Summary: When evaluating potential projects and initiatives related to your core business systems, zoom out and look at the big picture. Spot fixes and headache-reducers are helpful, but the tools that enable you to thrive commercially deserve your strategic focus.
Each year when we attend ERP technology conferences and user groups, I am continuously impressed with the numerous plugins and add-ons designed to solve specific and common problems. On top of the powerful functionality that comes with a modern ERP platform, these additional service and software providers fill missing gaps and enable distributors to maximize their operational efficiency.
If you’re like most attendees at these conferences, you make the rounds to stay up to date with the latest trends and tech that could support your business. Streamline accounting. Improve your warehouse efficiency. Seamlessly integrate eCommerce. Provide your sales team with actionable insights. Improve your product data. There’s a lot to take in.
Of all the enhancements distributors can make to their ERP system, strategic pricing is the most valuable investment. Why? Because the significant EBITDA improvement that it unlocks can be used to reinvest back into the business and fund technological improvements and digital transformation.
In this article, we’ll discuss how leading distributors see strategic pricing as the most critical capability in their business, and how to get past common barriers to prioritize it.
Pricing Capabilities Make Dollars and Sense
Average wholesale distributors achieve approximately a 4-5% EBIT, which means most would consider them to be thin-margin businesses. Even small improvements to profitability can show up significantly on the bottom line for these businesses. Optimized pricing and the additional margin that results is one of the quickest and easiest ways to generate a meaningful profit improvement.
How? Adding small premiums when quoting less-competitive and less-sensitive sales opportunities can easily provide an extra 200 basis points or more in EBIT improvement. That means a distributor with 4% profitability can elevate to 6%.
Small Improvements in Pricing...
Huge Improvements in Profit.
This improvement is possible because the small premiums put on certain sale prices go straight to the bottom line; cost of goods sold (COGS) and operating expenses don’t change.
Of course, it’s not as easy as simply increasing prices across the board to achieve this improvement. But doing so would compromise your ability to win in competitive, price-sensitive sales situations. That’s why strategic pricing needs to be done surgically, employing a sophisticated customer matrix and statistical analysis of price sensitivity. This is why distributors look to companies like SPARXiQ to support them in building their ideal pricing system.
Price Optimization vs. Other Technology Investments
There are countless technological enhancements available to streamline and improve your business, many of them integrating directly into your ERP system. Whenever we are in conversations with current and prospective clients, we hear about other projects and priorities that are on their plates.
Many ERP plugins and add-on services are design to streamline, accelerate, or simplify everyday business processes. We see IT directors and managers at ERP user conferences and similar events gravitating toward suppliers of these solutions. These typically become top-of-list priorities because they solve hot-button pain points. These solutions usually reduce headaches or make somebody’s job easier within the company.
So what about pricing? Apart from simplifying price management, purchasing a pricing solution doesn’t necessarily reduce any headaches for front-line employees. It doesn’t speed up daily business processes. It doesn’t reduce strain on the systems upon which your business operates. That’s why pricing rarely becomes a top priority for IT and systems managers, unless there is significant frustration associated with pricing management currently.
Strategic Pricing Funds Other Strategic Investments
Who does care about pricing? Senior leaders and executives responsible for the performance of the business.
Implementing a better strategic pricing system significantly improves the profitability of a business, and often provide an ROI of 10:1 or greater, measured in profit dollars. While these executives don’t often attend ERP-related user conferences, their interests should be factored in as IT and systems teams explore system enhancements.
In fact, improving pricing performance can easily generate enough profit dollars to then be able to fund purchases of every other ERP plug-in the IT manager desires, and then some.
Leading distributors recognize the importance of getting pricing right first to be able to fund important technological and transformational investments in the business. As Scott Schuenke, VP of Strategic Development at Sonepar, shared at the recent NAW Executive Summit, “Pricing is where you can have the biggest impact the quickest.” On the same panel, Kathleen Shanahan of Turtle & Hughes added, “It’s all about margin. It’s all that matters in terms of being able to reinvest in and grow your business.”
Side note: it’s a great discussion about profitable growth strategies and you can watch the full recording here.
The bottom line is, there aren’t any ERP enhancements and add-on software platforms that can deliver the business impact and high ROI that price optimization can.
Strategic Pricing is the Fuel for Technological Enhancement
Price optimization solutions may not provide a quick fix to the front-of-mind pain points your IT team faces each day. However, exceling at pricing can transform your business and provide the ability to grow market share, generate significantly more profit dollars, and fund countless other important investments.
When you’re evaluating potential projects and initiatives related to your core business systems, be sure to zoom out and look at the big picture. Spot fixes and headache-reducers are helpful, but the tools and capabilities that enable you to thrive commercially, like strategic pricing, deserve your strategic focus.
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.