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Summary: Discover the four key signs that your distribution company’s pricing matrix needs a strategic overhaul. Learn how to identify issues and implement effective solutions to enhance profitability and market competitiveness.
Is your pricing strategy really driving your growth, or is it holding you back in a competitive market? In distribution, where margins are thin and competition is tight, effective pricing can be a major differentiator between market leaders and the companies who struggle to grow. With the post-COVID economic landscape shifting, many distributors are finding that their previously successful pricing strategies need re-examining to find ways to preserve margins while being able to win business in competitive situations.
Every distributor has worked on pricing, but few have truly mastered it as a core competency of their business. If your company is taking a fresh look at your pricing processes as a result of these economic shifts, this article will help you identify clear indicators that your pricing matrix may need a refresh.
Symptom 1: Prevalent Manual Overrides
If your sales team frequently bypasses your pricing system to manually set prices, it’s a clear sign that your current matrix is not aligning with their needs. In fact, if you’ve enjoyed improved margins and profitability in recent years while still pricing much of your business manually through overrides, there’s a good chance that most of your profit improvement has come purely from vendor cost increases.
So, let’s talk about overrides. It is important to empower your sales team with pricing flexibility to win business. However, excessive manual overrides lead to market inconsistency, wasted time, and margin erosion. Leaving it up to salespeople rarely results in optimized price points in the market; they tend to favor lower pricing to secure business, which can harm your bottom line.
Too many companies rely on manual override pricing to price half of their revenue, or even more. But there is hope. Numerous distributors have drastically reduced their override rates by implementing a strategic pricing engine that gives sellers accurate and appropriate pricing for each quote, reducing the need for guesswork and optimizing margins along the way.
If excessive overrides are a concern, consider downloading our free eBook based on a playbook we’ve seen work for countless distributors, 4 Key Steps to Reduce Price Overrides.
Symptom 2: Most Customers Priced Individually
Customer-specific pricing records are another method of pricing that is commonly used by distributors, and every ERP system has functionality to support it. It is a powerful tool for setting appropriate pricing for key pieces of business. Unfortunately, it can be misused and overused, resulting in significant administrative work to maintain the records.
We hear from distributors who have one or more full time employees keeping up with updating these records, sometimes line by line. When you find yourself inundated with customer-specific pricing adjustments within your system, it is likely another symptom that your matrix pricing may not meet the market for specific customer situations.
A more strategic pricing engine can provide your sales team with accurate, appropriate pricing for the majority of your sales situations. That said, the most competitive items sold to your largest accounts do often require special pricing to be set up specifically in the system. And that is what customer-specific pricing records are designed for.
Symptom 3: Your Matrix is Two-Dimensional
For many companies, their pricing matrix falls into the trap of being overly simplistic. A typical distributor’s matrix incorporates just two dimensions, usually one that differentiates pricing by customer tier, one that separates product families. This may work fine for some businesses, but rarely is sufficient in the complex pricing environment distributors face. In distribution, different customers are often buying your products for different reasons and your product families contain items that are more price sensitive than the others.
In order to price accurately and profitably, a more robust pricing engine gets more granular. At SPARXiQ, we generate a pricing recommendation for every sale that considers each of the four factors below.
Type of Customer: Different customer types may respond differently to pricing strategies. Tailoring pricing based on the nature of the customer, and why they buy your products for you (OEM vs. MRO vs. contractor, for example) can yield substantial benefits.
Size of Customer: Large customers might warrant different pricing considerations than smaller ones. Of course, simply pricing on historical spend may not be ideal and may restrict growth for emerging accounts, but you also don’t want your sales team pricing every new account based on the hope that it can grow into a key account.
Product Group Visibility: Assess the competitiveness and visibility of each of your product families. A robust pricing engine should adapt pricing strategies based on the competitive nature of each product family.
Price Sensitivity of Each Item: Within a given product family, individual items have varying levels of price sensitivity. An advanced analysis and statistical pricing engine identify these nuances and adjust pricing accordingly.
To meet the market, your pricing engine must go beyond 2-D pricing and integrate these four dimensions to produce pricing that helps you grow in the market while capturing margin where it’s available.
Symptom 4: You’re Stuck in a Lose-Lose Situation
We often talk to companies who struggle to grow market share while also lagging their industry peers in gross margin. On the surface, this feels like it can’t be true but in practice it happens all the time. This often arises when a simplified pricing matrix relies on broad-brush rules. This situation hinders your ability to compete in the most price-sensitive areas of your market while also failing to extract optimal margins in less price-sensitive customer-product combinations.
We find that most distributors (and especially their sales teams) are overly cautious about capturing margin premiums on less-sensitive items and customers. This not only tightens margins in those situations but also restricts your ability to appropriately discount competitive items and key customers. In order to tilt your pricing system in a better direction, it requires a careful analysis and data-driven targets. Plus, your sales team needs to trust the pricing guidance rather than overriding it (full circle back to Symptom #1 above).
Time for a Fresh Look at Pricing
When facing an increasingly competitive market, it’s critical to verify that your pricing system is maximizing its potential. If you are recognizing any of the symptoms in this article, a retooling of your pricing strategy is essential to improve your market position and your profitability.
Consider adopting a more granular, data-driven approach to pricing. By doing so, you position your company to not only capitalize on margin opportunities, but also to align with the unique needs of your customer base. This strategic shift ensures that you’re pricing accurately and consistently, laying the foundation for sustainable growth.
The right pricing strategy can significantly elevate your market presence while simultaneously boosting your profitability. Take the leap towards a more refined pricing model and watch as it transforms your market share and margin performance.
Strategically price every customer and product.
PriceGPS™ provides data-driven recommendations to help distributors and manufacturers maximize their margins and allow your sales force to focus on serving customers and delivering value.