Most industrial distributors are looking to gain every advantage they can in today’s market. Whether that advantage they hope to gain is over their competition or over their own past performance, it is important that the leaders of these businesses consider every opportunity available to add as much as possible to the bottom line. Warehouse automation, transportation negotiation, and Lean practices all show up in operational goals to drive efficiencies, but often distributors overlook the thousands of chances a day they have to instantly increase profitability: every time a price is agreed upon in a sale.
Stop Discounting Blindly
Sales professionals are often awarded a great deal of room to negotiate prices with their customers — and they should be. After all: they know the customer better than anyone else at the company. But salespeople often resort to discounting as a way to win – and keep – business, even when discounting may not be the best option for that customer, or even that specific sale.
The best sales professionals know that pricing is an art; that you can charge more for some items, but need to give certain customers breaks on others. These salespeople combine their experience and intuition and try to make the best decision for each sale. But gut intuition is not foolproof.
“It is important to not always rely on gut when running a multi-million or multi-billion dollar company,” says Barrett Thompson, General Manager of Pricing Excellence Solutions at Zilliant. The software that Zilliant and other pricing solutions providers create takes historical sales and customer data, market conditions, and even branch-specific statistics and creates optimized pricing for organizations to rely on instead. These pricing solutions can be configured for an unlimited number of SKUs, customers, and data points to ensure that every selling situation possible is represented, because pricing is a dynamic aspect of business.
“Just like in demand forecasting,” says Thompson, “in pricing it is possible to predict what will happen with specific groups of customers when you change your price: what will the response of the marketplace be in terms of demand or amount of purchase a customer will make with you when you change your price?” Implementing a dynamic pricing strategy allows a distributor to adjust the price when it rewards them to do so, and to hold fast to the current price if raising or lowering it would create an unrewarding response from the customer, like less spend or the refusal to pay a higher price later on in the selling relationship.
“Dynamic pricing is customizing the price to the selling circumstances,” explains Thompson. By adopting a dynamic pricing attitude, an organization can maximize their profit on each sale based on actual data.
Timing Is Everything
The problem with dynamic pricing is that pricing is… dynamic. It changes every day and for every item and with every customer.
“That kind of complexity is impossible for any human being or team of human beings to manage manually on their own,” says Doug Fuehne, VP of Strategic Consulting at PROS, a company that harnesses big data to help salespeople make pricing decisions. He’s right: the speed of business is too fast today. Salespeople need to have the data at the ready to make pricing decisions now, not a day from now. “Just by having the information available at their fingertips, salespeople were able to get the time to quote down from a couple of days to a couple of hours, and that was really impactful because they were finding the first good price out there would win a deal, not necessarily the best price,” says Fuehne. “In using software, salespeople on the front line can understand a range of pricing for every item and every customer.”
This range of pricing from PROS includes three touch points: an Expert Price, the one that experienced sales professionals should be aiming for; a Target Price, where all salespeople should be aiming on an average sale; and a Floor Price, the price at which all sales people are trained to walk away. “This three-point band is very familiar to salespeople,” says Fuehne. “The band engages competition, and gives easily-identifiable benchmarks for new sales professionals as well.”
Without measurable data, how does a sales manager know when a salesperson is discounting at the right level?
“If you don’t have a forecast or prediction of price response, one of two things is happening,” says Zilliant’s Thompson. “Either you are leaving money on the table, or you are over-discounting and giving away more price than you need to to close that piece of business.” When it comes to sales management, pricing solutions software can help supervisors manage more effectively by giving them hard data to reference when discussing discounting with their salespeople.
For managers whose employees are using pricing software, they can pull reports for individual employees, branches, and regions, and make sure that the data is stacking up as it should. “We have seen sales managers who are able to hone in on when salespeople are too often hitting that Floor Price, enabling them to coach their reps and branch managers away from the deep discounts,” says PROS’ Fuehne.
Those deep discounts often coming into play when salespeople are rewarding customers for loyalty. Thompson encourages managers and salespeople to re-think what loyalty actually means. Is it that they have been a customer for a long time, or are they actually exhibiting good buying behaviors? This could mean placing large orders less often to save the distributor shipping charges, or the willingness to pay market price for items rather than expecting discounts all the time. “If managers and salespeople can agree on what good buying behavior is, then they should be able to reward it in a way that is most beneficial to customer and distributor,” says Thompson. “The nice thing about pricing solutions is that, over time, good buying behaviors emerge as easily-identifiable patterns and can more easily be quantified and rewarded appropriately.”
He adds: “There are many degrees of goodness — a whole spectrum. And we are able to customize the price across that spectrum.”
Lest salespeople think their agency in the pricing conversation will disappear entirely with the implementation of pricing software, Thompson makes it clear that dynamic pricing does not take all the control away from sales. Instead, it gives them all the information they need to make the best decision available. Salespeople and their managers retain the ability to tweak the prices as needed, but to do so with as much knowledge as possible at the beginning of the conversation. “Sales can choose to deviate from that recommended price if they feel it is the right thing to do in that selling circumstance,” notes Thompson.
The beauty of dynamic pricing, says Fuehne, is that it sets salespeople up to make the best decision possible. “When you have low gross margins, that translates into even lower net income margins,” he notes. “If we can drive a one percent or greater change in pricing based on data, that is going to do amazing things for distributor profitability.”
In driving greater profitability on the front lines of the business through dynamic pricing initiatives, distributors can boost their margins and help to avoid eroding the gains made in other areas of the business.