Whenever I speak to distributors, they all claim to be the best in the market. They claim top-notch salespeople brandishing longtime industry experience or technical backgrounds. Their inside sales groups are well trained in parts selection and way above average at solving customer issues. To hear them talk, you would believe the competitors send a van down to the mission district every morning to pick up another batch of out-of-work winos.
When I push them for precisely why they are better, distributors are likely to raise the pitch of their voice, wave their hands a bit more and spout, “We provide better service.” If you happen to be one of these “we provide better service” distributors, you need to stop and ponder precisely why you are better than each of the other businesses just down the street. Here are a few examples.
If you have an extensive program for stocking “just in case” service inventory for local customers, you are better than the storefront location of a competitor down the road. The stock you maintain allows your customers to maximize uptime when emergencies take place. The extra uptime allows customers to make more money. And, quite frankly, they should be willing to pay you a bit more for the value provided. If you have a well-documented process for maintaining customer “storeroom” inventory, you outshine the guy who merely fulfills orders. Your process eliminates the overhead created with the customer who overstocks or has obsolete parts on their shelf. Because experts indicate the cost of a customer holding repair parts and other assets is 32 percent per year, you save the customer big bucks. If the “storeroom” process ensures the right stuff is available for emergencies, you further build on your value. Your distributorship generates a competitive edge for the customer. Once more, they should be willing to pay a bit more than they would a purely fulfillment guy.
Finally, if you have a highly trained technical specialist responsible for assisting customers with training on the products they use, your company tops the guy who lacks local training. Nearly every product technology on the planet has increased in complexity. At the same time, the North American workforce is losing knowledgeable and experienced baby boomer generation workers. According to research done by the Pew Research Center, baby boomers are retiring at a clip of 10,000 workers per day for the next 19 years on average (the math works out to just shy of 4 million workers a year). As our customers look to fill the ranks of their top technical workers, training grows in importance. Not only does the specialist fill a critical need, your company’s effort saves travel time, logistics and other issues that again provide rock solid value to the customer. You deserve to be paid more than the distributor who provides product but no training.
Saving time and space, we listed just three specific cases where you might excel in the marketplace. Obviously, the list could go on and on. But please note: Our list compares you against specific competitors. To illustrate, you may compete with a company who provides one or more of the same services that appear (at least on the surface) to match your own. This is common. However, the value proposition you provide is cumulative. Using the examples above, it includes service stock, crib process and technical training. If the other guy lacks just one of these, you provide a better package.
The resources you provide for customers are your competitive advantage. Honestly, most distributor managers never make an effort to catalog and cross-compile their advantages against the competition, but they should. It’s important. Here’s why.
If distributor management doesn’t have a complete list of why your company is better than each of your competitors, there’s a good chance your salespeople don’t have one of their own. And this is where the problem begins.
Purchasing departments and customers in general have been conditioned to take advantage of our situation by implying that all suppliers are more or less equal. But it’s never an “apples-to-apples” comparison. The offerings you provide, be they products, services or a hybrid combination of both, are never exactly like the competitor’s offering. Yet, smart procurement departments actually practice phrases like, “Of course you are a top quality supplier. All the people we do business with are top notch.”
When pricing differences arise, your seller has a split second to challenge the lower price of the competitor by listing the competitive advantage you provide. If practiced, they can deflect a good many price concession requests. If unpracticed or, as is mostly the case, unaware of their competitive edge, the salesperson is likely to stammer and say something like, “Let me sharpen my pencil and revisit the price again.” In worst-case scenarios, sellers immediately cave, knocking four or five percent or more off the price. Think about this. In a split second, the salesperson can give away a quarter of your company’s real revenues (considering distributors live on gross margin, not sell price). Your ability to counter discounting requests relates directly to gross margin (and ultimately bottom line).
I believe most sellers cave into price pressure because it’s emotionally easier than thinking about competitive strategy. Salespeople contend that gross margin-based commission encourages a push for the highest price possible. Don’t buy it. Faced with the potential of getting a better gross margin or possibly losing the sale, they wrinkle up like a $50 suit. Research supports this point; read on.
In The New York Times best seller, Freakonomics, authors Steven D. Levitt and Stephen J. Dubner answer the question: do realtors (commissioned salespeople from another industry) really sell their own houses for more money than their clients’ houses? According to their extensive research, the answer is yes. Allow me to explain why. When a salesperson sells a home for $300,000, the selling agent receives a commission of approximately 1.5 percent. That equates to $4,500. If they sell the same house for $310,000, the commission bump is only $150. The difference to the owner is huge, right at $9,400. The question really becomes how much effort should the salesperson put in for an extra $150? But if the realtor is selling their own home, they get the whole ten grand. (Want to check the facts? You can read the whole story on pages 5-8 of the book.)
So how does a company capitalize on their competitive advantage? First, don’t leave competitive analysis (or setting price levels) to individual salespeople. The task has far too strong a payback for you to loosely delegate it to sales guys. Experience dictates that half of them will put the task off indefinitely (maybe they find it too painful), and the rest may not do it correctly (either underestimating or overplaying your company’s competitive strengths).
To assist, we have put together a sixstep program.
1. Create a matrix of products and services you provide. This is a great group activity for your next sales meeting. Then evaluate individual competitors against this list. Be specific. What are the strengths and weaknesses of each of these competitors if you compare it with your own? Don’t be surprised if some competitors exceed your capacity in individual areas.
2. Spend time discussing the monetary value of your competitive strengths to your customers. Drive home the point: Customers are willing to pay extra for the value you provide.
3. Establish system pricing confidence. You build confidence only when prices are cross-compiled by customer type, product type and pricing sensitivity. Salespeople and their customer service counterparts entering orders must be able to trust that system prices are both fair and accurate.
4. Set up a pricing process which creates a natural “dwell time” in establishing prices. Take away the salesperson’s ability to quickly cave to discounting requests. Set up an approval chain for all discounting. When pricing questions arise, sellers must seek approval before lowering the price.
This short interruption in the selling cycle allows the salesperson to rethink the situation and avoid discounting pressures. The time can be spent rethinking the real competitive situation.
5. Apply a scientific process for matching gross margin to customer value. Distributors have struggled with this task for years; the concept of “Matrix Pricing” goes back several decades. The problem with the concept is its overwhelming complexity. Think about this for a moment. A distributor with 2,000 customers and 4,000 SKUs generates more than 8 million pricing permutations.
The whole thing is just too complex for a person to accomplish manually (even armed with the best Excel skills on the planet). To be successful requires the use of a sophisticated computer algorithm. Companies like David Bauders’ Strategic Pricing Associates can assist distributors in establishing a pricing cube that breaks the typical distributor matrix into hundreds of “micro matrixes” capable of establishing a price that matches intrinsic service to customer value.
6. Build a mechanism for measuring sales performance against use of the optimized system pricing. A “Ratio of Attainment” indicates the percentage of transactions where you discount price from the system norm. Things work better when a management scorecard/dashboard measures the number of discounted invoices by salesperson, branch or region.
Share the ratio of attainment with salespeople, branch managers and others. Point to the potential revenues for the company and additional commissions missed by not following the process.
What happens when these steps are followed? A number of in-depth interviews with distributors using the process provided by Strategic Pricing Associates, which includes all of these steps, reveal some natural conclusions. The distributors typically add two full points of gross margin to their business.
Ponder this. Two points of additional margin provide a massive impact on the distributor’s bottom line.
Because margin increases largely fall straight with no extra incurred costs for expanded warehouses, delivery vehicles or new personnel, the distributor reaps huge benefits.
Frank Hurtte provides Strategic Insight for New Times. He speaks, writes and consults on the new reality facing distribution in a post-recession world. Contact Frank at River Heights Consulting via email at [email protected] or via phone at 563/514-1104.