Are We Crazy or What? 2014 Pricing Strategy
By Frank Hurtte
Just back from a whirlwind tour of distributor locations. There's plenty to be thankful for. Business is still doing pretty well. Most of the sellers we hired last year have gotten traction at their assigned accounts. The same goes for the inside support and customer service people: the number of lines entered each month has risen steadily. Things seem to be progressing nicely with one exception: margin squeeze.
There are a lot of excuses for the lower margins. The internet boogieman, new competitors, purchasing people flexing their muscles taking more aggressive stands all get mentioned during the first few minutes. We talk about manufacturers being to blame for a portion of the woes. I ask a few more questions about the market. Then we turn to price points.
When asked how customer price levels are established, I repeatedly hear the same story.
"The salesperson sets the price, they're the closest to the customer and understand the commercial situation."
Then it dawns on me. A good percentage (as high as 30%) of these salespeople have been with the company for less than two years. Many were hired from adjoining industries; similar to ours but not the same. Some are new college graduates. A few are freshly minted engineers. None have detailed market price experience in our industry.
Most if not all of the training done for these guys is technical product training. Nobody talks about market prices, margins needed to maintain levels of business or the cost to provide any of the services customers stand ready to consume. Training on negotiation or customer value is scarce as the Iowa hen's teeth. And in my 30 plus years in this industry, I can count instances of market price related training on one hand.
But price related training takes place. Purchasing guys train our people about price. If our product doesn't match the current needs, they tell our guys, "Your price is too high." If the customer doesn't like our service, procurement people say, "Your price was too high." When we bomb the heck out of the price and come in 10% less than any competitor, the buyer says, "You were a point or two high, but I am giving it to you anyway." Based on this constant string of misinformation, our new guys think they know the market.
Now for the "are we crazy" part. Here are the facts as I see them:
- We are giving employees with just a couple of years' experience the ability to set our price, limit our income and control our future success.
- We are leaving the whole topic of price training to the evil ones in the customer procurement group.
- Coaching and Managing Points
- We are wondering why margins are going down.
- We justify our actions because new sellers spend time driving around visiting customers.
Ask yourself, how many years of experience in the market does your management team have? How many times in the early stages of your career did you discover you fell for a purchasing trick and left money on the table? Think about how complex the whole matrix of customers, price levels and product types can be.
I believe now is the time for distributors to put some discipline into their pricing process. Further, I attended my first Matrix pricing class over 25 years ago and have seen flop after miserable failure mostly because the distributor didn't have the right combination of analytics, metrics and coaching points for their team.
If you don't have a scientifically developed and well defined pricing process, you need one. The process you select should feature not only analytics, but documentation, training and ongoing metrics. After looking at dozens of purported experts in pricing, I feel the state of the art in the field belongs to Strategic Pricing Associates (www.strategicpricing.com). David Bauders and his team have worked with over 350 distributors and I have had the opportunity to interview over 30 of SPA's clients. Here's what I have discovered.
Strategic Pricing Associates (SPA) is more than a "how to" book and way more than a consult with a plan. SPA combines scientific computer analytics with training, coaching and user friendly metrics to drive change. Their system works, the distributors I have interviewed all commented on two things. First, real impact to their gross margin percentage; the two points SPA advertises are real. Secondly, every Strategic Pricing client observes an overall improvement in the outlook of their sales team. One commented, "Our people used to fret over pricing issues. They didn't really know the right direction to follow. Today, they work on the one thing that's really important – providing value to our customers."
I believe this demonstrates what happens when we think differently.