Strategic Pricing Associates

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The Competitors and you: How do you differ?

Let's start with a premise. Overall, your company performs better than the competition. OK, since we're done with that little nicety, let's talk specifics. How are you better? Can you crank out a list of reasons why your organization outshines the other guy down the street?

Whenever I speak to distributors, they all claim to be the best in their market. They claim top notch salespeople brandishing long-time industry experience or technical backgrounds. Their inside sales groups are well trained in part selection and way above average at solving customer issues. To hear them talk, I wonder if they believe the competitors send a car down to the mission district every morning to pick up another batch of out of work winos.

If you happen to be one of these "we provide better service" distributors, you need to stop and ponder precisely why you are better than each of the other guys. Here are a few examples.

If you have an extensive program for stocking "just in case" service inventory for local customers, you are better than the store front location of a competitor down the road. The stock you maintain allows your customers to maximize uptime when emergencies take place. The extra up-time allows customers to make more money. And, quite frankly, they should be willing to pay you a bit more for the value provided.

If you have a well-documented process for maintaining customer "store room" inventory, you outshine the guy who merely fulfills orders. Your process eliminates the overhead created with the customer has overstocks or obsolete parts on their shelf. Because experts indicate the cost of a customer holding repair parts and other assets is 32% per year, you save the customer big bucks. If the "store room" process insures the right stuff is available for emergencies, you further build on your value. Your distributorship generates competitive edge for the customer. Once more, they should be willing to pay a bit more than a purely fulfillment guy.

Finally, if you have a highly trained technical specialist responsible for assisting customers with training on the products they use, your company overreaches the guy who lacks local training. Nearly every product technology on the planet has increased in complexity. At the same time, the North American workforce is losing knowledgeable and experienced baby boomer generation workers. According to research done by the Pew Research Center, baby boomers are retiring at a clip of 10,000 workers per day for the next 19 years (the math works out to just shy of 4 Million workers a year). As our customers look to the fill the ranks of their top technical workers, training grows in importance. Not only does the specialist fill a critical need, your company's effort saves travel time, logistics and other issues which again provide rock solid value to the customer. You deserve to be paid more than the distributor who provides product but no training.

Saving time and space, we listed just three specific cases where you might excel in the market place. Obviously, the list could go on and on. But please note: our list compares you against specific competitors. To illustrate, you may compete with a company who provides one or more of the same services which appear (at least on the surface) to match your own. This is common. However, the value proposition you provide is cumulative. Using the examples above, it includes service stock, crib process and technical training. If the other guy, lacks just one of these you provide a better package.

The resource you provide for customers are your competitive advantage. Honestly, most distributor managers never make an effort to catalog and cross compile their advantages against the competition, but they should. It's important. Here's why.

If distributor management doesn't have a complete list of why your company is better than each of your competitors, there's a good chance your sales people don't have one of their own. And this is where the problem begins.

Purchasing departments have been trained to take advantage of our situation by implying all suppliers are more or less equal. But, it's never an "apples-to-apples" comparison. The offerings you provide be they products, services or a hybrid combination of both are never exactly like the competitor's offering. Yet, smart procurement departments actually practice phrases like, "Of course you are a top quality supplier, all the people we do business with are top notch."

When pricing differences arise, your seller has a split second to challenge the lower price of the competitor by listing off the competitive advantage you provide. If practiced, they can deflect a good many price concession requests. If unpracticed or, as is many time the case, unaware of their competitive edges, the stammer and say something like, "Let me revisit the price again." In worst case scenarios, salespeople immediately cave knocking four, five or more percent off the price.

Think about this. In a split second the salesperson can give away a quarter of your company's real revenues (considering distributors live on gross margin not sell price). Unless you are striving to be the D4C (dirty deeds done dirt cheap) discount warehouse of your industry, ability to counter discounting requests is directly related to gross margin.

Sales departments will argue this point but most sellers cave into price pressure because it's easy. Salespeople will contend their commissions are tied to gross margin so intuitively they push for the highest price possible. Don't buy this contention. Faced with the potential of getting a better gross margin or possibly losing the sale, even seasoned professional sellers will cave to pricing pressure. Research supports this point. Let me share an eye opening example.

In New York Times Best Seller, Freakonomics, authors Levitt and Dubner answer the question; do realtors (commissioned salespeople from another industry) really sell their own houses for more money than their client's houses? According to their extensive research the answer is yes. Allow me to explain why. When a salesperson sells a home for $300,000 the selling agent receives a commission of approximately 1.5%. That equates to $4,500. If they sell the same house for $310,000 - the commission bump is only $150. The difference to the owner is huge, right at $9,400. The question really becomes; how much effort should the salesperson put in for an extra $150? But if the realtor is selling their own home they get the whole ten grand. (Want to check the facts? You can read the whole story on pages 5-8 of the book.)

So how does a company control the pricing process?

Step One

Create a matrix of products and services you provide. This is a great group activity for your next sales meeting. Then evaluate your competitors against this list. Be specific, what are the strengths and weaknesses of each of these competitors compared to your own. Revisit the list and talk about the financial impact your competitive strengths have for specific customers.

Step Two

Establish system pricing confidence. Confidence is built only when prices are cross-compiled by customer type, product type and pricing sensitivity. Salespeople and their customer service counterparts entering orders must be able to trust that system prices are both fair and accurate.

Step Three

Set up a pricing process which creates a natural "dwell time" in establishing prices. Take away the salesperson's ability to quickly cave to discounting requests. Set up an approval chain for all discounting. When pricing questions arise, sellers must seek approval before lowering the price.

This short interruption in the selling cycle allows the salesperson to rethink the situation and avoid discounting pressures. The time can be spent rethinking the real competitive situation.

Step Four

Apply a scientific process for matching gross margin to customer value. Distributors have struggled with this task for years; the concept of "Matrix Pricing" goes back several decades. The problem with the concept is its overwhelming complexity. Think about this for a moment. A distributor with 2,000 customers and 4,000 SKUs generates over 8 million pricing permutations.

The whole thing is just too complex for a person to accomplish manually (even armed with the best Excel skills on the planet). To be successful requires the use of a sophisticated computer algorithm.

Step Five

Build a mechanism for measuring sales performance against use of the optimized system pricing. A "Ratio of Attainment" indicates the percentage of transactions where price is discounted from the system norm. Things work better when a management scorecard/dashboard measures the number of discounted invoices by salesperson, branch or region.

Share the ratio of attainment with salespeople, branch managers and others. Point to the potential revenues to the company and additional commissions missed by not following the process.

What happens when these steps are followed?

After a number of in depth interviews with clients using the process provided by Strategic Pricing Associates (SPA), some natural conclusions can be made. SPA driven distributors typically are adding two full points of gross margin to their business results.

Ponder this. Two points of additional margin provides a massive impact to the distributor's bottom line. Because margin increases largely fall straight with no extra incurred costs for expanded warehouses, delivery vehicles or new personnel, the distributor reaps huge benefits. To paraphrase a comment from several SPA clients:

"There is no better ROI anywhere in the Distribution."