Pricing Professional – The time has come

By Frank Hurtte

Over the past decade, modern distributors have implemented massive organizational change. Most were driven by customer needs and market demands while a few others were based on shifts in the behavior of our supply partners. But, I believe the time has come for us to consider our own needs. The time has come to build a position which benefits the shareholders of the wholesaler.

For the next few moments, let's review some of the new positions and faces around most distributors.

Enter the Professional Salesperson

Based on any objective view, salespeople have become more professional. Rather than the back-slapping, good ole boy relationship builders of our fathers' day, salespeople are positioned to add measurable customer-focused value. Instead of carrying stacks of catalogs and the latest jokes, today's sellers bring technical knowhow and professional problem solving skills.

Distributor sellers manage their calendars better, orchestrate teams of support people and often understand bits and pieces of the customer's business better than the customer. In many instances today's seller has a technical degree and on-the-job experience equal to any of their customers. In most situations, customers see them as peers, and in the best of cases as a trusted professional advisor.

The inside sales group has evolved as well. Without great fanfare and sometimes without notice something happened back in the 1990s. The inside department morphed from its traditional role of training ground for outside sales recruits and elephant's grave yard for folks who couldn't make it, to a professional team focused on assisting customers in their selection of the right products for their applications. Today, distributors search for high caliper people who can contribute to the selling effort from the inside position. The job isn't necessarily a stepping stone or a training slot; it's a profession with compensation and status levels designed to attract the right kind of people.

Based on research for "The Distributor Specialist: Customer Champion, Profit Generator" in 2007 over 70 percent of all distributors employed a specialist. For most the position was a new add. These product specialists armed with in-depth knowledge of new technologies are viewed as highly professional. And their abilities to steer customers through complex decisions before and after the sale often impact the customer's own decision making process.

Clearly all of these customer facing roles make the distributor business look different than early in most of our careers. But, changes have not been limited to the customer facing side.

In a combination back office and customer side move, distributors have upped the professionalism of their warehouse and logistics teams. Customer tolerance for shipping errors has dropped to nearly zero. The cost of fixing shipping and the resulting billing errors has escalated. In response, many progressive distributors have both installed barcode/location systems and raised the wages they pay "out back in the warehouse." It's not uncommon to see warehouse managers with backgrounds that include years in a manufacturer's central distribution center. Further, the distributors establishing professional systems in the warehouse report improvements in efficiency of their operation.

Why the improvements?

Distributors rarely do anything without cause. In all of the instances defined above the changes have been gradual and designed to meet market dynamics. And, because making each step in a more professional direction equated with a good return on investment to the distributor.

Now is the time to consider creating a new professional. The Pricing Professional.

Many readers may be thinking, "I already have a pricing person." However, a closer consideration of activities performed by this person has more to do with loading cost-centric pricing into the ERP computer system and very little do to with setting a companywide official price for the products going out the door.

Considering the concept of matrix pricing was a major topic of discussion during my very first distributor management training in 1991, one would wonder why the pricing profession didn't evolve further over the past couple of decades. Reviewing hundreds of distributor organizations, experience dictates the following:

  1. Many 'customer sell prices' are not maintained on distributor's ERP systems encouraging sellers to use cost up pricing.
  2. Cost up pricing generally settles on some 'magical' number which often does not reflect the value provided by the distributor.
  3. Distributors lose mega bucks because their sales team neglects to consider incoming freight and other acquisition costs on specialty lines.
  4. The wholesale industry struggles with eroding margins.
  5. Most distributors don't really know if the margin erosion phenomenon is a product of the economy, the market or their own actions.

At the same time, the typical Strategic Pricing Associates' client gains two points of additional margin often impacting their bottom line by over 50 percent. Many clients drive even more gross margin improvement. Armed with this justification, there is economic reason to devote some thought to the need for a pricing professional.

Assuming there is room for pricing process improvement, let's look at the current state of the current pricing person.

Until now, there was little training for "the pricing guy." Often, they come from one of four backgrounds, each with their own special set of issues. Let's take a moment to explore the strengths and weaknesses of each.

  1. Inside sales guy moved to pricing administration - The inside salesperson typically has some understanding of how the sales process works. However, they often lack the clout with outside sellers to push back on pricing decisions. Worse yet, they sometimes are calloused to the cost up pricing techniques which push margins in a negative direction.
  2. The IT department staffer assigned to pricing - Information Technology skills generally allow this type of person to easily pull data and reports from the system and upload new pricing files. What they lack tends to be good commercial understanding of customer situations. Speaking in broad generalities, many times they have almost no previous experience 'holding their ground' against more aggressive sales personalities.
  3. Purchasing people migrated to pricing authority - When moved to a pricing role, people with purchasing backgrounds often have no clout with the sales team and often shy from the conflict of handling price level pushback from the sales team. Further, in many instances their previous background makes it easier to focus on the correct buy price rather than customer sell price.
  4. Clerical workers plugged into pricing administration - For many distributors pricing administration is passed to a talented clerical person as a parking spot until some other use of their talent is discovered. Many times the position becomes a game of musical chairs. The chief issue here is this: most clerical types lack the resources and training to actually make decision. Instead, they simply keep number up to date and run reports for someone else within the organization.

Until now, there has been no real training path for the pricing professional. Certainly, consultants are willing to help establish a process but once the consultant leaves, things gradually slide back to mediocrity; many times initial margin gains are lost and the process must be reenergized.

Six Sigma Master Blackbelt Greg Preuer, of Strategic Pricing Associates has designed the first course designed to apply time tested Six Sigma methodology to pricing. Those who study with Greg will learn not only how drive the pricing process but how to sustain the gains and automate the process. They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement. They will learn each of the following steps:

  • How to design and design goals which are consistent with their company's pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

Is all this worth the effort?

Imagine what two additional points of margin does for the typical distributor. In an industry were financial returns hover in the three to four percent range, adding an additional two percentage points increases profitability by 50 percent (or more). What's more in an industry where companies are valued as a multiple of earnings, these extra bottom line results increase the company value by the same factor.

I think it's worth the effort.