Shifts in thinking during a fast economy
For a moment, let's stand back and look at our world. For most distributors there has been a relative shift in the way day life appears. The economy picked up; actually business is moving along at a fast pace. Not to say we were dawdling along back a couple of years ago during the Recession. We were busy then too, but there's been a shift in the whole way things work.
Remember the old saying; a rising tide raises all ships. In our business a little sales growth covers a lot of issues. Sales people bring in orders, sometimes in spite of fundamental flaws in scheduling, planning and targeting process. In most organizations personnel development and hiring still lags behind the business growth. This puts stress and strain sales managers and owners as their attention is often drawn to urgent activities like expediting, balancing inventory levels and dozens of other issues.
This brings us to the central issue of the fast economy: the concept of prioritization is lost. Every single person within the business is busy. And, because the numbers show well, it's easy to get suckered into believing progress is being made. We have asked a number of friends in the business to recant their activities over the past week, month or quarter. They struggle to remember how they invested their time. They were busy taking care of customer calls, sales emergencies, product shortages and people issues in general, but couldn't really recall doing anything significantly important for their business.
Their world has turned into total reactivity all the time. Don't get me wrong, sometime reactivity is a good thing. Opportunities abound. New customers appear out of the blue. New suppliers are suddenly seeking out your services and presenting new ways to capitalize on your customer base. And, customers, who are short staffed, ask you to handle larger chucks of their business. All good, we're making money but fundamentally important capacities - the ones critical to long term growth and sustainability are at a standstill.
Let's explore some of the scenes lying on the cutting room floor of many distributor executive's office. For some it's an important technology project. The CRM system necessary to better sales utilization may be languishing in the "get around to it someday" basket. Or it's even worse. A new system has been bought and paid for, yet not fully implemented. Extra capacity sits unused due to lack of discipline or training.
Speaking of training; sellers who are turning in average results may not be producing at maximum rates. Lack of training knocks off progress. Ground breaking research presented in Dixon and Adamson's new book The Challenger Sale indicates a gap of 400% in the results produced by average and top performing sales people in a complex solution sale. Yet we can't seem to prioritize the training that might close the gap. What's worse, in some companies new sales people have been hired. Then, aside from pointing them to their waiting company car, we haven't had time to closely monitor their progress in real terms.
Processes which once ran smoothly have been shuffled aside by our new reactionary thinking. Simple stuff like disputed invoices may be taking longer to research. And every day the invoice languishes, our chance of recouping the full owed amount suffers.
The proactive process you laid in place during the tough times has slowly been neglected. Many distributors made great progress on things like proactive quotation follow-up and recouping freight dollars a couple of years ago. Now everyone has copped an attitude - we're too busy for good business.
The battle between expedient and strategic has an almost addictive allure. Most of these expedient opportunities have a pleasant feel. They may remind us of our younger days when we rolled up our sleeves and just handled customer issues. To use the old axiom, we truly enjoy working in the business so we just handle them as they come up. Long term fundamental, sustainable growth takes a backseat to making money on Monday. But, we must snap out of this hypnotic state, grab hold of ourselves and think about the bottom-line and stock holder equity.
Let's explore one of the greatest opportunities for profit and equity to come our way in modern recollection. A by-product of today's fast times is the supply partner price increase. Fluctuating commodity prices and the unspoken reality of inflation created an environment where supplier price increases are crossing our desk almost daily. Further, customers are seeing these increases flow down the pipe from all of their vendors.
Each time a price increase hits, we have four basic courses of action and only one of these brings about long term value for your company. Combine this lop-sided menu with the hustle and bustle of fast economy and we have a real issue. Because of the importance of these points, join me as we explore each in detail.
The Four Choices for Supply-Partner Price Increases
Absorb all or a portion of the increase within your organization
Here's the scenario, salespeople receive the price notice, but are too busy to immediately reach out to their customers to get the new price locked into place. Weeks pass, sometimes months and finally the price increase again surfaces. They do a quick review of the margins and think, "Hey, we're still making money, it's probably better to not rock the apple cart." Sometimes the customer is locked into an annual pricing agreement and the fear of calling the price increase to their attention drives the decision to absorb the increase.
Either way, the net losers are the shareholders of your company. Gross Margin takes a hit, the bottom line suffers and the value of your company is negatively impacted.
Push back against the supplier because of a commercial situation
Few of us openly confess this action, but experience around distribution indicates it happens far too frequently. The supplier provides a price increase, and rather than address the subject with the customer, we push back with stories of aggressive competitors circling like vultures, smart purchasing guys who will use the increase against us, or giant opportunities just around the corner - if only we all hold the price level. Many times distributors are successful at making this play several years in a row. But, it's foolhardy to imagine this as sustainable strategy. Actually, the evidence leads to another conclusion.
Ultimately, the supplier discovers their own margins in jeopardy. In a year, two… maybe three, they will demand some type of action - a price improvement. The only issue is by this time, instead of a couple percent price hike, we're staring down the barrel of eight or nine percent. Instead of a minor tick on the customer's radar screen, your pricing increase raises a huge red flag. The business becomes questionable and at the last minute you decide to absorb a couple of points just to maintain your hold. This plays almost like our first point, except now the losses are higher, much higher.
Pass the price increase along to the customer and forget it
This one seems fairly benign at the beginning. We get a five percent price increase and simply pass it on to the customer. The gross margin percentage stays the same, so what's the big deal?
The problem is our expenses are escalating. Little things like gasoline for the company vehicles, heat, lights, office supplies and all the rest are spiraling upward. And, this strategy freezes your margin level. Furthermore, most times distributors aren't given an opportunity to actually pass on the whole cost increase because of the 30 or 60 day notifications required by major customers. The distributor draws the short end of the straw, again.
Use the price increase as a tool to leverage additional gross margin
We saved the best to last. Why not use price increases coming down from vendor partners as a tool for enhancing your margin? Nothing says you can't add an additional point to the price above and beyond the supplier's announced level. This isn't some sinister and diabolical plot, instead one simple action provides you with new margin to cover your own rising costs and hopefully puts a little more to the bottom-line for the home team.
When spelled out this way, one would assume everyone would possess the discipline to create extra margin. However, without a real pricing process, the strategy just never seems to happen. Let me restate; there must be a real pricing process with documentation, training, metrics, coaching points, analytics and individualized measure of success. As simple as all of this sounds most distributors lack a real scientifically-founded process.
What's worse is most distributors lack a pricing process, period. Many simply allow their sales teams to guess the right price for each customer. Others try to maintain a handle on pricing using a combination of spreadsheets and guess work. They've been lulled into believing their process and Santa really exist.
Is this a strong statement? Think about the typical distributor, 10,000 SKUs in their catalog and 5,000 customers. This equates to 50 Million pricing permutations. It is humanly impossible to manage that many points without a scientific approach. Further, without a strong system for analytical feedback, it's impossible to keep your process on track.
Strategic Pricing Associates developed a process for easily harnessing the power of science to your process. Not a consultation, but a proprietary analytic tool coupled to training, coaching and feedback mechanisms. In our experience with over 350 distributors we have documented results which typically exceed 2 points of additional margin within a few months.
Once your company is part of the Strategic Pricing Team, you learn tools for handling issues like Special Pricing Agreements, purchasing department negation ploys, price increases and your sales team morphs toward selling value. And, this builds equity like nothing you might do today.
Steven Covey's Seven Habits of Highly Effective People spoke of the importance of balancing urgent tasks against those which are strategically important. As you drive home some evening, turn off the radio, shut down your cell phone and think. What would your business look like with two additional points added to the bottom line? How would your company's equity be impacted? Give Strategic Pricing Associates a call when you're done. We'll be here to help you join the 350 companies who are really enjoying fast times.