100. Distributors: Upgrade “Strategic Pricing”

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.

Test Yourself: Do You Believe Any of These Pricing Assumptions?  

Buy low, sell high fattens margin percentage, and no other management activities can improve profits bigger and faster.

True! But, only as a static financial analysis exercise. Every distributor has pursued this concept for years with no sustainable profit improvements. Why?

  • Suppliers and customers play this same zero-sum, win-lose game to a stand-off
  • Hidden mistrust costs then undermine win-win replenishment system possibilities
  • There’s no innovation or creation of better service value for target niches of customers to justify higher prices
  • Reps often prefer meeting last-look prices, rather than insisting on extra points for their own value added and for the company’s measured, guaranteed service excellence
  • No company has ever prospered by raising prices for the same commodity service value

Naturally-occurring high gross profit percentage (GP%) SKUs and customers are profitable. Get more!

False! Higher GP% is not the same as the GP dollars (GP$s) needed to cover cost-to-serve dollars (CTS$s). Small customers with higher GP% usually have small-dollar sales, orders, and picks. Their profit equations are mostly losers (GP$s (less) CTS$s (equals) Profit/Loss dollars).

You can fix losing small-dollar pick items by increasing the mark-ups to what the traffic will bear!

Do it! Your bottom line will improve. But, the small-pick items will still have losing profit equations. Just less so. You can build up GP$ per pick and per order to profitable levels by imitating Amazon.  Bundle the popular small items (into 2-12 packs) and make the bundles add-on items.

Every incremental customer, sale, and margin dollar is good.

This data-free chain of flawed rationalizations goes something like this:

  • All employees are a fixed cost in the moment
  • Any extra order and line-item pick activity just keeps idle folks busier
  • This allows for incremental margin dollars to go to profits
  • And any extra sales will add to supplier rebates for more profits

What You Need: Line-Item, Profit-Equation Analytics

With a cost-to-serve model that generates a profit equation for every line-item event, you will discover the big cross-subsidies that exist amongst both customers and SKUs.

Take your strategic pricing to the highest level. For a free, tutorial/demo contact me. At bruce@merrifield.com.

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