July, 2004 | Daphne Carmeli — When it comes to distributor pricing, a major disconnect often exists between the sales force and the branch or home office. This gap - the result of outdated pricing processes, maverick selling by independent-minded sales representatives, and a lack of information necessary for field sales to defend prices - can undermine business and margin objectives.

The problem stems from the static "mark-up mentality'' that pervades many distributor sales organizations. When setting prices, managers frequently use an inflexible, cost-based approach that does not reflect real-world market factors such as competitive pricing, inventory exclusivity or customer volume history. As a result, corporate pricing guidelines often fail to reflect current internal operations or market dynamics.

At the same time, some sales personnel are skeptical about the business validity of corporate price targets. They are convinced that central-office pricing contains "fat'' that can be negotiated out; they fear that strict adherence to pricing policies will result in lost business. In order to meet their volume objectives, sales personnel may offer price breaks that have no basis in empirical costs or volume calculations.

Mutual Misunderstanding
The combined effect of this miscommunication can erode profits, even in the face of increasing volume. The large number of SKUs and massive volume of low-margin transactions that most distributors handle make the challenges of price setting and enforcement particularly critical. While enterprise CRM and analytics applications have been touted as including tools for setting prices, real world distributor experience shows that using them to effectively communicate and enforce pricing strategies is often difficult, if not impossible.

Fortunately, a new generation of pricing applications is spanning the communications gap between the corporate office and the field. Combining empirical analysis of historical transactions with a range of other relevant market factors, these systems allow managers to quickly calculate an optimal price for a particular product, volume level and customer.

Just as importantly, the systems provide sales representatives with the knowledge they need to understand how a particular price was derived, as well as acceptable price parameters for negotiating a deal with the customer. Collectively, these capabilities greatly increase price consistency in the field and boost the likelihood of compliance with corporate pricing objectives.

Today's new pricing solutions can also increase revenues by identifying sales circumstances where money is regularly being lost or left on the table. For example, today's pricing systems can identify customers or products that are consistently unprofitable, or highlight customer segments that are the greatest source of profits. The result is a pricing strategy that matches the unique characteristics of your market - balancing profit versus volume objectives for each segment - and illuminates "found money'' or revenues that were slipping away during each transaction.

Understanding And Setting The Right Price
At the core of the new pricing solutions are calculation engines that analyze all relevant sales information to derive the optimal price for a specific volume of product. These solutions use regression analysis, a statistical technique that predicts the best price for a transaction using a set of variables such as customer, order size, product, and comparable sales. With these analytical functions in place, pricing becomes an iterative process - as changes in these variables automatically drive changes in the optimal price. These solutions can allow you easily and intuitively to view the results and take action.

Armed with this capability, pricing managers can make much more sophisticated decisions about price by quickly determining elasticity at a variety of volume levels for a particular product and customer.

The resulting optimal price can then be pushed out to the field, along with acceptable negotiation guidelines and data on similar sales to like customers. The latter information strengthens price credibility by allowing the sales representative to understand the deal price within the context of the larger organization and the market as a whole.

By providing the optimal price within a range of acceptable prices, the systems give the representative room to negotiate. This feature acknowledges a reality often overlooked in rigid, price-setting systems: both buyer and seller typically have a strong desire to arrive at a negotiated price solution.

Over time, as it becomes apparent that the new pricing applications can increase margins without reducing volume or cutting win rates, sales representatives gain renewed confidence in corporate price targets and price compliance increases significantly.

No Longer One Size Fits All
In addition to bringing greater sophistication to discounting calculations for the largest buyers, today's pricing applications also help ensure that customers buying much smaller quantities are charged a profitable price. Too frequently, distributors provide small-volume buyers with the same discounts given to large purchasers. By establishing prices that are in line with cost and volume considerations - and then enforcing these price levels - margins are increased and money-losing business is eliminated.

Effectively pricing these "smaller" low-turn items can have a big impact on revenues and profits. Because 20 percent of SKUs typically account for 80 percent of sales, optimal pricing for the entire SKU portfolio is often not a top priority. In fact, pricing for many items can be woefully outdated and sales reps might not be actively working to move the product due to this absence of price accuracy or reliable price history.

By subjecting orders for low-turn SKUs to the same rigorous analysis and price setting techniques as large-volume SKUs, distributors are creating new demand, addressing money-losing products and boosting profits across the entire portfolio. Again, effective pricing can either increase the flow of profitable business or push less desirable business away.

One final benefit provided by new pricing software is the ability for managers to better identify the most effective sales people, and conversely, weed out those that that fall short of corporate guidelines or productivity objectives. The ability to bring greater scrutiny to not only individuals but also regions and divisions, creates a new set of tools for more proactive management of sales operations.

Maximum success in the distribution arena requires a high level of trust between the branch office and the field. By arming pricing and sales personnel with the capabilities they need to work more effectively, and by providing new avenues for real-time communication, organizational trust is strengthened and major benefits can be created for both the sales rep and the company.