competitive right to play. These accounts, often pushed by a sales rep who doesn’t know how to sell other prospects, should be considered “unsafe at any price”. This assessment of your sales volume is known as evaluating your “quality of sales”. Work with your sales team to focus their time on growing high value, high potential accounts.
Finally, this analysis will help frame your sales pitch, marketing strategy, and brand awareness efforts. These should be focused on your points of difference. Adjust your marketing mix so your message gets in front of high profit prospects. Some consideration of customer preferences about pricing is helpful here: given a choice, what pricing structure do customers want? Every piece of your marketing plan should be aligned to maximize customer conversion.
Moving beyond the business model, a pricing consultant should next look to your pricing process, sales incentives, and culture. How are pricing decisions made? What motivates a sales rep to act in the company’s interest? A brilliant pricing strategy with bad incentives is not sustainable.
The end game is simple: we want to guide the selling organization to the point where they can articulate and justify the value behind a price. If there isn’t enough value to justify the desired price, we must create it. If the sales rep isn’t confident enough to deliver the message, we must coach them. If the organization isn’t positioned to sustain the gains, we must build systems and processes to facilitate this.
All of these efforts are intended to create the conditions by which your pricing team can become successful. Going back to my original point, pricing is the act of claiming part of the value you create. Your success in claiming price will be dictated by your ability to show value.
This is not to dismiss the role of a pricing function, pricing process, and pricing model. Execution is critical for success. Without clear pricing performance metrics and an oversight process, your sellers will revert to bad habits. While this may be good for your revenue and market share, your profit margin will suffer.
One of the best ways to make a pricing initiative sustainable is to embed elements of the process into your operating systems. Make the right way the only way. The good news is there are many companies who will gladly help you accomplish this task. The problem? They start at the end of the process rather than tracing the path we just navigated, which unlocks the full impact of a strategic pricing program.
On a related note, it’s important to look at pricing as a journey rather than a destination. Focus on building a process which can reliably improve and control margins over time. Ensure you pass through every price increase. Control margin leakage. This approach allows you to play the long game, building towards industry leading margins one small step at a time.
Coming full circle, this mindset is a key point of difference that we can offer a wholesaler client. Many consulting firms offer actionable insights to support your strategy. In contrast, I’ve built my consulting business around reshaping a wholesaler’s strategic pricing capabilities to unleash their full potential. Which gives us a strategic advantage before we ever crunch a number or coach a sales rep on how to price.
This approach sets my consulting projects up for a double win. Like any pricing consultant, we can deliver a bump in profit margin by pushing through price increases. But the real value is in the second wave of our efforts. This occurs when your investments in your sales force, marketing, supply chain, product, and service capabilities align to create greater value for the customer. Which, in turn, will accelerate your profitability and growth.
Want to read more?
- Strategic Pricing – 9 Real World Ways To Earn Higher Margins
- Using Customer Profitability For Good and Not Evil
- Target Pricing – Setting The Correct Focus With Your Sales Team
- Using Yield Management To Improve Overall Performance
- Aligning Pricing Tactics With Your Process
- Measuring Pricing Performance
- How To Balance Cost vs. Value in B2B Pricing Strategy Consulting