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Strategic Pricing for Distributors: Tools & Rules to Build Higher Margins

Learn how to optimize your margin in the complex world of wholesale distribution and improve your pricing process for better profitability.

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Strategic Pricing for Distributors: Tools & Rules to Build Higher Margins

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  1. Strategic Pricing for Distributors Tools & Rules for Building Higher Margins Commercial Vehicle Solutions Network Lake Geneva, WI September 13, 2010 Presented by Brent Grover Evergreen Consulting, LLC

  2. About your speaker • Author of six books about wholesale distribution • NAW Institute Distinguished Research Fellow • Consultant, B-school faculty, distribution executive • Member of several W-D company boards • Honorary Tailhooker (what is this?)

  3. Multi-disciplinary approach to W-D STRATEGIC PRICING FOR DISTRIBUTORS Tools & Rules to Optimize Your Margin Brent R. Grover

  4. A complex business Branch-based distribution; counter business Complex product lines – high SKU count, many vendors Large number of active customers – many small customers Heavy activity levels – transactions, small order size Many people involved in pricing decisions Sales rep autonomy; commission based on gross margin $ Pricing undermanaged Improve your consistency – attack outliers Tweak less sensitive and less visible items Find profit leaks: low leverage discounts and rebates, freight recovery Get more out of your ERP system’s pricing module Need accountability for pricing function About CVSN members

  5. Survey – Personal responsibility

  6. Survey – Outside sales representatives

  7. Survey – TTM vs. year ago

  8. Survey – TTM vs. expectations

  9. Survey – Problems

  10. Survey – Boards

  11. Survey – Strategic planning

  12. Survey – Customer profitability analysis

  13. Survey – Acquisitions activity

  14. Survey – Acquisitions plans

  15. Survey – Sales rep pricing autonomy

  16. Survey – Assessment of pricing process

  17. CVSN PAR Report

  18. CVSN PAR Report

  19. CVSN PAR Report

  20. CVSN PAR Report

  21. CVSN PAR Report

  22. CVSN PAR Report

  23. CVSN PAR Report

  24. Strategic profit model for aftermarket truck parts distributors ©2010 Evergreen Consulting, LLC

  25. Profit Power of Pricing Frozen

  26. Harry AmorosoB&A Friction Materials • “2% price increase leads to 15% profit increase” • McKinsey, other authorities • Depends on industry • Depends on company • Multiplier effect • Asset turnover • Leverage

  27. Objectives • Find 200 basis points (2%) or more of hidden gross margin • 2% of sales generates over 10% increase in return on investment • View your pricing process in a new way – not cost driven • Build foundation and structure in the pricing system • Rethink your sales compensation plan and sales training

  28. Margin scatter diagram Desired state - order Current state - chaos High High GTM% GTM% Large Large Customer Size Customer Size

  29. High Large

  30. Pricing analytics • Make order out of a highly complex, chaotic environment • 3000 customers X 5000 SKUs = 15,000,000 combinations • How much pricing responsibility is delegated to the sales team? • Segment customers and products for pricing purposes • Determine item sensitivity • Design a business intelligence cube for your ERP system

  31. Dave ClarkKarmak, Inc. • 1. Velocity matrix – slow movers • 2. Cost matrix – low value • 3. Price rounding – 200,000 SKUs @ $.05 • “1-2% overall gain can be expected”

  32. STRATEGIC PRICING MATRIXMRO segmentmargins for a sample SKU

  33. PREMIUM / DISCOUNT cubepremiums & discounts from average margin (= 1.00) FOR MRO CUSTOMER SEGMENT

  34. SmartCube ©2010 Evergreen Consulting, LLC MRO SEGMENT OEM SEGMENT CONTRACTOR SEGMENT ITEM SENSITIVITY CUSTOMER SIZE

  35. Opportunity area #1 - Consistency • Fix outliers • Customer favorites – analyze spend • Customer buy patterns – Fragmentation, churn • Popular items – by customer segment • Fix pricing process • TMV pricing for sales reps • TMV bracket pricing • Pricing tools

  36. Opportunity area #2 – Fine tuning • Less visible items • Brand names, private brands, generic products • Low value SKUs

  37. Opportunity area #3 – Other revenue • Unproductive discounts • Freight cost recovery tactics • Add-on charges • Low-leverage rebates • Service labor, travel time, parts

  38. Company margin optimization

  39. Highest & best use of sales talent • Time wasted on clerical work • Overinvestment in low profit, low potential accounts • Lack of knowledge of true market pricing • Slow, awkward pricing processes • Ineffective negotiations with major accounts

  40. Pricing: Stuck in the 1960s? “The Road Ahead” Internet, smartphones, texting, Twitter Laptops, e-mail, mobile phones PCs, fax machines, car phones, pagers Minicomputers, copy machines Service bureaus, mimeograph machines Pay phones Kardex Comptometers

  41. Paul RaymondParts for Trucks, Ltd. • “I have to tell you the truth – I buy better than cost” • Uniform pricing throughout the company • Segregate product areas by customer • Lots of special price files • Shop labor @ 75% billable

  42. Territory target trends ©2010 Evergreen Consulting, LLC

  43. G 10 20 30 40 50 40 30 20 10 G Transaction Analysis Pricing Process 20-30% ROI 10% ROI Pricing Engine Sales Training 50 G 10 20 30 40 40 30 20 10 G © 2010 Evergreen Consulting, LLC

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