Without buy-in from your entire team – including that salesperson that complains the most – a strategic pricing project will, simply put, not yield the results you need.
On a recent episode of Wholesale Change, we asked industry expert Gregory Smith, Vice President of Strategic Accounts and Partnerships for SPARXiQ, to share his tips on a successful strategic pricing implementation. He outlined why buy-in is so important and discussed strategies to achieve that goal from the entire team.
Before becoming part of the SPARXiQ team two years ago, Smith gained 40 years of experience in the distribution industry, starting out as an electrical contractor in the 70s and founding his own electrical distribution firm in the mid-80s. The SPARXiQ team has worked with over 600 different distributors and around 250 manufacturers to implement strategic pricing programs that typically yield an increase between 200- and 400 basis points.
Distribution Strategy Group: Why is an effective pricing strategy so important to an organization?
Gregory Smith: Let’s talk about strategic pricing generally. If you’re looking at distribution as a whole, and you look at the different levers that distributors have to increase profitability, the largest lever by far is a price increase. As an example, if you’re a 4% EBIT company and you raise your prices by 2%, that has a net profit impact of somewhere around 42 to 44% – that is a huge net profit impact. You can sell more product, but it only makes a fraction of the impact. The largest lever that distribution has to increase enterprise value, to make additional cash, is to increase pricing.
DSG: We’ve seen economic demand curves, so we expect that if we raise price, we’re going to lower demand. The brilliance of great pricing solutions like SPARXiQ is that you can raise margins and it all goes to your bottom line.
Smith: Exactly right. A lot of companies and salespeople think that there’s only two levers within pricing, lower price or raise price, and that’s just not the case. There’s a lot more that you can do with pricing other than just lower or raise price.
In talking with a lot of clients, there are two schools of thought. One is I don’t want to tell anybody I’m partnering with you and they consider a strategic pricing project a strategic advantage. And the other school of thought, which I was in, was that I wanted all of my competition doing this, in doing so it raises the water level and raises all boats. So, depending on where you’re at, and I understand both sides of the discussion. Other companies are doing cost plus, which is probably the worst approach to pricing that a company could ever do. And that’s the one that most companies allow their salespeople to deploy. I’ve had conversations with hundreds of companies, and I would say that 80% are doing some sort of a cost-plus pricing matrix and methodology.
DSG: Why is pricing so challenging for organizations?
Smith: As we work with companies and as they’re about ready to go live with the new matrix and pricing recommendations, the biggest fear that companies have is external. What will the customer say? Am I going to get a lot of pushback? Am I going to get a customer screaming at me? Am I going to lose business? Is my top-line revenue going to drop?
We look at several aspects of a successful price-matrix project, which is customer-specific pricing, contract pricing, customer sizing and vertical, product sensitivity and highly visible products that we recommend are out of the matrix. When all those are done correctly, there is virtually zero pushback, externally. It is all internal. Again, we’ve seen this thousands of times, it was always internal pushback, and very little customer pushback and, frankly, very little customer acknowledgement that something’s even changed. Especially now. Manufacturers have already shot that bullet over the bow. There are lots of price increases coming. Doing a pricing project in unison with a manufacturer’s price increase is tremendously helpful; this can work really well.
DSG: Let’s say leadership agrees implementing strategic pricing is important. How do you get the rest of the company, especially sales, to buy-in?
Smith: It lives at the president and CEO level. This has to be a strategic initiative that is driven by senior leadership, otherwise it doesn’t work. It doesn’t get traction. Going back to why do some companies achieve 2 basis points while others exceed 4? , The difference between 2 and 6 belongs with who owns it, so it has to be driven by the CEO or the president, and the messaging has to come out right from the start such as, “By the way, we want you to help us make it the very best pricing matrix possible in the marketplace. It’s a team effort, but at the end of the day, it’s not going away, and we’re going to hold people accountable to achieve our stated objectives.” Revenue and profit growth have to be baked into the fabric of your organization.
DSG: Another challenge is that it’s hard for sellers to know market price, unless the company does a good job of collecting and sharing it with the sales team.
Smith: That’s why it’simportant to have a strategic-pricing plan in place that sets the boundaries and the guidelines around which prices should actually be changed and which ones shouldn’t be. So, you don’t have a hundred different salespeople reacting to 500 different conversations, because that’s exactly what happens. We recommend only optimizing your pricing on an annual basis.
DSG: How do you align the goals and compensation across the organization?
Smith: Some companies will do a pretty good job setting up a strategic margin plan or pricing plan, but they don’t really align it with compensation, and the two really need to be aligned. If you want the sales team to participate in your pricing methodology, then you need to pay them based on the actual gross margin percent, your gross margin dollars. And when you actually share that information with them, you get buy-in from the team. I do believe in showing what I would consider an operational cost of goods in the order-entry screen, which is maybe different than your actual average costs of goods, but you pay them off the actual cost of goods.
Why treat all products equally when you don’t treat all customers equally? D products should be getting a higher margin than your A products. Most of the time, your sales team will sell D products using their standard peanut butter margins; the problem is D products actually have a higher cost to serve. But again, I would just caution and advise companies to pay commissions off the actual cost of goods.
DSG: One of the primary reasons for failure is human resistance, and we have found that the less control that outside sales has over pricing, the less the customer brings up pricing issues. Is that your experience too?
Smith: Absolutely. It’s really about keeping the salespeople focused on the orders that they should be focused on, not on the day-to-day pricing.
DSG: So, the less control outside sales has overpricing, the less the customer brings up pricing issues?
Smith: That’s exactly right. Once you start looking under the covers, the issue with the customer’s pricing was not the price, it was the variation of price that happened over a period of time. That’s what irritates customers. It was the variation of pricing.
DSG: That trains your customers to ask for price discounts.
Smith: That’s it, you hit the nail on the head. We’ve trained our customers to ask for price discounts. What other industry do you know where that happens?
DSG: What is required to ensure a successful implementation?
Smith: I think the first thing is to create the why. Why are you doing it? Why is it important to the organization? Create a strategic vision.
Then it’s about building a cohesive strategic plan for the implementation. Then you have to communicate it, and then over-communicate it and share it 50 times, and share it 50 more times. Write about why it’s important to your organization, why you’re doing it, and what the objectives are. It really is the entire organization that needs to develop the plan, work the plan, and communicate the plan. Then you’ve got to remove some internal barriers. Revenue and margin enhancement has to be built into a company’s culture; it will fail over time if read as the “flavor of the month.”
What’s also important for most pricing projects is make sure your customers are in proper categories and you can do that at high level.
DSG: You mentioned having an empowered pricing committee. What is that?
Smith: It’s about having a cross-discipline group of folks that has the authority to manage the pricing matrix and profitability within your organization. You should have a dedicated lead. This could be a VP level person that reports directly to the CEO who actually oversees the committee.
DSG: Talking about the outcomes of a price matrix initiative, we all know about the EBIT improvement increase in enterprise value. So, what are the other benefits in this type of initiative?
Smith: When you put a price-matrix initiative in, what comes with that is a whole host of other benefits, and one is market-basket diversity. It’s about understanding the gap analysis. What are you selling this customer versus what you’re not selling this customer? And it’s also about understanding market share – what is your market share with that customer? How do you price based on market share? How do you price based on market basket diversity? If you can increase gross margin dollars per ticket to something above what your cost is, then you’re making money in this business. It’s all about understanding all those nuances and understanding all those different levers. Other benefits include:
- Healthier customer relationships focused on value, not price
- Taking the guesswork out of pricing: faster, more accurate
- More consistency and fairness: principled variations
- More time to serve the customer
- More effective competitive positioning
- Clarity of goals and objectives
- A healthier employer that can invest and grow
- More compensation dollars