In Part 1 of the series and collaboration with Modern Distribution Management we covered the “big” changes a leading distributor – MSC Industrial is making to their pricing model.
The latest distributor series I have written with MDM starts with a deep dive into MSC’s pricing changes. After a somewhat challenging 2024, the metalworking and MRO supplies distributor continues to work through a critical web pricing realignment.
Inside MSC Industrial’s Big Pricing Reset – Modern Distribution Management
If you are an MDM Premium Paid Subscriber you can access the full story from the MDM platform by using the link above. P.S. If you are not a subscriber getting one for your company is easy and economical. If you do not have a subscription I thought I would share a few highlights below for our Industrial Supply Trends Readers.
The key takeaway in the MSC Industrial Series on MSC’s pricing reset was clear to see.
- Resetting public mscdirect.com pricing that a Non-On-Account customer sees will improve their business (MSC Industrials with an existing account can sign-in and see “their pricing” today). Prior to MSC’s recent changes “visitors” saw prices that were too high (List Prices) that could cause high cart abondonment rates. When that happens consistently that “visitor” business declines.
- I went deep into how a standard distribution pricing model runs today with examples on how impactful a pricing reset can be for MSC long term.
The analogy I referenced in the article is List Pricing (or what some distributors call 3rd Column pricing) is like a “Block of Ice” that is often highly coveted and guarded by distributors traditionally. That list price margin profile is sometimes twice as high in terms of a gross margin percentage as the regular business. That higher List Price business at the item level helps raise your overall margin profile, and often as a distributor you may treat this List Price business as untouchable.
You want more of that High Margin% business as it helps offset lower negotiated business – Customer Specific Pricing (CSP) GM% that your associates set with the end customer. The List GM% profile helps offset the CSP GM% profile. In a perfect world before we all had a smartphone in our pocket that made sense, but today that “Block of Ice” list price margin business is melting away at rapid rates.
Buyers today have more information at their fingertips to check pricing in real time. If they see you have a price on a product that is $20 because you are only showing them List price, but they can find the same item from a credible competitor for $10 what happens long term? Over time or immediately that buyer goes elsewhere or gets the impression that you may not have “fair prices”.
That perception of not being “fairly priced” impacts the business in many ways. One area that I think is overlooked or not thought of often is the organizational and cultural impact to the business.
I’ll share a short personal story on how lacking “perceived credible prices” can affect a distributor. When I joined HD Supply Power Solutions as a pricing leader in the 2010’s we had a cultural price issue that was affecting the overall margin of the business.
As a first step to find out how bad our cultural problem was, I asked our associates with a confidential survey about their “price” perception. The responses we got from the field selling associates were almost all very negative, and some of the responses were top-level comedy material. My favorite response was this gem “The pricing department has made us “High Dollar Supply” which was a clever use of the HD in my opinion. The challenge was when I talked with our associates many of them were using that “High Dollar” internal joke with each other.
It was perplexing as our overall margin profile (we were a very large Electrical Distributor) was when we compared to our competitor peers was on par. So, how could we be High Dollar Supply when in reality we were somewhat Fair Dollar Supply?
There were many issues we had to correct but the key one was when an associate was writing an order or quoting a customer often they would see a “list type” price for an item they were trying to sell. Now the SKU that looked too high was C or D slowing-moving item, but that did not matter in terms of perception. An associate may be selling the 1″ fitting for X and when they sold the 2″ fitting it was 5 times the 1″ inch fitting for example. In this example, a fitting five times the price of a fitting the next size down was unfair and not a fair and credible price to sell to the customer in the associates opinion.
This perception of prices that did not make sense and were “unfair” and not market level pricing it was a big cultural issue for us. It was negatively affecting employee morale, that we are too high attitude gets conveyed to customers and then….well you can guess what other effects it had on our culture. That we were “High Dollar” supply mindset hurt sales volume, employee retention (I am going to do somewhere else where they will listen to me), and on and on.
I would have to write a book on all the changes we made as a team to change that pricing self-inflicted “we stink” spiral we were in, but we did turn it around.
It took time, resetting pricing, and relentless communication with our associates. MSC Industrial has publicly shared their “pricing reset” journey over the past year. It has not been easy (they have to price 2.4 million SKUs) as the size of the effort is enormous, but they have made progress, and I commend them for the effort.
That “ice block” of high margin list prices MSC is changing has the most intense sunlight on it. The distributor competition and online competitors are not using a List Price model and pricing to take business away. As a wise mentor in this business once said a 50% GM level on zero business is zero GM dollars. Wise advice indeed for every distributor and manufacturer in the Industrial Channel. This does not mean you as a channel leader have to be a Low Dollar distributor or manufacturer to win. With a strong pricing system that delivers proper perceived “Fair or Market” level pricing you can make stronger margins and grow top line sales effectively.
As always, we appreciate your comments and feedback. jgunderson@channelmkt.com
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