Many experts and software companies offer to help distributors improve profitability. Those resources can be very helpful, but distributors should always take these basic principles into account when formulating their pricing strategies.
Gross margin is the single most impactful driver of profit. For example, a 2% improvement in gross margin would drive higher profit than a commensurate improvement in either sales or expenses.
However, gross margin is often considered “too hard to do anything about.” Faced with the “hard to do but important” conflict, far too many firms simply procrastinate instead of making meaningful improvements.
The issue is compounded by the fact that pricing has the very real possibility of making the firm look overpriced. Better to let sleeping dogs lie.
Our program will review three strategic areas in improving margin:
- increasing prices where real opportunities to do so exist
- ensuring that the sales staff is supporting the pricing initiatives
- taking appropriate pricing actions when supplier price increases inundate the firm
In making pricing decisions, particularly regarding raising prices, consider where real opportunities exist. Clearly, raising prices on the best-selling items in the assortment is a non-starter. These are the items that influence customer perceptions. Being high here means being viewed as high priced on the entire product line.
At the same time, most firms have an abundance of items where prices can be raised, at least modestly, with no negative competitive impact. Those items are in the long-tailed slower-selling segment of the assortment.
The challenge is that there are lots (as in really lots) of slower-selling items in the typical distributor’s assortment. For most firms, around half of the SKUs in the assortment fall into this category. Evaluating them individually, and probably debating them individually, is time-consuming. Generating higher margins item by item could take weeks, if not months and possibly years.
This is an area where AI could be a major competitive advantage. By examining the factors that could cause individual items to be price insensitive, a well-structured AI initiative could take the pricing decisions from months down to hours. It is an avenue that distributors should be exploring.
Sales Force Support
The sales team is on the front line of pricing issues. In practice the sales force is consistently inundated with “Gee, that seems a little high” or “If you can take five off we can do this.” Being on the receiving end of such comments eventually takes a toll on behavior.
When the idea that prices are too high is repeated long enough, even the best salesperson falls prey to the Stockholm Syndrome. Simply put, there is a natural tendency to believe that the firm’s prices really are too high because everybody says they are.
The issue is compounded by the firm’s goal to provide value to customers. One easy way to provide value is to reduce prices. Because the prices are “already too high,” it is an easy step to take.
Every effort needs to be taken to help sales reps avoid the Stockholm Syndrome issue. This must include explaining why prices must be maintained to ensure adequate profitability to the firm.
Supplier Price Increases
In reality, supplier price increases are a major boon to achieving higher profit. This is true until they no longer are a boon.
The higher profits generated in almost every sector of distribution at present is due in large part to the ability of distributors to pass those price increases along. However, as price increases are built on top of price increases in an escalating manner, the ability to pass the price increases along is diminished.
Distributors need to be aware of their susceptibility to supplier price increases. This requires understanding the economics of outbound pricing changes when given inbound supplier price increases.
I’ll cover these topics and others on June 7 Best Practices program, “Practical Post-Pandemic Pricing for Profit.” Register to watch live and ask questions or to get a link to watch the recording later.
Dr. Albert Bates is Principal of the Distribution Performance Project, a research and education entity focusing on distribution. He makes about 100 presentations each year on topics such as Improving the Bottom Line, Doing More with Less and Pricing for Profit. He also heads the firm’s investigation into profitability research for over 50 different trade associations. He has published widely in both the professional and trade press, including in the Harvard Business Review and the California Management Review. He has also authored eight books on financial planning for businesses.