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Pricing Process

Innovation’s in the air - Stellar Industrial Supply

Close your eyes and breathe in the Great Pacific Northwest.  Sensory images race through your head.  The splendor of nature like Rainier and St. Helens of the Cascade Mountain Range, the great Columbia River with salmon struggling upstream and tall majestic forests fill your mind.  Great technological achievements seem to sprout everywhere – Bill Gates, Microsoft, Massive Boeing 747’s, sprawling Intel campuses and computerized shipping facilities.  Like mountain fog on a clear morning, innovation drifts through the Northwestern air.

In this setting we find Stellar Industrial Supply - eight locations strategically situated to provide the critical needs of the region’s industry.  It comes as little surprise that Stellar applies technological innovation to their work.  A quick Google search reveals this company has been recognized (repeatedly) as leaders of their industry; including the prestigious 2010 Distributor of the Year Award from Industrial Supply Magazine.

The cover story of Industrial Supply’s January 2010 issue starts with this comment:  “In the old day, distributors maximized profits by increasing sales.  In the current economic climate, margin gains are more difficult to achieve.  Stellar Industrial Supply discovered it’s possible to make incremental margin gains even when sales are flat…”  To us this sounded like innovation worth investigating.

Stellar’s journey to a scientific pricing process began simply enough.  They had pushed their business system provider to help them develop an enhanced inventory management tool.  With over 35,000 SKU’s in place, this was a tough job.  Further, they felt like they needed something that provided more than just a lot of data.  The old “matrix” method tools seemed primitive and the number of SKU/Customer permutations demanded unrealistically large amounts of human intervention.  Stellar wanted help in making decisions – not more data to sort.  

The search for a truly innovative solution culminated in Activant (the maker of their P21 business system) approaching them about participating in the “beta” test of an innovative new program that could address their needs.  The beta program was Strategic Pricing Associate’s Pricing Module.  But as you will discover later, it’s more than just a software program.

According to John Wiborg, Stellar Industrial Supply’s President, the first conversations began in February of 2009 and by June they “flipped the switch and went live”.  One might glance over the four months sandwiched between decision and operation - but to do so would be a mistake.  Some important stuff transpired during this time.

First, Stellar provided SPA with 12 months of invoice data for scientific analysis of things like customer price paid, quantities, dates and other information.  A critical point: the data was transferred using software tools developed by Strategic Pricing Associates to minimize the need for human interaction in the process. 

Strategic Pricing Associates then ran the data through their advanced scientific analysis to recommend a pricing architecture based on customer and product price sensitivity.  David Bauders, SPA’s President has noted, “Our system focuses discounting where it pays off in the market and extracts reasonable price premiums where there is no pricing sensitivity.”  The pricing recommendations were tweaked based on Stellar Industrial’s understanding of the market.

Finally, Stellar Industrial Supply and SPA conducted a number of strategic employee meetings designed to educate sales and customer service people on topics like:

  • How the new Stellar/SPA pricing system worked
  • The importance of fair pricing
  • The relative sensitivity of pricing
  • The benefits of a centralized pricing group
  • Understanding and selling the value of solving customer problems

Based on their well thought out implantation, Stellar felt the positive results of the program by the end of the very first month.  And the results got better and better with the passing of each month.  As customer contracts expired, they were reviewed and more products were run through the SPA process.

The centralized Pricing Department, which is run by a Vice-President level executive, enables Stellar Industrial Supply to learn and identify market pricing trends much faster than ever before possible.  New pricing agreements are now more accurately recorded and maintained.   Customer quotations can be generated much faster.  Cost-plus type contracts have been eliminated.  And, removing the pressure associated with pricing from customer service oriented people has created a positive by-product.

As the pricing architecture rolled along, Mr. Wiborg noticed another phenomenon - an organizational shift.  This cultural shift enhanced customer service and drove morale through the roof.  Here are his words:

“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...”

Best of all, the Strategic Pricing Associates designed process received little or no pushback from customers.  Matching relative pricing sensitivity to customer and product types creates a setting where sellers are less likely to error in their pricing decisions.

The SPA system allows for improved pricing decisions – that result in margin growth of 2 to 4 points.  And, Stellar Industrial Supply has witnessed better pricing decisions.  The culmination of these results comes in the form of additional margins and profit to the bottom line. 

After nearly two years of operation, the pricing system continues to generate additional bottom line benefits.  First, a growing percentage of Stellar Industrial Supply’s business goes through the SPA process each month as the management team and SPA determine additional pieces of business to run through the process.  Further, additional pricing process tweaks continue to improve the margin situation.  And, as new customers are attracted to Stellar Industrial Supply, the system makes an immediate impact.  And, in wholesale distribution, success follows new customers and good margins. That’s innovation. 

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