Wholesale & Distribution International - Spring 2017 - 17
Business is certainly no game, but there is room for
creativity and experimentation in the pursuit of a winning bottom line.
Let's face it, the business challenges within distribution are numerous and painful
to manage. The increasing number of
customers with widely varying buying
behaviors make optimal price setting difficult; negotiations with your suppliers
can often be tenuous; frequent product
cost changes are common and low visibility into supplier incentive programs is
enough to keep all of us up at night. And
that's just for starters.
In an attempt to drive growth, most
companies rely on the same tried and
true playbook - they pick apart cost. Even
mildly successful organizations commonly try various tactics to reduce costs and
boost efficiencies. And those efforts are
an important component of growing the
business, certainly. But there is another
even more impactful profit lever - price.
Unfortunately though, change in this area
often comes hard, and for good reason.
Setting the right price is done on the
other side of several complex issues.
You're typically dealing with thousands
(or millions) of products from hundreds
(or more) suppliers that may offer many
variations of the same product, good-better-best options, and your own private label options. You'd also like to include service offerings and product bundles where
applicable and you deal with a large number of customers that are both national
and global in scope and represent multiple industries.
In addition, you're also managing
digital disruption with customers who
expect a multi-channel experience, increased pricing visibility and more manufacturers and customers looking to work
direct...and the list goes on. With these
challenges and others, it's no wonder you
are tempted to remain satisfied with the
little profit you have now rather than risk
making a price change.
The benefits of knowing and setting optimal price shouldn't be ignored. Of the
three key profit levers (price, volume,
cost) it's price that can make the largest impact for any organization. In the
revised 2010 version of The Pricing Advantage by experts at McKinsey & Company, which analyzed 1,200 large public
companies, a 1 percent increase in price
levels nets an average of 8.7 percent improvement in profit. Likewise, researchers found a 1 percent reduction in variable costs produces just a 5.9 percent
Additionally, Deloitte researchers
looked at 100 different pricing projects
in 2012 and found companies employing
pricing strategies were able to increase
margin benefits equal to an average of 3.2
percent in revenue, and for some industries the percentage was much larger.
Smart price setting may be complex, but
it's a necessity for customer retention
& business growth. But how do you set
the optimal product price? How can you
gain control of your margins and how
will you quickly gain price and margin
visibility to identify bad deals? Consider
these 4 best practices:
Organize for pricing success: First,
establish a pricing function by setting up a
'pricing council' made up of senior company representatives from cross-functional
areas. Typical organizations include:
q Centralized - All pricing analysis
and authority goes through a single,
central pricing organization.
Decentralized - Each business, functional, product or geographic unit is
responsible for its own pricing without much central coordination.
Center-led organization - A com-
bination of centralized and decentralized, by which a small central
team enforces corporate policies,
runs analysis, organizes meetings and supports business units
or geographies that retain decision-making authority within predefined guidelines.
Build a profitability framework and
utilize a price waterfall: Gain a deeper understanding of where profitability
gains can be found by institutionalizing
the price waterfall concept. With this in
place, you can see the profitability levers
that make up all transactional adjustments between your starting price and
ending point or margin. Your price waterfall should incorporate both your buy side
and your sell side for maximum benefits.
Create pricing strategy maps: Pricing
strategy maps, created at both the corporate and customer level, are a great visual
representation of your pricing strategy
that help managers articulate and execute their desired strategies.
Rely on process playbooks: You can
ensure consistent, repeatable execution
of the above-mentioned pricing strategies with process playbooks, which
could cover such topics as account profitability, price increase effectiveness,
service cost recovery, rebate evaluation
and others. Key elements of a process
q Defining the pricing challenge;
q Identifying and analyzing the source
of the problem;
q Quantifying available opportunities;
q Executing corrective action; and
q Measuring effectiveness. q
Kim Long has more than 25 years of professional experience in the distribution industry
ranging from product management, procurement and pricing. Prior to joining Vendavo
as a business consultant, she worked at
OfficeMax, where she was the senior director of pricing for the B2B business and
was responsible for pricing strategy, profit
management, performance measurement
and process re-engineering.
Spring 2017 www.wdimagazine.com