The List Price Question
Is it possible to charge more than list price?
What is List Price?
Many salespeople believe list price is that artificially high number which is used as a marker for future discounts. In their minds, it is an unnatural sin to sell anything to anybody for "list".
Part of this attitude and philosophy comes from daily life. For instance, "Nobody pays sticker price for their new Ford and no real customer pays list for their supplies in our industry." can be heard echoing through sales bullpens.
But the story doesn't really hold up well. For example, car dealerships have regularly charged more than sticker for hard to find or limited production vehicles. Toyota dealers still stick to the manufacturer's sticker price on most of their line-up.
But we're not in the car business. Our question becomes should distributors selling things like plumbing, electrical, HVAC and industrial items ever sell at list price or maybe even beyond? Do our vendors really put much thought or analysis into the list prices they publish? Do they really understand the complex and varying economics of distribution by customer/product segment? What should we do when the answer is No?
In a recent post on "The Distributor Channel" blog, we challenged readers (predominately distributor sales professionals) on this topic. One response came back, "Danger Will Robinson, Danger! Selling at or above list price, while possible in rare occasions, is fraught with "gotchas." Most Sale's Engineers would be ecstatic to sell at list." The response demonstrates the fears of most distributor sales people around the topic. Simply stated they fear selling anything to any customer at "list" because the customer might see it as a personal affront or, worse yet, an act of dishonesty.
I recently had a conversation on the list price topic with distribution pricing expert David Bauders of Strategic Pricing Associates. Using their years of pricing expertise and a sophisticated algorithm, SPA's team regularly identifies hundreds of products which should/could be sold at prices greater than list. Further, his clients have successfully implemented strategies which scientifically direct the list (and greater) concept. Let's explore the situation.
The average distributor handles thousands of transactions per year. A good many of these fall into several categories which must be (at least) considered for list or greater pricing. Here are three glaring examples:
- Products of very low value which are purchased in small quantities.
- Products which are difficult to source or a vendor with unusually difficult terms.
- Unusual products where the distributor must research the market to locate a source and/or cross from an obsolete part number.
Let's do a deep dive on each of these areas and review the pricing justification for a list or greater price.
Products of very low value which are purchased in small quantities
Some products are meant to be purchased by the case, carton or pallet-load. They are designed for large "wholesale" orders, but a good many customers only need one or two at a time. They ask you to break the carton, split the quantity, repackage the product and sell it to them in the smaller number needed to match their immediate needs. List price levels set by the manufacturer are defined by the case quantity.
Broken cases are sold purely as a customer convenience. Distributors who apply the normal pricing to single items lose money on the transaction. Not only does the gross margin generated by the sale not cover the cost of a sales transaction (inside sales time, invoice costs, and sales expenses), the transaction generates extra costs for things like repackaging, manual processing (because the bar code is on the case) and potential issues with lost products down the road in the warehouse.
Truthfully, the best way to handle the issue would involve some type of shipping and handling charge. Unfortunately, many distributors lack the IT horsepower to administer these non-product transactional fees. The best answer, at least for today, is a sell price which exceeds list.
Products which are difficult to source
Distributors have vendors (I won't call them supply partners) who are difficult. They insist on terms and conditions which always put the distributor at risk. Sometimes, orders require massive amounts of engineering/specialist involvement. Support time is consumed answering dozens of pointless questions on the front end and constant babysitting throughout the production.
Thankfully, these aren't our bread and butter suppliers. Whenever possible we direct customers to other manufacturers. But for a number of reasons, the customer either chooses to use the product or must use it based on the dictates of the MRO environment.
Make no mistake about it; most of us would rather not sell these products. But we do - it's part of our customer service. And there is no way to ever capture a profit selling these products at a normal margin. Again selling these products outside a list price boundary is the only way to create a return for the home team - the distributor's shareholders.
Unusual products where the distributor must research the market to locate a source and/or cross from an obsolete part number
Customers are leaning down their operations. Every purchasing department worth its salt used to have a clerical person trained on the use of the Thomas Register. When a specialty machine imported from Lower Transylvania needed fixing, this person spent entire days on the phone tracking down a catalog (often not in English), deciphering the numbering system, staring at drawings and bouncing back and forth between the maintenance and procurement departments.
Guess what? Today the customer has a much more efficient solution. And, it's not the internet. They simply call their friendly neighborhood distributor customer service group and let somebody else do the work.
In this author's point of view, there's nothing wrong with outsourcing. And certainly, distributors are better equipped for finding hard to get items than their customers. But, the distributor needs to get paid along the way. Charging a normal margin just doesn't pay for all the extra work required to solve the problem even when the items are relatively high value.
Why is the need to charge list (or more) accelerating?
Actually, there are a combination of ingredients pushing the need for a new look at pricing strategy.
We already stated the first one; our customers are operating with skinny work forces and quietly downloading increasingly more work to their distributor partners. Whether it be; manufacturing companies, contractors, dealers, you name it - they are doing more with fewer people. For you this means more business along with a disproportionate amount of work.
Secondly, since the recession of the early 1990s, customers have been more closely watching their investment costs. You've heard of JIT inventory, "Kanban", Lean Manufacturing, The Toyota System and maybe a few more. All of these systems call for companies to place many smaller orders for the stuff they need rather one large order. For distributors, this means more broken case quantities, lots of extra handling, more packaging materials and potentially small orders without a corresponding bump in margins (if we don't make changes).
Finally, the one stop shop sales pitch has spread through the world of distribution like Mrs. O'Leary's blaze in Chicago. Distributor salespeople regularly pitch their ability to handle everything. Unfortunately for their employers, when using old style pricing practices, it can include lots of unprofitable business.
It's a massive profit give away...
All of these lead to a massive profit giveaway. Distributors do a poor job of measuring profit contribution by customer. But experts agree; less than half of our customers actually make us money and the rest are charity cases. We are taking from good customers and making handouts to the rest.
Bauders' Strategic Pricing Associates does statistical graphs by product showing the pricing spread of products. Tiny customers, placing miniscule orders get pricing levels equal to or better than the largest accounts. Measuring the impact of transactional costs, some of these folks are charity cases, living off the profits made from their larger brethren. This is a gap that must be fixed but it's not easy to spot.
The issue of identifying the costly issues of pricing can best be understood by revisiting a conversation I had with my boss back in 1991. We were talking about margin erosion (even then it was an issue). He suggested putting orders into a spreadsheet and sorting them by size and gross margin. He said, "You don't have time to look at everything, so examine the biggest opportunities." And I believe this is the root of the problem. The average distributor has hundreds of thousands (Millions?) of transactions each year. It's humanly impossible to plan, measure and gage each of these. The biggest ones get handled, the rest are shoved to the side. And, here's where SPA comes in.
The SPA team applies the power of statistical analysis to review the millions of pricing permutations found at even the smallest distributors (pricing permutations = 2,000 potential SKU's x 1,000 customers = 2 Million permutations). They provide measures and metrics which extend well past the big dollar opportunities reviewed on your manual spreadsheet and into the small and tiny customers who are buying small orders.
In research surrounding the over 350 distributors who are using SPA's process, I have discovered a great deal of the profit improvement comes from tiny and small customers who are brought typically brought under control first. Many of these accounts must pay "list price" on the categories of products defined above because they lack the size to offset the transactional costs via their other purchases.
But the SPA process does not just segment distributor customers. An additional segmentation takes place with vendors. Identified by the distributor, product lines falling into the categories described are earmarked for margins levels which provide a fair return for the efforts of the distributor's sales and support teams.
Pulling all of this together
In the world of wholesale distribution, there are very few home runs. Instead, gains are made a few dollars at a time. Addressing seemingly small issues provides a cumulative impact with major results.
After building pricing processes with over 350 distributors, SPA has demonstrated an ability to produce two full points of additional gross margin for their clients. It takes place one transaction at a time. Boosting a transactions to the list (and beyond) status is just one of many margin improvements. But, I believe it sends a message to distributor sales teams:
The work we do is valuable and we deserve to be paid for it.
In my book, The Distributor's Fee-Based Services Manifesto, I explore those times when margin at any level does not cover the value of our work. But, no distributor will successful migrate to fee-based revenue without first understanding how to make the price they charge for other products stick.
Finally, think about the impact of two additional points of margin on your business. We've got to get past the list price issue.