In Distribution, Sales Does Not Equal Profits

For distributors, success with pricing optimization is much more about changing behavior than analyzing data. Some of the early adopters of ‘strategic pricing’ failed to achieve sustainable results. This was not necessarily because of bad analytics, although some were advised to be greedy and raise margins too aggressively. The primary problem was inability to win the support of the sales organization.

Distribution Sales does not equal ProfitsDo you pay your sales reps commissions to generate profits – or sales? How much do you pay your sales reps to bring in money-losing orders? Are you providing market pricing guidance to your reps? The sales reps who are confident that the prices in their company’s price book are market-driven may also be the ones who believe that professional wrestling is real.

It’s a dirty little secret of pricing optimization that bringing prices to market level for small customers on low-priority products increases the distributor’s overall margin by at least one percentage point, often more.

Yet, nearly all of the resistance to fixing pricing outliers comes from sales people, not from customers. In our experience at Evergreen, proper data analytics using our proprietary software, good preparation and implementation results in almost no customer pushback or loss of profitable business.

In distribution there is often a tense relationship between colleagues with different viewpoints. The sales department view is: “My job is to protect customers. I know my buyers better than Pricing does.” The pricing department vantage point is: “I am here to protect profits. I know our costs better than Sales does.”

A pricing strategy driving profitable growth can better align these critical business functions. The pricing coordinator can provide sellers with market-driven pricing that help increase sales and profits, increasing sales compensation. That is especially true if sales compensation is aligned not only with sales growth and gross margin dollars, but also with operating profits.

SMART Pricing is beneficial to key sales KPIs such as increase in average order size, meeting sales targets and shortening the average selling cycle.

Sellers need to understand how much pricing flexibility they have and when to walk away from a bad deal. They need triggers to avoid excessive discounting. To achieve this level of pricing maturity sellers must have training in pricing skills, and they need access to market-driven pricing data and customer profitability data.

A solid pricing architecture for distributors combines automated discount flexibility for routine pricing with human intervention, by exception. Pricing “guardrails” empower reps to make pricing decisions on their own, without having to slow down the buying process by having check with their sales manager at every intersection.

Pricing management is a dramatic evolution of the distributor tradition of largely autonomous commissioned salespeople. Breaking the historical habit of visceral pricing decisions is essential to achieving profit excellence.

In an era when long-established practices about light-handed sales management are changing rapidly, new technologies and processes necessary to support them start to look less like nice-to-haves, and more as necessary ingredients for successful sales effectiveness strategies.

Sales leaders who are transitioning to more of a “Chief Revenue Officer” role, focused on both the sales line and the companys bottom-line, are the Chief Sales Officers of the future.