Many years someone made the off-hand comment, “Before we instituted a pricing process, we were just an off-price discount shop.” This thought has rattled around in my mind for a good many years. Truth is, I find myself repeating it as I talk about the power of the Strategic Pricing Associates (SPA) pricing program. But recently, I have been wondering just exactly what the world must look like through the eyes of an honest-to-goodness price chopping discounter.
Conjure up the picture of a discount shop – a vivid recollection in my mind’s eye is a reoccurring Radio jingle for a clothing outlet:
“No frills, no fixtures, and no salespeople – great deals. Our loss is your gain!”
Bargain hunters love this sort of thing. The smart ones don’t depend on these places – instead, buying is a bit of a sport. They understand all sales are final, there’s no guarantee, and it’s buyer beware to the nth degree. The ill-informed and unaware soon fall victim to unexpected quality problems and a seller unwilling to provide satisfaction. But, they learn quickly, you can’t rely on the discount places for your real needs.
For our kind of distribution, this translates into no support, no knowledgeable salespeople, no expedites and schlocky products from second-rate vendors. Many have tried to make this model work. They lease a worn-down warehouse in a bad side of town, buy a couple of mailing lists and send blast after blast out with promises of red hot prices. A few customers try them with varying results, and soon they fade off into the sunset or show up on online, ever broadening their list of potential one-shot customers.
If you are a wholesale distributor, this model really doesn’t work. For one thing, you have salespeople who understand your product offering. They have cars, phones, computer systems and a myriad of support staff backing up their efforts. According to one of the latest distributor association profit reports, our employees alone represent more than 60 percent of our costs. You can’t have qualified people and the lowest price on the planet.
Unlike the off-price discount shop, wholesale distributors must support all of their customer needs. Here we’re talking about not just the fastest movers, or a collection of close-out merchandise. Instead, we maintain spare parts and even some slower moving items kept just in case our important customers need something fast. Distributors call it service stock, and customers have come to rely on it.
But service stock is just a fraction of our total service package. Wholesalers hold customer training classes, where they introduce new technology to the rank and file members of our customer’s team. They scramble when customers have an emergency, sometimes spending hours searching for a hard-to-find, obsolete part necessary to keep things running smoothly. And think of the times you have opened your shop after hours or on a weekend to help out a customer. This service thing is a huge overhead expense for the typical knowledge-based distributor.
But the service doesn’t stop there. Progressive distributors are pushing for ways to help customers manage their inventory. They raise the bar by offering supply contracts and other programs which allow customers to reduce overhead and administrative costs. All of this costs money. And, unless we are missing something, this has to come from somewhere. Truth is, it’s incorporated into your price.
Now here’s where we need to take a hard, introspective look. By now, most would say, “Hold on, I’m not really an off-price discount shop.” Discount shops would never hire the caliber of people we employ. Instead, they would look for folks willing to work for minimum wage. Instead of hiring a top-notch recruiter to find a “product expert,” they would attend the same job fairs as fast food joints and temp-labor firms.
A discounter would never use a nice building with a training facility designed to handle customers interested in learning. A discounter would minimize whatever stock they had, unless they could get a hot deal on a truckload of grey-market stuff. And, no discounter in their right mind would ever offer any type of return policy. Making money as a discounter is all about minimizing costs, selling lower cost product and avoiding expensive service issues.
Are discounters evil? Not really. No matter what we think about it, there will always be price buyers - individuals, departments and whole organizations that make every decision based on price (alone). This group ignores the research of major universities outlining the importance of understanding total costs. To them, everything is price. These are the people who get great deals on old-style products and discover they won’t work in the new-style holders. Yet they keep on looking for deals. Discounters faithfully serve this ever-shrinking market.
Death comes slowly for organizations that support a knowledge-based distribution infrastructure and an off-price discounter selling culture. Unfortunately, no one consciously launches into this situation. Instead, it comes over time, encouraged by human behavior and purchasing department negotiation strategy.
How does this happen? Well, first your salespeople establish themselves with customers. Remember, your sellers really do want to provide the right kind of service to their customers. And the customers recognize this quality. They build relationships, maybe make a few small sales – then it happens.
Their “friend” at the customer counter calls them aside. Symbolically putting their arm around the sales guy’s shoulder, they sweetly recite the Siren’s Song:
“You know, Pat; we really like you and your company. We thought that late-night delivery last week was really swell. That widget you recommended to solve our moisture issues worked dandy - just like you described. And we want you to have our business. But… you need to sharpen your pencil and give us the same price as Cousin Fred’s Discount-land used to before they went out of business.”
How can you pass up a deal like this? You get to provide world-class service and you get paid with defunct bargain basement margins. Is it any wonder distributors are feeling a margin pinch?
How does a company avoid this trap? Mostly via a pricing process. Without a process, every customer transaction becomes the responsibility of the salesperson, customer service or counter sales rep interacting with the customer. Every pricing situation is an exception. If they are conscientious folks – and most are – they want to close the order. They slowly move customer margin levels downward until no one complains. If they hear squawking (which is often a negotiation tactic), they adjust prices down another notch – it’s that simple. And it can be avoided if the distributor has a process.
The trouble with process in today’s distributor environment – everybody thinks they have one but very few really do. To elaborate, a process has three important components:
· Documentation and Training
· Measures and Metrics
· Coaching and Managing Points
SPA leads the field in true scientific pricing process. By combining advanced statistical algorithms with a time-tested process – SPA delivers what no book, computer program or single person can provide. SPA provides a training program that allows you to educate your associates to pricing process.
After the training, SPA’s scientifically developed algorithms help you set optimum price levels and, even more importantly, measure the progress in your company’s use of the process. Finally, specialized reports generated as part of the process equip the busy sales manager with the information needed to help their team excel.
Now a word to any cut-price discount operators reading this piece; have you ever heard AC/DC’s 1976 hit “Dirty deeds done dirt cheap”? It rocks.
Frank Hurtte is the founding partner of River Heights Consulting, a consulting firm specializing in “knowledge-based” distribution. He is the author of the NAW publication The Distributor Specialist: Customer Champion, Profit Generator!Hurtte’s work centers on four basic questions: Does a sales process drive profit, which processes create the greatest bottom-line impact, why do target-driven sales organizations enjoy a 47 percent advantage, and what have upper quartile distributors discovered about specialist deployment? Discover the answers at [email protected].