The pricing world for distributor sales representatives is chaotic. They must make most pricing decisions on their own, under intense time pressure, and with little or no market pricing information. Whatever competitive pricing information they do have is provided by their customers.
The reps’ pricing decisions depend on the product cost and hunches about competition. Sometimes the reps need pricing authorization from a manager. Ultimately, due to deadlines and busy schedules, most of the quotation approvals are “rubber stamped.”
At most distributors, the largest contracts are handled by management. Although the sales rep is part of the team, the negotiations with the customer are conducted between managers from the seller and buyer. Just such a situation occurred recently at one of our distributor clients. I participated in a conference call with six or seven managers including the CFO.
The distributor lost an enormous piece of business 2-3 years ago after servicing the account well for many years. The business had always been marginally profitable at best, and when a competitor came in and undercut the pricing, our client stood his ground. In fact, they asked for a small price increase, and the customer awarded the business to a competitor.
Our client was given a chance to regain the contract. Two important points: The competitor who took the business on price couldn’t service the customer properly, and our client maintained a cordial relationship with the former customer. The team presented three pricing scenarios on the conference call.
Questions raised on the conference call:
- What is the return on sales and return on investment (not just gross margin) for each of the three pricing scenarios?
- What is the cost to serve for the customer’s more distant locations (freight is included in the price) and what is the minimum order size?
- Which opportunities with other customers must the distributor pass up if they get this contract?
- How does each pricing scenario compare to the pricing the distributor charges for like products to similar customers?
None of the above questions relate to guessing what competitors might bid, or to what the distributor was paying to the competitor who lost the account.
The moral of the story? In the pricing world for distributor sales representatives, sometimes the deal you don’t get is the best one.
If this story brings up any pricing questions of your own, don’t hesitate to reach out to our team. We look forward to hearing from you!