Line items on invoices that make it through the filters at standard book price are a much smaller percent than you may think, perhaps 15% to 25%. Your job is to investigate how much volume is transacted by each pricing filter and why, and to train your team to only use those pricing filters when appropriate.
Hall of Famers Bob Gibson and Bert Blyleven are among those pitchers that gave up a home run facing their first major league batter.
Though they both eventually worked out their errors in judgment with coaching and experience, these two Hall of Fame pitchers were unprepared for their first “transaction” with a batter to say the least. They let the batter get to them and “gave in” rather than nibbling at the edges plate and risking a walk.
There’s a time to take a risk and there’s a time not to take that risk. As rookies, they had great skills, but didn’t really know the game. For the baseball pitcher, it’s about winning the game (profit), recognizing the risk (who’s on base and what’s the score), and knowing your costs (what you give up for the outcome you want). That’s being prepared for the customer interaction.
Here’s a similar situation for wholesalers:
We repeatedly hear wholesaler owners and managers lament that inside sales people “givein”at the first sign the customer “lays off” (objects to) a price. Adding insult to injury, salespeople often take the easy way out because their business system easily facilitates pricing all the items on an order at the same discount as the item with the questioned price.
This is like giving up a home run on the first at bat. A pitcher “gives in” to the hitter after he fouls some pitches off or takes some pitches and throws a fastball right down the plate instead of continuing to hit the edges in a critical situation so he doesn’t get taken to the bleachers.
We highlight this situation because some wholesalers spend a lot of time engineering their pricing matrices to different types of customers for different types of items. Then the salesperson, most often the inside salesperson, blows it all away in five seconds during one at bat. He gives up the dinger, and your profit margin plummets if he gives in too much in the wrong situations. Worse yet, the batter (customer) knows how to “work” him next time. Fail to correct this and your profit margins become mediocre.
Great game plan, no practice?
Having a great matrix with little training for personnel is like having a great game plan and failing to drill the players on execution. Obviously, it takes both to win.
A great game plan consists of a keen awareness of how much volume, profit and margin is earned by each pricing “filter” (the various changes that affect final price), well thought-out book pricing matrices, pristinely clean product and price data and adequate system controls.
A great training program consists of teaching people the following:
A. Profit, cost and ROI principles, such as the cost of and how to make the most profit on stock, nonstock and direct orders.
B. Showing how these principles are at work in the pricing matrices.
C. Making them aware of differences and matrix exceptions by major supplier.
D. Making them aware of what to do when they encounter different customer and transactional situations.
E. Making them aware of typical mistakes, like giving in, and how the right thing to do differs from the mistake.
For now, let’s concentrate on stock, nonstock warehouse, and smaller direct transactions. We’re not going to talk about projects here, because that’s a whole different ballgame.
The value of filters and how they affect your prices
We know many distributors who worry themselves to death over their pricing matrices. But they do it without knowledge that matrices are only affecting 15%-25% of the business. Maybe even less. So how could this be? Other pricing methods are affecting most of your business.
If you view your business volume as travelling through a series of filters in a funnel, you need to know how much of it is altered by the different filters in the funnel. The filters are:
1. Special pricing authorizations (SPAs).
2. Templates, which are reusable price quotes and pricing templates stored in your computer for different product lines and/or stock-keeping units (SKUs). They can be applied to a customer or customers.
3. “Price As” tags, which tell your computer to price an item like red wire the same as black wire.
4. “Quote and Claim,” which is like an instant SPA that you may still have to claim.
5. “Overrides,” which are manual selling price deviations from the price generated by your pricing matrix.
You might have a slightly different list of filters, but here’s the point: Line items on invoices that make it through the filters at standard book price are a much smaller percent than you may think, perhaps 15% to 25%. Your job is to investigate how much volume is transacted by each pricing filter and why, and to train your team to only use those pricing filters when appropriate. After that, fine-tune your profitability by tracking down and correcting misuses and opportunities to improve price in each filter.
Adjusted for your exact numbers, the funnel illustration could serve as a reality check to your staff so they get a better sense of how to pitch each customer.