Corporate success, for many, is typically defined as sales success as sales revenue is an easily identifiable, and discussed / shared, metric. But in a quest to grow sales, and due to competitive pressures, gross margins for many distributors have eroded making gross profit dollars scarcer for investment back into the business.
And with operating costs increasing and investment requests accelerating, finding ways to increase your gross margin to impact net profitability is critical for long term success.
Epicor had written a white paper highlighting their observations of strategies that help distributors in their quest to improve profitability … essentially a roadmap.
These 8 habits include:
- Establishing a pricing committee
- Defining a profit margin goal
- Use \”list less\” pricing whenever possible
- Understand that not all customers and products are created equal
- Establish thresholds and approval processes
- Understanding value-added services – and how to charge for them
- Understand how to monetize customer service
- Walk away from unprofitable business
Epicor came at the issue from an ERP company observational trend viewpoint. Not “how” they are using their ERP systems but more from the processes that top performing distributors utilize. You can download a copy of the presentation, 8 Habits of High Gross Distributors, and here is the white paper.
I have added som observations from a strategic and practical viewpoint from what we\’ve seen, recognizing that (admittedly) I’m not a pricing guru … not close. From a corporate strategy, sales and marketing viewpoint we look at pricing strategy through a different lenses and I shared complementary perspectives which are highlighted in this document titled Channel Marketing Group – Improving Distributor Profitability. Topics here included:
- 8 causes of lack of high profitability
- The pricing challenge includes “plugging the leaks”
- The “Whack a Mole” approach and why it isn’t a viable business strategy but is needed (sales is creative!)
- Too many cooks can water down the pricing strategy. Sometimes a benevolent dictatorship is needed … and is needed to force selling vs order acceptance and mediocre profitability.
- The need to identify root cause problems with your margin issues
- The power of decimals and how they can improve gross, and NET, margins by .25-.46% bps
- Overrides and how they cost distributors net profit
- Contract and SPA pricing maintenance
- The current, and future impact of eCommerce on pricing strategies … and the need for consistency across your ordering channels
And let us know your feedback. Our goal is to add to your internal discussions and share some “thought nuggets.”
What is your biggest pricing challenges (or what you see as the industry\’s biggest challenges) and/or inhibitors to improving margins?
Your thoughts, and those of your cohorts are very good, here are just a couple of my comments.
1) Trade Services puts a ceiling on prices, particularly B, C, and D items. Retailers can mark those up 3-5 times cost, difficult for the ED to do so. (Not that anyone would)
2) You have to be adding value and/or be differentiated from your competitors, or you can’t raise prices
3) It’s a must you have a pricing strategy, and someone overseeing that, daily. Our entire channel remains at about the same GP when you look at it over any 5-10 year period of time.
4) Biggest issue, and then opportunity, is our channel has 1000’s of inside and outside sales reps that set prices for their customers, and most think anything above 20% to their best customers is too much.