An industrial buyer asks a distributor CEO a question.
BUYER: “Can you beat my last year spend on 20 MRO SKUs? The grand total was $35K.”
CEO: “Well, it depends upon the average dollar size of your orders. We can do simulations with my OptiQuote calculator. The general rule is that prices drop with fewer, bigger orders. We pass the reduction in our line and order fulfillment activity costs on to you. And, on any given order prices will drop at both the line-item level and order-total level as the dollar totals increase. As a best-theoretical case, we could enter the annual SKU totals on one big order.” Continue reading 101. Case Study: Customer Names Price, OptiQuote Calculator Sets Terms
The first step to ensuring your strategic pricing initiatives are successful is to understand what you’re doing. Here are a few questions to ask of yourself, as a business owner, and of your top management.
- What is “strategic pricing”?
- What is our Pricing Analyst’s job? (scope, objectives and success metrics)
- What assumptions underlie these answers and is there data to back them up?
- What additional analytics would improve pricing effectiveness?
If you find wildly varying answers, or confusion, from your management team it’s time to upgrade your approach to strategic pricing. Continue reading 100. Distributors: Upgrade “Strategic Pricing”
The Problem: Informational Blindness and Paralysis
Human brains have evolved to make fast either/or decisions. Reflex thinking includes a type of informational blindness that fools many on this riddle:
A bat and ball cost $1.10. The bat costs $1 more than the ball. What does the ball cost?*
New analytical insights can also be overwhelming. The quick decision becomes whether you should figure out the problem now or put it aside and do it later. Then there is no later, and paralysis sets in. We are too busy doing what we habitually do, with fine tunings. Continue reading 99. Why Don’t Folks Use New Analytics?
Why Are Your Margins Too High v AMZ’s?
Your margins must cover your channel cost structure which was built for bygone days. Most channel costs evolved (from WW2 on) to push true-new products to first-time buyers. Cold calls (requiring product-education) required both factory and distributor reps to create demand. Both sets of reps got paid roughly 5% of their respective sales. Today (70 years later), most channels still have two sets of reps costing about the same. What other elements of your push-channel costs will AMZ threaten?
2018 Legacy-Channel Challenges:
- The US consumer-society lifecycle is mature with too much global supply. Power has shifted to customers. And, AMZ owns the increasing numbers of Prime customers. Brands must go to where the eyeballs are and sell them the way they want to buy.
- 80%+ of distributor product sales are for equally-excellent commodities (no demos needed)
- 90% of sales are rebuys from experienced customers (fewer cold calls)
- The internet makes all product – information, availability and pricing – 24/7 available. As digital information grows, product knowledge help from local reps drop.
- Mark-ups for full-lines of SKUs create profit/loss cross-subsidies. Average-pick size and turns are ignored. Buy: a popular $500 piece of equipment at 20% margin and some fittings for $1 to $3 each at a 40% margin. The equipment’s $100 of gross profit covers: its activity costs; the losses on fittings; and residual company profit.
- Mark-ups covering bundled services are not customer-centric. Customers get an assigned rep whether they want them or not. If reps were unbundled for fees and customers got 5% rebates for buying on their own, what would happen? Without unbundling, Millennials will web-room you on the big-price, popular and most profitable items on AMZ for less. They will: check the $500 equipment price at AMZ. Sees savings of $X. Spot buy it. Then, order the little-dollar picks (net-profit losers) from the distributor.
- And, the Perfect Clones of most profitable items are increasing at AMZ. Clones – with great information content, reviews and prices – will steal share from top brands not there. Clones can skip channel development costs and go right to AMZ’s unlimited cyber-shelf space using Fulfillment by Amazon.
- Loyalty to – brands, distributors and reps – will continue to erode.
Factories and distributors share SKU profitability analytics to solve cross-subsidies and rethink their respective service bundles. And, factories get on AMZ to win the content management war against the clones. For more: contact me for a free, virtual, SKU analytics session. email@example.com
Channel partner incentives, collectively and imprecisely known as rebates, are huge, addictive, and problematic programs for distributors. One 2012 survey estimated total channel incentives in the U.S. to be $55B. That’s 80% of the reported $69B in total channel management budgets. A Silicon Valley survey reported that the typical factory respondent ran an average of 21 incentive programs annually with an estimated overpayment of 6%.
Twenty-one incentives programs annually? Sure! Cash bribes get fast attention. Competitors understand indirect price cuts and can quickly follow, tweak and escalate with their own programs. But, without effective plans for disciplining, tracking—and in some cases exiting—these initiatives, what happens? Factory list prices generally keep rising as backend channel incentive checks multiply. Continue reading 96. How to Be Strategic on Channel Rebate Management
UNDER-VALUED RUSTY: RIP
Daniel Joseph (Rusty) Staub passed on March 29th at 73. Rusty (Le Grand Orange) played 23 years in baseball’s major leagues retiring in ‘85. His career stats: batted in 1,466 runs; averaged .276 with 292 homers and 2,716 hits; and walked a spectacular 1,255 times. With walks, his career on-base percentage (OBP) was .362. He didn’t swing at bad pitches.
Rusty, a champ admired on and off the field, did not make the Hall of Fame. Baseball beliefs back then were still blind to the value of Walks. In 2000, the same Analytical Ignorance allowed the Oakland A’s to “buy runs to win games” cheap. They snagged free agents with superficial flaws, but high OBPs. (Well told in Moneyball: both the book and movie). Continue reading 95. Rusty Staub and Your Unequal, Margin Dollars