It’s no secret that pricing has always been a critical business lever in wholesale distribution. On top of being in a relatively thin-margin business, distributors are forced to navigate a unique amount of complexity to get to an ideal pricing model.
Selling many different items from numerous suppliers to a wide range of customers creates an environment where distributor sales teams can’t possibly know the ideal price point for a given sale on their own. Even worse, the economic and supply chain swings over the past few years have exposed flaws and gaps in many distributors’ pricing systems that prove to impact profit significantly if not addressed properly.
As Epicor’s strategic pricing partner, SPARXiQ has worked with countless distributors over the years to improve their pricing systems to simplify pricing management, align pricing with market levels, and maximize margins in the process. In this article, I’ll share best practices that leading distributors use to get the most out of their pricing system in their Epicor Eclipse and Prophet 21 ERP platforms.
Tip #1: Treat Pricing as a Top-Down, Company Wide Function
Companies with strong strategic pricing disciplines start at the top. While it’s easy to see reasons why IT teams, purchasing, or even dedicated pricing managers might be tasked with leading pricing projects, doing so can prove very difficult.
Instead, build a cross-functional pricing committee that includes players from the executive team, sales leadership, marketing or product management, finance, IT, and of course pricing. Without giving each of these functions visibility and involvement in strategic pricing decisions, organization-wide buy-in and trust of the system is not likely to happen.
Notably, the executive team must lead the charge and ensure that each function in the organization understands its role and responsibility in the success of the pricing strategy. While a well-designed pricing strategy doesn’t necessarily create a bunch of extra work for everyone on the team, awareness and clear messaging is still critical.
Tip #2: Use Customer-Specific Pricing Responsibly, and Manage it Closely
One of the ways companies initially try to formalize pricing for different customer and product scenarios is to set up customer-specific pricing records, or CSPs. These are pre-determined price points or pricing libraries that are available to certain customers, which are generally used to provide discount levels appropriate for key customers and opportunities.
Where CSPs sometimes go awry is when they are misused or overused and become an administrative challenge.
To get the most of customer-specific pricing functionality without having it become a burden, be sure to set CSPs up right in the first place:
- Include only the necessary products or product lines rather than entire catalogs of products; lower-volume and lower-sensitivity products should be priced using a standard matrix
- Structure CSP records as discount or margin percentages, rather than fixed-net prices
- Set expiration dates so that the preferred pricing offered to customers doesn’t become a “permanent price override”
On an ongoing basis, be sure that your pricing team and sales team collaborates in a periodic review process to ensure that CSPs aren’t viewed as permanent or untouchable. Best-in-class companies review CSPs for utilization, revenue, and margin performance on a quarterly basis, but even a semi-annual schedule can work wonders compared with letting CSPs go unchecked for too long.
Tip #3: Segment into the Right Number of Customers
Your wide range of customers buy products from you for different reasons and vary in price sensitivity as a result. To properly reach an appropriate market price for each customer, it’s critical to segment pricing for different customer types based on how and why they buy from you.
When we initially engage distributors to support them in building an optimized pricing structure, we find an impressive range of customer segments. Some companies treat all customer types the same and may or may not have different tiers by customer size.
Others segment into just two or three segments. On the other end of the spectrum, we’ve seen companies that had dozens of customer segments.
So what is the right number of customer segments for your business? It depends, of course. For companies who serve just a few categories of customers (residential contractors, commercial contractors, and end users for example), maybe just a few customer segments are appropriate. If your business has additional complexity with industrial customers, OEM, resellers, or any other types that are buying your product for very different reasons, you’ll want to account for those by adding segments accordingly.
SPARXiQ Customer Success Manager Marshall Lehr has an extensive background as a pricing manager in distribution prior to joining our company. His advice? Keep it simple. Marshall advises our clients to “use as few customer types as possible, but as many as you need.”
Tip #4: Segment Customers by Size, in Addition to Type
Now for the other side of the coin. It’s equally important to segment your customers by size. Again, we find that many distributors segment customers and assign pricing libraries by either customer type, or customer size, but not often both. Both, in fact, is the right answer.
Adding a dimension for sizing customers to your pricing matrix uncovers additional margin opportunities in your smallest customers, while maintaining maximum competitiveness for your key accounts and larger customers.
Determine where the appropriate size thresholds are for different tiers of customer within each type, as shown in the graphic below. The largest customers of some customer types may be much smaller than others, and that’s okay. Appropriate tiers will reflect the potential of each type of customer and provide ideal pricing standards for customers whether they’re tiny, huge, or somewhere in between.
The Epicor Strategic Pricing Module, an add-on available for both Eclipse and Prophet 21, makes classifying customers and assigning pricing standards as easy as possible, even when setting up a more sophisticated pricing matrix.
As part of our companion data services for Epicor Strategic Pricing, we provide initial customer size recommendations based on our data analysis, but customers can certainly be reclassified as needed. One thing to be careful to do is size customers based on their actual purchase potential as your customer, rather than their perceived size in the marketplace.
Here is a simple example of navigating a customer sizing dilemma. A major corporation that everyone recognizes has a small manufacturing plant in your company’s geography. While it’s tempting to be swayed to provide that company with the most aggressively low price points, you will want to size that opportunity based on the true spend potential that’s available to you, rather than based on the size of that corporation’s global presence. If you underprice in an example like this, you will likely find that company will “cherry pick” you and purchase ancillary or add-on items where your extremely low prices make sense, but not necessarily the high-volume items you desire to sell more of.
Tip #5: Account for Cost to Serve by Adjusting Customer Size
Once you have a matrix that properly and reliably adjusts pricing based on customer spend potential, there are some additional creative things you can do to adjust for market realities. One example is adjusting customer size ratings, at times, based on customers with high costs to serve.
We all have had customers that required (or insisted on) additional levels of support or customer service. Maybe they place a high number of small orders daily rather than consolidating them. Or they call Customer Service more often than most with difficult requests. Or maybe they expect to be treated to a night out at a Major League Baseball game at least once a year.
For customers with higher-than-usual costs to serve, it may make sense to adjust their customer size rating down a notch. A “large” customer that is costly to serve could be re-classified as a “medium” customer and you could recover some of those costs by capturing a bit more margin in the lower sensitivity items sold to that customer.
While SPARXiQ’s Platinum tier of analytics offers Epicor users a better, more accurate way to factor in cost to serve in pricing calculations, this small “hack” may prove useful even if you have a basic matrix in place.
Tip #6: Segment Products for Pricing Purposes
Every distributor has products segmented in some way in their Epicor platform. Some companies segment solely by vendor. Others adopt the additional layers of segmentation provided by their suppliers (OE vs. replacement parts, for example). Companies that have structured their product groups based on how buyers buy them, however, are best prepared to optimize pricing.
Pricing should always be buyer centric. That is to say that your pricing system should be built around your customer’s buying behavior, rather than basing it on the way you purchase them or stock them. With that in mind, be sure that your product groups are organized with an appropriate number of similar items grouped together
Overly simplistic customer segmentation often leads to the same margin standards being applied to items that can be very different, which leads to underpricing lower-sensitivity items and missing out on profit opportunities in the process.
On the other end of the spectrum, sometimes vendors provide extremely granular hierarchies of segmentation that leaves only a few items in a lower-level product group. Organizing your product master file this way requires additional administrative effort and doesn’t allow a pricing analysis to have a rich enough data set to work with.
Tip #7: Take Advantage of “Puffing” Functionality
The Epicor Strategic Pricing module has a secret weapon that yields significant benefits for practically every distributor, even those who have disorganized product segments (see tip #6). This is its strategic costing, or “puffing,” ability.
What is puffing? It’s strategically adding small premiums to the cost or list price of specific low-sensitivity items. These padded costs on long-tail items help companies meet market price levels, easily add margin, and correct for higher costs to serve. When applied strategically at the item level, puffing is a great way to achieve product-level strategic pricing even if your product segmentation is not optimal.
How does it work? The SPARXiQ price sensitivity analysis applies what we call “coreness” ratings to each item based on as many as twelve factors identified in customer buying patterns for that item. Those coreness ratings then inform how much additional premium is applied to the cost (or list price) of the item as it’s calculated into the pricing matrix. Best of all, you have the ability to adjust standards about how much premium is added at the global level, which informs the relative adjustments at the item level. Easy management and maintenance steps allow you to strategically price products even if your product hierarchy needs work.
Tip #8: Strategically Price Non-Stock Items
Many distributors generate a sizable amount of their revenue by supplying customers with items that they don’t stock in their branches or distribution centers. This is an important part of many businesses, but one that can be a profit drain if it’s not accounted for in a pricing strategy.
Items that aren’t stocked can represent just as wide a range of items as those that are kept in inventory. Non-stocks can include items that are fairly commoditized, as well as larger equipment purchases, as well as add-on items and replacement parts. In fact, a lot of non-stock items are specialized and not commonly purchased, which is why they aren’t stocked to begin with.
For these reasons above, it’s important to not apply one-size-fits-all pricing standards to non-stocks. We find that many companies treat non-stock items as though they’re highly competitive and can’t be sold with much premium at all, when that’s not the case.
Just as you do with stock items, be sure to place appropriate premiums on lower-sensitivity non-stock items. Place them into the product hierarchy in a way that they can pick up appropriate multipliers and differentiate margins as needed. After all, these items are generally more costly to serve and you should be able to make margin on them.
Tip #9: Build in Premiums for First-Time Sold Items
For many distributors, a surprising number of products sold each year are new items. These could be new versions of existing equipment or parts, or just a new line of business that had not been a focus previously.
Pricing new items strategically can be an obvious challenge, as these SKUs can’t yet be analyzed to understand how price-sensitive they are (or aren’t). Surprisingly, even though the vast majority of first-time sold items are by definition not common items that customers price shop, many distributor sales teams sell these items at lower margins.
The Epicor Strategic Pricing module makes it easy to set default pricing standards for new items based on product groups and customer characteristics. This functionality helps you to “price new items like their brothers and sisters,” as SPARXiQ’s Tammy Leinberger puts it, even if there is not yet enough sales history to evaluate for price sensitivity.
In addition to gaining a few points on margin, setting new items’ margins in the right direction from the first order helps create a stronger precedent for future quotes as well.
Tip #10: Differentiate Freight Standards to Recover Costs
The recent swings in the economy and supply chain strains have made freight costs a hot-button issue. These conditions placed even more pressure on distributors who haven’t consistently recovered freight costs in their pricing model in the first place. Some distributors don’t charge freight much at all, while others apply the same freight standards across product lines and their customer base.
Thankfully, Epicor’s Strategic Pricing module provides powerful functionality to differentiate freight standards by carrier, product, and customer. This means that distributors can add margin to orders based on what carrier is delivering it, what products are being sold, and who the customer is – their type or their size.
Want to add a few margin points to low-sensitivity add-on items? What about small customers who place frequent small orders? The built-in functionality in Epicor’s module helps you do both of these, and more.
Leverage the Power of Your Modern ERP System
Today’s complex and unpredictable economy requires companies to employ pricing systems that are agile, scalable, and data-driven. With the functionality included in the Epicor Strategic Pricing Module for Eclipse and Prophet 21, companies can do exactly that.
To learn more about SPARXiQ’s partnership with Epicor and how the Strategic Pricing Module can support your business, click here.
Simplify price management and maximize margins.
SPARXiQ partners with Epicor to provide powerful integrated price optimization solutions for companies using Prophet 21, Eclipse, and Prelude ERP systems.