The Best Payback in the Distribution World
By Frank Hurtte
Texan's think big. They don't use words like big, best or delicious; they frame their definitions in phrases like the "Biggest Bull on the Planet" or "Hotter than Double-X Tabasco". To illustrate the point, on a recent trip to the Lone Star State, three people promise to take me to the best Bar-B-Q joint in the World. Not surprisingly the three drive-ins weren't the same place. And when confronted with the difference, each vigorously argued for their favorite. They actually got emotional - Texans are that way about Barbecue. But still how many "World's Best" can there be? Well, a quick Google Search for the term "World's Best Barbecue Sauce" netted over 138,000 results. Logically there can only be one - but, somehow there's more.
But this isn't just about Barbecue. The same thing holds true for the world's best hot dog (something like 369, 000 claims), the world's best Rock and Roll Band (34,000 Google Hits), the world's best beach or anything else tied to human taste, preference or fashion. Simply put, without a measure - it's pretty hard to really say "World's Best".
So how can I make a claim like the "Best Payback in Distribution"? Am I no different than my friends down between the Brazos and the Rio Grande? Unlike barbecue where all judgments are purely subjective, we have an objective and standard measure for payback. Here's a short definition:
Payback period - is an estimate of the time that will be necessary for an investor to recoup the initial investment. It is used to compare investments that might have different initial capital requirements.
Early last month we had an opportunity to take part in the interview of four distributors who had applied the Cleveland-based Strategic Pricing Associates process to their businesses' pricing dilemma. These distributors came from a number of lines of trade. During the interview we asked the question: "How long did it take for you to recoup the cost of participating in the SPA program?" Here are the results:
|Distributor||Line of Trade||Payback period|
|Pennsylvania-based||Plumbing, HVAC-R||2 months|
|Multi-State Regional||Flow Control Products||1 month|
|California-based||Electrical and Automation||3 months|
|Michigan-based||Plumbing and PVF||1 month|
For the sake of our discussions, let's call this a two month payback. Based on dozens of interviews with distributors who have implemented the SPA pricing process, we know that dollars returned actually increase as months go by. In other words the revenue to the distributors is very likely to not be linear but instead ramp up. So the impact of the first couple of months is not as hefty as the remainder of the year. Most companies ramp up their activity with pricing process starting first with tiny customers and gradually taking on customers with greater sales numbers. But we want to be conservative, so let's assume the bucks remain the same throughout the year.
Per the experts at www.solutionmatrix.com:
Calculating Simple ROI for Cash Flow and Investment Analysis
Return on investment is frequently derived as the "return" (incremental gain) from an action divided by the cost of that action. That is "simple ROI," as used in business case analysis and other forms of cash flow analysis. For example, what is the ROI for a new marketing program that is expected to cost $500,000 over the next five years and deliver an additional $700,000 in increased profits during the same time?
Simple ROI is the most frequently used form of ROI and the most easily understood. With simple ROI, incremental gains from the investment are divided by investment costs.
If we apply the same formula we come up with the following formula:
Gains = 12 months of revenue create by higher margins
Costs = the 2 months required to repay the investment
So the formula looks like this:
Simple ROI = (12 months of return - 2 months of return)/ 2 months of return
Simple ROI = 10/2 = 500%
Now a few extra points before we move on...
We like the Strategic Pricing Associates process because it is just that - a process. It includes all of the components required to make a process work. In order to be a process a plan must include:
- Analytics & Metrics - Without some type of measure and metrics it's impossible to identify gains and correct issues. In the case of SPA, this includes a statistical analysis of invoice history, pricing data, sales quantities and customer types. SPA can determine optimal pricing in complex environments with thousands of products and thousands of customers (millions of combinations!). Equally importantly, SPA provides metrics as you move through the process. Metrics like percent of revenues going through the process (and the percentage deviated) and measures performance by customer, salesperson, branch or territory are provided.
- Documentation - Documentation is important for training your team and understanding exactly what is expected from everyone involved. In the case of a pricing process this means training for salespeople, customer service reps and management alike.
- Training & Coaching: Helping your people understand their territory and how to best carry out the process proves important in deriving benefits from a process. The SPA pricing process allows for the manager to understand which portion of their selling team needs added help. And most importantly, allows the manager to quickly gage any customer price pushback.
Is there a better payback in the distributor world? In the 30+ years that I have been directly involved in the world of wholesale distribution - I have never seen anything that compares. Click here to see what real distribution principals have to say about my proposition: