Pricing Strategy in a Technology Driven World
The Air Hydro Story
When you sell complex high technology products, things are different. The sale is a solutiondriven event; more a component of customer manufacturing issues than a true product sell. Based on this point, scores of distributors working in the motion control, hydraulic, vision, and systems world give themselves an "out" when it comes to building a disciplined pricing process.
They incorrectly reason the technical nature of their world drives higher margin. They assume the ebb and flow of normal technology adoption cycles puts them into a narrow gross margin band which cannot be adjusted. And, they surmise the consultative selling style used by their teams automatically creates a fair margin scenario. But one progressive company has bucked the "common knowledge" of the industry and serves as a guide post to others serving the same distribution segment.
Air Hydro Power of Louisville, Kentucky has roots in the traditional hydraulics business going back 50 years. But rather than rest on their laurels, they continued to branch into other aspects of customer need. Today they provide a set of technical solutions that answer the issues of today's manufacturing sector. Their seven locations handle a diverse list of technology-based products - Hydraulics, Machine Safety, Pneumatics, Motion Control, Fluid Connection and Vision Systems are joined by a department capable of turning out special assembled systems. Clearly - this is not a commodity driven distributor.
We asked Air Hydro co-owner Matt Ott to open up the hood and give us a look at the force that makes him a very vocal proponent of the Strategic Pricing Associates (SPA) system. Matt shared:
"We experienced a time of dynamic growth. Our vision of customer service and technical support was embraced by many new customers, as well as our existing customer base (which numbers over 3,000) alike." We grew dramatically, but soon we noticed our bottom line was not keeping pace with growth."
The truth became apparent, top notch support and world class technical expertise is expensive to provide. And, unless a pricing process is put into place, salespeople can only benchmark their prices against "low/no service" commodity sellers.
In 2005 Air Hydro Power was approached by a key supplier and introduced to the work of SPA. A select group of forward thinking distributors was called to Parker-Hannifin's corporate headquarters where they learned of that organization's own results in applying SPA's methodology. SPA's methodology (which employs a unique blend of scientific analysis and a proven process) had worked so well within the manufacturer's environment - they decided to share the results with select distributor partners.
Following the April, 2006 "turn on", Air Hydro experienced a number of quick wins which allowed for meaningful growth to their bottom line. Over the course of the next year, care was put into cleaning up pricing files - which yielded even more meaningful results. Later in the process they upgraded their company ERP computer system to Activant's P21 system. This allowed for even greater ease and flexibility in analyzing invoice data. Matt's comments demonstrate the growing power of Product Specialists in these knowledgebased distributors. When we asked how he would proceed if he had the opportunity to do things over, he responded:
"If we were going to start the process over we would definitely involve our Specialists early in the process. While we understand our industry and the customer drivers, we have found that no one understands the nuances of our different technology silos like these members of our team. They are involved now - and are pushing the results we achieve in their perspective area."
At the most recent Association for High Technology Distribution meeting in San Antonio, Tom McGuire, another Co-Owner of Air Hydro, made a comment during a workshop on building a sales driven process that is worth noting.
"Nothing that we have done in our business model has produced the kind of results we see with Strategic Pricing Associates' price process. It has interacted with every fiber of the way we see ourselves in the market. And, it has been responsible for moving us into the high performance side of the association's Profit Analysis Report (PAR). If you aren't doing following this model - you definitely need to explore doing so."
While Air Hydro has not publically announced the types of gross margin gains they have witnessed. It should be noted that high performance distributor organizations regularly outperform the profits of their "typical" distributor colleagues by a factor of 4.
After significant gains one might imagine that Air Hydro would be happy to rest on their laurels, however Ott and McGuire unanimously agree there are more gains to be made. The company recently acquired a new business which offers an outstanding opportunity for margin and process improvement. And after five years both are certain that still more margin enhancement can be distilled from their existing businesses.
Amazingly, this cutting edge distributor feels confident in sharing the lessons they have learned throughout their price process journey. We even asked them what would happen if their solution based competition instituted the exact same system. In their opinion, their slice of the wholesale business exists to provide customers with more uptime, ongoing quality improvement and other real revenue enhancements. Each time a distributor makes a pricing error, the event recreates a drain on the very resources required to provide creative new ideas. And that is a point which is difficult to argue against.