I have shamelessly exploited my daughters and their habits to make my point about how distributors can run their businesses better. Today, I am going to exploit my whole family. My wife calls me thrifty and a planner, and that is generally true. Who doesn’t still use their mechanical pencil from college? I’m starting to plan a holiday visit to my parents in Arizona and I know I’m a little late to the game. It’s not a tough sell for me to get my family excited about visiting the grandparents; in December the weather is usually nicer in Arizona than Colorado. I just need to get us there as economically as possible.
As I begin the game of getting the best airfare, I notice how the price changes from day to day and week to week. Sometimes I feel like the price starts off low and only gets higher as the date gets closer to when I want to fly. Other times it seems the prices starts off high, then gets lower and then increases again as we get close to the desired date. The game, of course, is when to buy. I could buy early, thinking the price is only going to go up. But if it drops, I’ve paid too much. If I play the waiting game and hope the tickets are going to drop and they don’t, I kick myself for not buying sooner. As I struggle with this, I realized that distributors have the same basic challenge with pricing. If they price too low they are leaving money on the table and if they price too high, they potentially lose the business
Wholesale distributors face a unique pricing environment because they play a critical middleman role in the supply chain. Traditionally, they have very thin margins earned across a large number of individual transactions, customers, suppliers, and SKUs. At the same time, because of these characteristics, even small improvements have a dramatic impact on profit margins. Cutting costs is no longer enough. You have to grow profits, and pricing is your most powerful lever. It’s crucial to determine the right price for each product in each deal you negotiate. Solutions for enterprise resource planning (ERP) and customer relationship management (CRM) gather the information you need, but fail to yield full value if you don’t apply the data to a unified pricing strategy. Without informed control over the prices you charge each customer for each product you sell, you’re leaving money on the table in nearly every deal – small amounts, perhaps, but substantial when aggregated over time.
Pricing is the most underutilized of all the available profitability levers; it is the last frontier in finding ways to improve the bottom line. A primary reason for this is pricing is an enterprise-wide problem because various groups such as marketing, sales, and finance are all involved in the pricing process. In large, complex distribution companies, pricing processes often vary by business unit, division, or product line, making it hard to recognize pricing challenges across an entire organization, let alone get a handle on them.
In my experience, I have found that to drive additional margin through better pricing, distributors must have a system that addresses these four things:
Segmentation – Distributors need a system that leverages data across their applications, including ERP, CRM, and legacy systems. It uses this data as input for sophisticated data mining and statistics, along with qualitative business analysis, to identify segments that should be grouped together for consistent pricing
Price setting – A pricing and risk model that provides the basis for setting optimized prices and guidance for each segment. Using sophisticated pricing science, the application should enable you to take action by setting segment specific optimal prices and providing guidance for your sales teams. This forms the basis for consistent and reliable differentiated pricing.
Deal execution – Your salespeople should have access to up-to-date contextual information, including segment-specific pricing and guidance, customer transaction history, and peer-group comparisons, enabling them to negotiate profitable deals that maximize customer relationships.
Analysis and tracking – At each stage of the pricing process, the application should provide visibility into key performance indicators for pricing through analysis and tracking. This helps you identify opportunities to improve product mix or reduce margin leakage and monitor ongoing performance.
If you are looking to drive additional margin, and really what distributor isn’t, you need to take the time to look into pricing optimization.
As always, I have enjoyed our time together, I hope I have given you insight into what to look for in pricing optimization. Now I need to check the latest prices for flights to Phoenix.
Mike Wise is the Industry principal for Wholesale Distribution at SAP America. He is a wholesale distribution technology and operations leader with over twenty years of comprehensive experience in distribution and logistics environments, executing operational improvement strategies through technology. He focuses on enabling efficient distributor operations with SAP for Wholesale Distribution solutions
Contact mike at mike.wise@sap.com mike.wise@sap.com or follow on twitter @jmikew1964
