In a previous post, I reviewed three common price leaks many distributors experience which significantly drain profitability. In that post, I shared how these three most common culprits can each result in a one-point EBIT drop:
- Pricing overrides
- Cost-plus formulas for one-time sold or rarely sold products
- “Peanut butter pricing” for products within a product group.
While each of these can be extremely costly to a company, overrides are listed first because they’re the most prevalent, and often the costliest.
Why It’s Important to Manage Price Overrides
When salespeople override pricing matrices, they commonly sacrifice about 10 gross margin points versus matrix values. Even worse, that level of discount can bring bottom-line profit on the sale to close to zero, or even into the negative. Overrides indirectly “train” your sales team and customers to have the mindset that price is flexible and negotiable. Thankfully, pricing leaks from overrides can be fixed over time with focus on the analytical, behavioral and systemic causes of these issues and continuous improvement.
Make Improvements by Addressing These Key Issues
A thoughtfully designed price matrix that accounts for concessions and price variances can help combat price leaks from overrides. It also gives your sales team confidence in the matrix and the ability to defend margin when customers apply pressure or negotiate. Remedying key issues can tackle price overrides and contribute to a stronger bottom line.
Train Salespeople to Negotiate Effectively
Knowing that 65 percent of buyers have been formally trained in negotiation, sales teams must be equipped with the right resources to negotiate. Our Negotiation Quotient training program teaches the skills needed to defend margin in all situations, from transactional sales to long-term strategic agreements. Over the years, we’ve seen countless examples of companies who implement strategic pricing initiatives only to have their success hampered by salespeople who bend to customer pressure and tactics. Solid negotiation strategies and skills can prevent this.
In our Tactical & Competitive negotiation training program, we teach sellers specific approaches to set optimal targets, understand buyers’ pressures, counter negotiation tactics and limit concessions. These are very much the cornerstones of a tactical negotiation skill set, and they make a significant impact in reducing the quantity and magnitude of override discounts. With confidence in your price points and the right skills, your team is much more likely to reach target price points.
Monitor Pricing Overrides and Build Better Pricing Matrices
Beyond the sales force behaviors that are creating an override problem, there is also a need for thoughtful and consistent processes to monitor and control the problem. Start with clear guidelines regarding overrides, as well as expectations around which low-sensitivity products and customers (cherry-pickers) are ineligible and/or less permissible. Many ERP systems provide functionality to set and manage these rules, most notably Epicor’s Strategic Pricing Module.
Overrides are a symptom of not only poorly trained sellers and haggling-conditioned buyers, but may also be a symptom of a half-baked or broad-brush pricing matrix. A lot of distributors have pricing matrices that fail to adequately address product-family-level differences in price sensitivity. As an example, standard margins may be appropriate for low-visibility SKUs within the family but may be excessive for the higher-visibility SKUs.
Based on what we’ve seen among countless distributors, pricing matrices that don’t differentiate within product families, at the SKU level, commonly result in overrides up to 30 percent higher than baseline levels. For example, if your baseline override rate would have been 20 percent, poorly tuned pricing matrices could raise that level to 26 percent, costing you 60 basis points (10 percent pricing delta times six percent override-volume delta).
Our pricing solutions for distributors are all designed to evaluate price sensitivity at both the product group and SKU level to control overrides and maximize margin opportunities. Implementing ERP-native tools to differentiate pricing standards within product lines is critical to your success, addressing a key root cause of pricing overrides.
Focus on Behavioral and Systemic Causes of Price Overrides
Aiming higher in price before negotiating and pruning wasteful discounting of low-sensitivity products are critical steps to controlling overrides. Sellers must be trained to reduce the frequency of overrides, make smaller override concessions, or negotiate offsetting customer-share-of-wallet volumes in exchange for pricing concessions. With this knowledge and training, your sales team can perform even better.
As mentioned in the post on price leaks, overrides can represent up to 60 percent of distributors’ revenues. Where competition is intense and margins are narrow, sales teams cannot afford to leave money on the table. The good news is your pricing overrides are a leak that can readily be plugged. Focus on monitoring concessions, establishing firm price matrices and equipping salespeople with strong negotiation skills to achieve win-win outcomes with educated buyers. With the possibility of quarantines and rolling economic lockdowns for the foreseeable future, there is prime time to dig in and focus on combating pricing overrides to preserve your company’s bottom line.
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