A Fresh Profitability Approach for Distributors
Leveraging data and powerful analytics, leading distributors have found that price optimization is the most effective way to increase profitability in industries where margins tend to be paper-thin. Unfortunately, there are distributors who lack the staff or resources to successfully implement a strategic pricing project. These companies often cite lack of sales support, shortage of resources, and disinterest in another “IT project”. However, there exists a middle path, a way to get significant profit with less effort and investment.
We sat down with Gregory Smith, VP of Strategic Accounts & Partnerships at SPARXiQ, to discuss a way for companies to leverage their ERP system’s capabilities to boost profitability by one to two margin points without the need for full-scale price optimization.
Distributor Strategy in a VUCA Environment
Gregory, thanks for joining us today. What’s the market look like for distributors today?
Well, we’re presently operating in an uncertain or VUCA (Volatile, Uncertain, Complex, and Ambiguous) environment. Some industries have positive outlooks in the near-term and others aren’t so sure. There are a lot of new marketplace factors for distributors to consider, particularly with the emergence of eCommerce and increasing commoditization.
How do uncertain market conditions like these influence distributors’ strategies?
Honestly, situations like these generally result in many organizations taking a wait-and-see approach to most strategic initiatives. Distributors are often opportunistic when there is a clear path ahead, but take the conservative approach when things aren’t so certain. Taking on a new pricing project to improve margins, for example, is sometimes seen as risky in VUCA environments. Doing it incorrectly can, in theory, result in lost customers and market share.
Margin Improvement with Less Risk?
What can companies do to approach a project like this correctly, to sidestep some of the risk?
First, it definitely takes vision and courage to embark on any pricing project and, in the current climate, I certainly applaud those who take that on. I think we can all agree that pricing is both a powerful and sensitive lever for distributors. It’s powerful because of its potential to raise earnings, but it’s sensitive because of the way it can be perceived by the sales team.
Often, the best first step is to target the areas that can offer the biggest impact with the least resistance. Everyone understands that products have greater or lesser degrees of price sensitivity. I like to use a grocery store metaphor. When we start most projects, we don’t recommend raising the prices of your “milk and bread,” meaning your most popular products. But, if someone needs artichokes for a recipe, then they need artichokes, so they’ll buy them. Artichokes are an obvious example of a product that is less sensitive to price changes. It’s better to find some margin opportunities with artichokes than milk or bread. That’s what we do with our newest solution, Switch™ by SPARXiQ. We use some advanced algorithms to identify the products that are not as sensitive to price increases. As it happens, these are often products that aren’t as profitable in the first place, so it’s a great opportunity to recover some lost margin.
In a distributor’s product offering, it’s not obvious what the best products to adjust are, unlike in grocery stores.
Are your “artichokes” priced strategically?
So, the goal is to selectively choose margin opportunities?
We’ve found that to be a great starting point. The first, most obvious targets are long-tail products or those with a high cost to serve. In order to make our recommendations, we analyze a dozen-or-so criteria to determine where we want to add small slivers of margin. For most distributors, it ends up being 20-30% of their products. We’ll deliver the recommendations in a few days. Then the client lets us know which changes to implement. The adjustments are made via a plug-in to the client’s ERP system. We have integrations into several platforms including Epicor Eclipse and Prophet21. And, since the ERP is where the sales team generates their quotes, there’s no change in behavior for them, which, as a salesperson, myself, is a big deal.
Getting Up and Running
Are you suggesting that it’s a misconception that price optimization is always complicated?
Essentially, yes. There’s no need to immediately commit to rebuilding your entire pricing matrix and re-training your sales team to sell at more profitable price points. Distributors can easily leverage the assets they already have, their ERP and data. Doing it this way doesn’t require full-scale change-management processes. And there’s no heavy lifting for IT; just a few small tweaks in the ERP.
From the client, all we need is simply one year of data, three-to-five days of hands-on work from your team, and that’s it. Within 30 days, your profitability will increase by $100,000 to $200,000 per $10 million of affected revenue. It’s a low-risk high-reward proposition. And that’s just what’s possible by addressing the long-tail 20-30% of products I mentioned.
After achieving these initial results, if they are interested, the client can then expand to full price optimization for all customers and products, correct?
Absolutely. Switch™ is designed to deliver an easy, immediate win. It can be a natural entry point for a lot of companies. If the client wishes to go on a further pricing journey with us, they’ll achieve even more significant results. The next steps into pricing provide more surgical product and customer segmentation to uncover even more margin opportunity.