ROI from Your ERP
When it comes to ERP systems, wholesale distributors have some unique needs. For this reason, distributor ERP systems provide specific functionality that is tailored to these businesses. Some systems emphasize the ability to control inventory because of the correlation between generating profit and inventory turnover. Others focus on data access, reporting, and presenting a 360-degree view of the customer. Many systems allow the business to pull a variety of data into reporting to gain deeper insights and foster better decision-making. Ultimately distributors are in business to make money, so your ERP system should also be able to report on profitability at multiple levels, such as the product-level or the client-level.
While these functions are quite valuable, many companies have found significant ROI by leveraging the power of their ERP data to enable dynamic, algorithm-driven pricing. Thoughtful price optimization can be the most critical lever for distributors who wish to increase profitability. Our clients generally gain 200-400 basis points of bottom-line profit. It’s hard to find other distributor business initiatives that can make that much of an impact.
Balancing Gain and Pain
Unfortunately, distributors historically have had mixed results when implementing dynamic pricing approaches. Some knock it out of the park while some experience significant friction. After all, pricing initiatives can require massive dumps of ERP data and reporting, data cleaning, IT resources, a task force, executive sponsorship, sales training, and about several months to see the desired ROI.
Indeed, it takes effort to do pricing projects well. We know this because we’ve guided hundreds of customers down that road over the years. We’ve also talked with countless companies that came to understand that a full pricing project was not right for them at that time, likely due to the work involved.
Thoughtful price optimization is the most critical lever for distributors who wish to increase profitability.
Let’s walk through some of the nuts and bolts of pricing so that we can understand why it is so complex. Generally, the price optimization process works like this:
- A year’s worth of transactional data is pulled from the ERP
- The change management team is formed
- Data is verified and confirmed
- SKUs are organized into buckets based on price sensitivity
- Possible premiums are suggested for less-sensitive SKUs
- The client gives feedback
- The executive staff gives its blessing
- The entire pricing matrix is reconfigured
- The lists and ERP are updated
- The organization is trained not to apply the same margin on all products
- The sales manager is coached
- The sales team is retrained in negotiation and communicating value
- 90 days later, the client starts to see results
While that sounds like a lot to take on, the results are significant when the project is executed well, as I mentioned earlier.
Certainly, some distributors can take on a pricing project and execute it effectively. However, we also understand that there are some companies who lack the time or resources to commit to traditional end-to-end pricing optimization. As Director of Customer Success at SPARXiQ, it’s my job to make it possible for companies in both categories to realize a significant ROI through strategic pricing.
Reducing the Pain
For companies who would prefer not to dive into a full-on pricing project, but want to find profit potential through their ERP, that means that we find a “middle way,” as my colleague Gregory Smith calls it. We’ve developed a solution – Switch™ by SPARXiQ – that does just that; we help clients realize a sizable percentage of the gains with significantly less headaches.
Essentially, we ask for a year of transaction data from your ERP, analyze it and suggest where to add slivers of margin where the easiest profit opportunities are. Our analytics reveal these based on our years of studying distributor transaction data. We identify certain ancillary products that generally have unique cost to serve factors that aren’t accounted for. Conveniently, these products also tend to be insensitive to slight price increases. Careful adjustments to these products can deliver results with virtually no friction; we almost never target high-volume, sensitive products.
After we provide recommendations, the client then takes a few days to review and confirm adjustments before turning on the Switch™ plug-in within their ERP system, and that’s it. The sales team is instantly able to create quotes with the new pricing, so there’s no additional training or change management. The client starts seeing results in about 30 days. It’s the “easy button” for pricing.
Best of all, the results. Clients who are using Switch™ have boosted their profitability by 1 to 2 margin points — an increase in net income of 20 percent or more. It’s possible to achieve sizable results through less investment and less effort. How’s that for ROI?