6 Pricing Mistakes Great Distributors Never Make
With relatively small gross profit percentages, distributors seem more focused on best practices in profitability than companies in other industries. Distributors are constantly seeking advice on what is working well in other companies and trying to emulate it in their own businesses. They say that imitation is the sincerest form of flattery, and distributors are downright obsequious. That being said, how do great distributors avoid making pricing mistakes?
Unfortunately, the strategy of copying what seems to work just doesn’t cut it when it comes to pricing. Just because a competitor offers their products at a particular price, how do you know they got it right? What went into their pricing decisions? Can you trust the feedback of your customers, or are they just trying to get a better deal? Do your sales reps know what price is needed to be competitive, or are they just tired of negotiating?
With these difficulties in mind, I thought it would be fun to look at what the best distribution companies DON’T do in their pricing strategy and how they evade pricing mistakes.
1. Great distributors don’t make data-free pricing decisions.
They base their pricing strategy on deep analysis of customer and product segmentation. That is, great distributors make pricing decisions that fit the business model of each individual company. Using real data to inform their decisions, they can assess pricing for customers based on other, similar customers.
Using “gut feel” and “sales instincts” to price is really just another way of saying that you are guessing. Don’t rely on random feedback from sales reps. Use your sales history and your knowledge of your customers.
2. Great distributors don’t use meaningless segments.
So often I hear about distributors who use seemingly logical customer segments that really don’t get to the core of unique customer behavior. A lot of distributors segment by industry categories, such as residential contractors or repair organizations. Unfortunately, just because two companies fit into the same industry, it doesn’t mean their behavior or pricing concerns are at all related.
Even worse, some distributors use small, medium, and large as a way to categorize their customers. But just because a customer is small to you in terms of their business, they might bring you more business and actually become a large customer if you priced them correctly.
Once you introduce customer segmentation and arm yourself with robust customer segments, you have the ability to recognize which customers you can go after to increase their value to your company. In other words, strong segmentation means that you’ll see how customers, both those that are already highly profitable and those that are less profitable, can all be made even more profitable.
3. Great distributors don’t confuse their customers with pricing.
Do your customers get different pricing if they call different sales reps or if they log onto your e-commerce site? Nothing causes more frustration to a customer than inconsistent pricing.
Nothing causes more frustration to a customer than inconsistent pricing. You want to ensure that wherever your customer meets you, they will have the same price experience.
4. Great distributors limit their pricing overrides.
When you get your pricing strategy correct, your sales reps stop overriding prices. Sales reps who are more confident in the reality of your price levels panic less in their negotiations.
If you have a foundation of solid segmentation and a real strategy for pricing, then your whole team should be buying into that process. They should be driving down overrides because you’re presenting to your sales reps the right price to win the order. And, over time, you should see the strategy working and the overrides diminishing.
If you take your overrides down, you take your profitability up!
It’s important to know, however, that having zero overrides can also be a symptom of a different problem—too low of prices. It’s normal for there to be a few overrides here and there so long as you’re keeping an eye on your opportunities for greater profitability.
5. Great distributors don’t manage pricing with spreadsheets.
Math and manual execution in pricing won’t drive your profits, but they will drive you nuts. Nowadays, it’s nearly impossible to do this all manually. Either you’ll be too overwhelmed by the number of SKUs you need to track, or you’ll miss out on pulling actionable data.
If you’re approaching your customers, product and pricing correctly, there is way too much to keep track of to raise profits through manual processes and lengthy calculations effectively. Spreadsheet tools fail because staying on top of “the right price” in this incredibly dynamic environment is limiting and nearly impossible.
Another disadvantage of manually tracking pricing is that you will never be fast enough. For example, if a supplier increases prices to you, being too slow means that you may be forced to absorb some or all of the cost increases until you realize what it’s doing to your profit. You may need to pass the cost increase along to your customer. If you’re able to respond quickly in your pricing, this should actually be an opportunity to increase your profit.
6. Great distributors have grown past high-priced pricing consultants.
Consultants can get you some quick hits, but many of our own distribution clients have left their pricing consultants because the consultant took too long to give them an analysis, refused to share their black-box methodologies and didn’t understand their customer segments beyond simple categories like small, medium, and large.
What do great distributors do in pricing?
So, what do great distributors do when it comes to pricing and pricing mistakes? They manage their own pricing strategies with state-of-the-art segmentation based on real behavior and perform regular (even daily) analysis to identify the most impactful pricing opportunities with leading tools like White Cup Pricing, powered by epaCUBE. Great distributors make pricing expertise a true core competency.
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