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Pricing Process

The non-price benefits of a pricing process

For most distributors, the obvious advantage of a disciplined pricing process is the corresponding increase to the bottom line.  Research conducted by David Bauders and Strategic Pricing Associates of Cleveland, Ohio indicates that most distributors see a margin bump of more than two points.  At the same time, examination of the Profit Reports generated by a number of distributor associations indicates the bottom line advantage enjoyed by the “upper quartile” members – those who outperformed 75% of their colleagues - comes from more than “just” a margin advantage.  

We discovered these upper-end players were at the vanguard of distributor organizations using Strategic Pricing Associates data driven pricing process.  We wanted to explore two points:

  1. What non-pricing benefits/advantages have they discovered as they implemented the SPA process?
  2. How has this migrated into the overall company culture?

Recently we spoke with Jay Johnson, President and COO of Plumbers Supply in Louisville Kentucky, in his mind the price related dollars are just the tip of the iceberg.  Mr. Johnson went on:

“We believe that our Strategic Pricing Associates based process is a cornerstone in nurturing customer relationships.  Consistent pricing builds trust.  Nothing is worse for our contractor customers than getting one price today and an unexpectedly different price next week.  When a customer experiences this, they begin to question every aspect of our relationship. Things like inventory, service and programs all flash through their minds.”

And, Jay isn’t alone in his feelings about non-price benefits.  Recently we interviewed John Wiborg, President of Stellar Industrial Supply of Tacoma, Washington.  As we talked about building a pricing strategy, John made this comment:

“The biggest benefits from SPA’s disciplined pricing process come in employee morale and service.  Let me elaborate.  When we centralized the pricing function, it took a lot of the complexity and stress out of our CSR’s life.  When they (the CSR’s) use system price they don’t need to worry about creating long term customer issues.  And, it helps them concentrate on the area they typically enjoy most – solving customer issues.  When we solve a problem, it makes the customer money.  If our price is a little bit more but our expertise creates addition uptime and more customer profit, we feel good.  This translates into better customer service where it really counts.  Further, our quotes are turned around and delivered faster – customers appreciate that because it allows them to be more efficient.  And, the accounting departments of our customers appreciate accurate billing their invoices.   This accuracy has improved the morale of our credit department because they don’t get stuck with disputed invoices that require hours of research and multiple phone calls to correct.”

The Company Culture Piece
Successful distributors don’t sell on price.  In depth studies of purchasing patterns in segment after segment show price ranked in the fourth or fifth slot.  Yet, our sales people repeatedly get “hung up” on this one seemingly low ranked point.  And often price moves to the number one spot in their personal hit parade.

Why?  I believe it has to do with three basic points:

  • The uncertainty of price – Metrics like product application features and delivery times can easily be measured and compared.  Our competitors provide this information to the public and we can easily measure their widgets against our own.
  • Human ego – For sales types nothing has the sting of being told, “Your competitor out performed you.”  When sales people find themselves on the wrong end of the purchasing decision, they immediately look for something else to blame.  Price is a pretty good excuse.
  • Nice Customers – Regardless of what you read, most people are really nice folks.  They don’t want to hurt other people’s feelings (even if they are a quasi-incompetent sales guy); the human ego is a terrible thing to bruise.  Rather than simply say, “I like you.  You work for a good company and you seem like a nice enough guy but your competitor out worked you.”  It’s easier to convey the message – your price was too high. 

Combining this with the human ego above creates an unnatural aura around price.

On the road to building a strategic pricing strategy, distributors face a barrage of pushback not from customers – but from their sales team.  But once the process is launched and the sales team witnesses no customer backlash, experiences no loss of business and sees the uptick in gross margin, these sellers start to feel empowered.  They savor a new found freedom from the heavy yoke pricing had placed on them.

Distributors with a data driven pricing process, know cognitively and empirically - our price is fair.  The data and metrics used along the way give them pricing confidence.  It removes a portion of the pressure.  A new logic embeds itself into their consciousness.  Value is the new game in town.

When sales teams loose an order to a competitor and price is uncertain, there is a strong propensity to blame price and move along.  But, take price out of the equation and the self-reflection is directed at a new more meaningful set of evaluations. 

Questions like:

  1. Is this customer really the type of business best matched to our organization?
  2. Did I really understand the customer’s needs?
  3. Is something lacking in a component of our relationship?
  4. Did my package of values align with the customer’s needs?
  5. Did I properly communicate the value provided with the product?
  6. Does my competitor offer better product, service, delivery, etc?

These questions drive behavior in a direction that promotes positive human and organizational growth. 

Before we go…
Allow me one favor.  Go back and review the first question.  Research indicates that companies who build a process around targeting customers are 47% more effective in reaching their sales goals.  Strategic Pricing Associates is the only organization that provides data rich pricing statistics and a value driven process for improving sales.  Targeting is a natural extension.  And, 47% is a big number.

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