You’re Not That Different: Common Pricing Problems Distributors Face
It’s human nature to believe you’re special…to believe your wants and needs, your flaws and failings, and your strengths and opportunities are as unique as the fingerprints on your hand. In a certain way, each and every one of us is special, and yet from a distance we’re all pretty much the same too. Very few of us march so hard to our own beat that we don’t have an army of clones who like what we like and do what we do. And we’re all the better for it.
This notion applies to business as well where every company is the same, yet just a little different. Over the years, each and every business I’ve worked with has taken the time to explain why they’re different from their counterparts. The challenges you might be facing in your company, like pricing for instance, are likely not as unique as you’d think. Most companies in similar industries will ultimately have similar problems, even when serving different markets or different types of customers. And so, if something is implemented that makes a change at one company, the same tactic could make an impact with another company.
When it comes down to it, most distributors struggle with price management and can learn from the successes (and mistakes) of each other. Pricing is an area where learning from the mistakes of others makes all the sense in the world.
What Your Company Has in Common with the Next One
Every business will face the same four problems that they will forever try to solve: growing stable profitable revenues, managing and scaling the costs of operations, setting the right pricing in the markets, and keeping our workforces in line to do the things that lead to predictable and repeatable success. If you have salespeople who price items without structure, or customers whose needs can change with the wind, or logistics costs that seem to rise faster than you can charge for them, or a workforce that does what they feel is right rather than what the company objectives are, then you certainly encounter the same problems the majority of companies face today.
So even though we admit we have our differences, we also have to admit we have our similarities. Our business DNA might be 97 percent equal to our rivals’ business DNA and the three percent can make a big difference, however, it shouldn’t be the only focus. There are lessons to be learned from the successes of our peers, and there are commonalities in the challenges we face. It’s worth learning what others are doing, and why they’re doing it. Instead of taking the approach of ‘that wouldn’t work here’, approach business with a mindset of ‘how can we make that work here?’
What Most Distributors Get Wrong About Pricing
Pricing is an area where most distributors feel their problems are too unique to solve. This is a shared concern among a lot of companies, especially when it comes to pricing. Learning from the mistakes of others may be the first step in the right direction to correcting your pricing problems. There are three reasons why initiatives to improve pricing end up failing.
The first, and by far the largest, reason is not getting buy-in from sales – or more specifically not helping sales understand what you’re doing and why you’re doing it. Too often, a pricing leader spends their focus on making the change, and not enough effort on selling the change.
Salespeople need to understand these three things:
1. If you’re going to strike a certain average in price, then half of your sales must be above that average.
2. You’re only targeting pricing changes for certain business conditions – the least sensitive transactions.
3. The places where you’re going to ask for more price premiums are necessary for the success of the company.
Salespeople must learn the basics of strategic pricing if they’re to prevent their natural instinct of using pricing to sell more and keep customers happy.
The second reason is that the price recovery is focused in the wrong area. Too often companies focus on smaller customers, but if those customers collectively buy products infrequently, then all the price optimization in the world won’t add much to the bottom line. Understand the mix of your business and identify where the best opportunity is, and most often it’s with your largest accounts. Getting a better price on their low–demand items can make all the difference in running a profitable distributorship. Negotiating smart contracts when it’s time to renew should be a critical endeavor.
Finally, you have to get pricing right. Just because an item is infrequently sold and you know price isn’t a driver, doesn’t mean you should add on whatever markup you want. There are limits. Part of any pricing strategy should be finding the ceilings of pricing certain products. And that ceiling might not be list price because the relationship to your cost and manufacturer list price is a complex one; different for every product range within each supplier. You have to carefully monitor the market response to certain price strategies to find where that upper limit is.
What You Can Learn from Fellow Distributors
Because many companies are facing similar challenges as their peers, they shouldn’t let their uniqueness get in the way of trying new things. This means, you don’t have to dismiss an idea because you think it wouldn’t work with your business. Yes, it might be deployed differently, and yes, it might have a smaller or larger impact with a greater or lesser return on investment, but chances are it can and will work. Like anything, all it takes is commitment and time. Your problems are not so unique that you couldn’t take the same path to success other companies have taken before you.
You can learn from the roads travelled by others. Rather than throwing up roadblocks saying our people will never do that, instead ask how did others get their people to do that? There are few problems that haven’t already been solved by someone at this point. There’s no penalty for copying homework, so watch others, speak with the experienced, learn of their journey and start your own a little wiser and more prepared.
A great example of this was the onset of websites. There was a time when some companies forged ahead not knowing if this new technology would ever take off, whereas others watched from the sidelines, unsure if they should join in, dismissing it as a fad that wouldn’t amount to anything. The idea of a computer in every home once seemed silly, and now we have a computer in every pocket. Sometimes, following the pack isn’t always a bad thing as the pack is going to set the destination.
Shared Challenges Present an Opportunity for Improvement
Whether incorporating systems for customer engagement, looking at investments in sales effectiveness, utilizing price optimization software, or refining your operational processes, don’t view your uniqueness as an obstacle that prevents action. Focus instead on the similarities you share with peers and view it as an opportunity to learn and achieve above–average outcomes from your pricing initiatives.
For more information about addressing pricing challenges, check out our eBook that will help you expand margin with a long-tail approach.