My wife recently decided that we need to move to a new house. Words cannot express how much I look forward to looking at dozens and dozens of houses, packing our belongings and moving 10 to 15 miles, unpacking and changing my address on who knows how many websites. Having said that, all and all in, it’s time for a change. As I browsed the various houses on line, compared location, number of bedrooms, year built, three or four car garage, etc., I pondered how do they price these houses? I am sure the sellers want to make money, but they want to price the house to sell in a reasonable amount of time. My realtor tells me there are comps, price per square foot, and other KPI’s. I am sure they are all valid, but which ones are the most relevant? As I was touring yet another house this past weekend, I got thinking, how distributors know how to price their products correctly to manage both volume and profit goals?
Wholesale distributors face a unique pricing environment because they play a critical middleman role in the supply chain. Traditionally, distributors have very thin margins earned from a large number of individual transactions, customers, and SKUs. Because of these characteristics, even small improvements have a dramatic impact on profit margins. Cutting costs is no longer enough. Distributors have to grow profits, and pricing is the most powerful lever. It’s crucial to determine the right price for each product in each deal negotiated. Enterprise resource planning (ERP) solutions gather the information needed but often fail to yield full value distributors don’t apply the data to a unified pricing strategy.
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 is that pricing is an enterprise-wide problem is that it reaches functional areas including sales, marketing and finance and impacts many different roles including sales reps, managers, and executives. In most 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. I can think a few areas of difficulty I have seen with distributors:
- Many distributors charge every customer the same price for a particular product regardless of their perceived value of the product or cost to serve, which can vary significantly by customer-segment attributes.
- Most distributors have highly manual, disconnected processes to manage prices and communicate pricing to customers. This impacts response time to make changes and introduces errors in pricing. These processes are even more limited because they are not integrated with other applications.
- Ad hoc price setting – ERP applications collect information that can help determine pricing. But often this information is ignored in favor of a “gut feeling” or an ad hoc approach, with money lost through ineffective pricing.
Without informed control over the prices distributors charge each customer, they are leaving money on the table in nearly every deal – small amounts, perhaps, but substantial when aggregated over time. What is needed is true enterprise-wide control of the entire pricing process. What is needed is an application that does at least three things:
- Price setting – Distributors need an application that provides the basis for setting optimized prices and guidance for each segment. The application needs to enable distributors to take action by setting segment specific optimal prices and providing guidance for sales teams. This forms the basis for consistent and reliable differentiated pricing.
- Deal execution – In order to price deals effectively, salespeople need access to up-to-date 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, distributors need visibility into key performance indicators for pricing through analysis and tracking. This helps identify opportunities to improve product mix or reduce margin leakage and monitor ongoing performance
SAP offers an application that helps you orient your entire organization toward maximizing profits through unified pricing goals and gives everyone in the process a view of the bottom line. It helps you gain more value from your current CRM and ERP applications by making better use of the information they gather. Equipped with a reliable basis for effective differentiated pricing and with tools that support price requests and approvals, your salespeople are better able to negotiate deals with the bottom line in mind
As always, I have enjoyed our time together; I hope I have given you insight into what needs to be done for optimizing pricing decision and driving additional margin. Change is here and forward thinking distributors need to embrace it and use it to their advantage, because if they don’t, their competitors will.
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