Max Out Margins with Strategic Pricing: 3 Blog Series
By Steve Deist, Chief Operating Officer, Ewing Irrigation and Landscape Supply
Blog 1: The Big Picture
Would you like another point of gross margin? Of course! Improved pricing is a great place to start. But, as we all know, there is no free lunch. If you want to sustain higher margins you need a strategy. By “strategy” I mean taking a long-term, customer-centric perspective rather than an opportunistic, internal, profit and loss view. If your starting point is “how much more can I squeeze out of customers?” then you’re playing with fire.
A sound pricing strategy is based on capturing the value you deliver; it’s not about deceiving or tricking customers. Relying on ignorance or habit is dangerous, especially in today’s information-saturated world. In five seconds, anyone can check your price on Amazon. Sure, you can sneak in price increases on low volume items and get away with it for a while. But at some point, your pricing level will be recognized and you will have to be offering enough value to justify it.
Pricing projects are notorious for showing big margin gains up front that melt away over time. The last thing you want is for a loyal customer to catch you “speeding.” You run the risk that a small gain destroys the trust that you’ve built up over years, leaving you with a suspicious customer who starts scrutinizing every quote. Poorly designed pricing programs have put companies out of business. Well designed, strategic pricing programs have helped many distributors dramatically raise their long-term profitability and enhance their customer relationships.
You can learn more about pricing strategy at my course “Max Out Margins with Strategic Pricing” at the University of Innovative Distribution (UID) this coming March.
Blog 2: What Are You Worth?
In my previous blog on pricing I made the case for starting with strategy. This is not as daunting as you might think. Pricing optimization is largely about finding the customers and situations for which you are not being paid market value for the services provided. You may be over-serving some of your customers, who would be willing to pay more to buy from you. But other customers may be all too happy to switch you out for a few pennies. More effective pricing requires that you can differentiate between the two scenarios and act on these different needs.
It’s important to remember that “market value” is not what you think you’re worth, but what your customers think you’re worth. You may feel that superior technical knowledge at your counter or field sales calls are important. But if a customer chooses to buy from Amazon instead, she is telling you loud and clear that these services are not worth a price premium.
A good way to discover where you are over over-serving or underpricing customers is to search for patterns where similar customers get radically different prices from you. More likely than not, customers at the higher end are paying closer to market value while those at the lower end are being underpriced. Root cause analysis will often show that these situations are the result of giving sales reps too much discretion, too little guidance and/or insufficient information to make good decisions.
This is just one example. There’s a set of proven analytical tools for finding and addressing pricing opportunities. I’ll explain them in my course “Max Out Margins with Strategic Pricing” at the University of Innovative Distribution (UID) this coming March.
You can learn more about the pricing strategy at my University of Innovative Distribution (UID) course.
Blog 3: Reality and Results
When you think of “pricing improvement” what comes to mind? Most likely you imagine a project with lots of data and analytics, maybe involving a pricing consultant or software package. If you’re really sophisticated, you might envision a crawler to pull prices from competitors’ web sites.
Technology can play an important role in pricing, but it may not be the right priority for you. Analytical tools can determine a theoretically “correct” price for a customer or a situation. But we don’t live in a mathematical model. Out here in the real world there are some important practical considerations.
In my experience, most distributor pricing improvements come from fairly simple process changes. Practical things like reducing overrides, managing contracts, and fixing the pricing “leaks” that inevitably pop-up in a complex business. These types of improvements can provide big margin improvements with low risk.
You also need to consider adoption and usage. It’s better to get full implementation of a decent pricing system than to build an ideal system that everyone works-around. It’s common for a distributor’s sales force to be a bigger impediment to pricing change than customers. You often must sell your pricing practices internally first. If your sales team sees that you’ve done your homework and that the intention is for pricing to be consistent and fair, they will be far more receptive. Here’s a great reality check: Do a role play exercise with one of your reps in which you act like an aggrieved customer who has just received a price increase. If the sales rep can successfully explain a justification you’ve both done your jobs.
World class distributors treat pricing as a process, not a one-time project. They assign pricing responsibility at the executive level; invest resources to continuously monitor and improve pricing realization; and have systematic feedback loops to objectively measure the impact of changes. We’ve found the best results occur when the pricing owner is in a product management or product marketing role. If this individual is measured on product profitability, she will be well placed to make appropriate trade-offs between gross margin percentage (speed) and revenue volume (altitude). Sometimes lowering prices will actually generate more total gross margin dollars, not to mention give the sales reps competitive weapons to open doors.
In my course “Max Out Margins with Strategic Pricing” at the University of Innovative Distribution (UID) this coming March I’ll cover these pricing process improvements and show you how to grow margin and sales.