Pricing has always been an important business component for distributors, and it remains to be a focus area for continuous improvement. Many distributors leave pricing decisions to their sales teams or some combination of sales and marketing or product management. This common strategy for profitability is inconsistent and reveals its flaws over time. Others evolve to more mature companies by putting some basic pricing practices in place on their own.
If you’re like many companies, you are trying to put the best pricing system in place that you can with your existing personnel and resources. To take the next step, you might consider working with a third-party resource that offers expertise in facilitating strategic pricing. But which is ultimately best for your company: DIY or outside expertise? In this article, we’ll weigh the pros and cons of handling pricing internally versus externally.
DIY: The Reality of Distributors Managing Their Pricing Internally
Many distributors opt to manage their pricing in-house, relying on the perceived expertise of leadership and the sales team. Companies believe they should be able to master pricing themselves because they also believe their sales leaders are experts in understanding their customers and markets.
The existing belief system
Distribution companies believe that their sales team has specific insights on market dynamics and where the organization needs to price customers based on their direct experience with them. Some companies believe pricing within their industry is more straightforward and driven by competition or manufacturer price lists with little opportunity to deviate from established pricing.
Adopting price initiatives
Distributors tend to overestimate their customers’ sensitivity to price and underestimate their ability to get paid for the value they are bringing to those customers. Often, their sales teams are more vocal and difficult to get on board with the idea of raising prices than customers. They don’t believe strongly enough that they are bringing value to customers to allow them to differentiate themselves from competitors.
The struggles with strategy
The most common struggles are a lack of strategy around margin management and an unwillingness to commit to a margin improvement effort. Too often, the focus is primarily placed on growing sales. Likewise, the compensation structure, based on revenue, drives low-margin behavior and sellers tend to avoid the risk of losing any customer revenue, even if it could lead to an overall higher profit for the company.
Third-Party: Why Should You Consider Working with a Company to Improve Your Pricing?
Pricing directly affects your bottom line, which means it’s important to set a solid foundation for growth.
Rectify your contracts & special price agreements
Contracts and SPAs account for a generous percentage of revenue for distributors, but end up draining profitability over time because of poor pricing practices. Often, individual product price sensitivity isn’t factored into contracts when discounts are applied. Contracts and SPAs may not even be reviewed to adjust prices as costs increase over time, which means a company can easily leave money on the table with every renewal. Working with a third party to provide deeper analysis and management tools benefits a distributor’s business long term.
Make strategic strides in the market
Working with a third party to manage your pricing enables you to implement strategies that set you apart from your competitors. For instance, when you identify major customer types and product families as target, core, or non-core, you’re able to develop specific operational plans to manage your groups of customers and products. This allows you to better manage the accounts and optimize your pricing, lower COGS and CTS, improving your mix and share of wallet (SOW).
Turn margin loss into profit gains
With many distributors selling a large number of new products, and new customers, each year, it’s difficult to know how to price new transactions. The sales team generally hasn’t captured any patterns from customer buying behavior for new pieces of business. To ensure they make the sale, sellers historically underprice new customers and new products. Employing predictive pricing analytics can allow you to more appropriately price new, and often small, customers and specialty orders to maximize your margin in an area where many companies lose money.
What are the Pros and Cons of DIY Price Management?
Pros of DIY
- Control of scope and method of analysis
- Predictable cost (limited risk of major increases or swings
- Can have better understanding of what is happening with the business or industry to trigger changes; someone in the business living and breathing pricing every day
- May currently have a dedicated role to do this and expect them to handle this
- Reduce reliance on outside firms
- Like the ultimate accountability of continued employment
Cons of DIY
- Usually takes longer to refine pricing with lots of trial and error
- Difficulty navigating large data set
- Internal employees often have limited experience and perspective
- Opportunity cost of moving high quality resource away from other roles
- Most businesses lack experience rolling out pricing initiatives
- Change management is one of the most principal elements of a successful implementation, and difficult when managed solely internally
- Need to have/find an individual for the role with the right mix of analytical, communication, and strategic thinking skills
What are the Benefits of Working with a Third-Party Pricing Company?
Working with a third-party or external source to manage your pricing involves delegating a task that allows you to focus on your daily operations (and even alleviate those day-to-day tasks). Three notable benefits of choosing to partner with external experts are the experience, speed and change management guidance they deliver. A third-party resource or company can see the bigger picture to help you form a pricing strategy that best fits your organization, and then work with you to successfully execute it.
A third-party company that has worked with many similar organizations knows how to execute this type of project and how to overcome the typical challenges and roadblocks. They can also guide your company to better refinements of product and customer data groupings, which results in a better-quality output, based on their unbiased perspective.
A third-party company can deliver a data-driven price improvement program that significantly impacts the bottom line by one to four percent in as little as 30 days and typically within 90 days. Not only do third party experts have more sophisticated ways to manage and analyze the data quickly, but they have dedicated teams who have successfully executed similar projects countless times.
High quality, timely and targeted communication is a critical success factor, both internally and externally (where appropriate). A third-party company helps their clients plan, prepare and execute those communications. They also provide training to assist customer-facing employees in better managing conversations and negotiations with their customers.
What’s the Best Price Management Plan for Your Business?
There are a number of key considerations when deciding to work with a third-party company versus managing your pricing through DIY methods. The financial costs of adding employees and investing in technology may outweigh outsourcing the task of pricing. Working with a company who specializes in price optimization sets your business up for improved profitability, delivering faster results often in a matter of weeks or a few months. Experts in pricing understand the price dynamics in the industry and know where you can charge more than competitors.
SPARXiQ provides ongoing support, including regular performance reviews and a web-based measurement tool to continually measure and ensure you can maintain and improve performance. We’re here to help you get more out your existing pricing efforts.
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