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Wholesale distribution experts have long touted the importance of effective pricing as one of the best and most sustainable strategies for growing margin. While that seems like an obvious answer, the reality is better pricing and profitability are often an uphill battle due to both internal culture and external market factors.
Independent distributors are also going up against larger national distributors with greater scale and fending off an increasingly rapid race to the bottom on price, driven in part by Amazon Business. Here are three profit-squeezing obstacles distributors must overcome if they want to protect and grow margin in this market.
Obstacle 1: Salespeople are lone wolves.
Over the past decade, distribution industry experts are calling more attention to the role of field sales in today’s market – what that role is and what it should be in a digital era. The inefficiency of the traditional sales rep-driven model is a target for many forward-looking distributors. They know that they shouldn’t leave most customer interaction in the hands of a field sales rep. After all, it’s difficult to maintain profitability when the competition is operating more efficiently, thanks to technology that moves administrative tasks like order-taking away from this expensive resource.
Salespeople have also historically had a lot of leeway with pricing, not afraid to adjust pricing downward to get the sale. Most distributors will continue to experience the wild west when it comes to margins if they don’t implement a centralized pricing strategy and technology tools to support its execution.
Obstacle 2: Treating all sales the same.
Many distributors have run on a cost-plus pricing philosophy their entire lives, marking up each product a set percentage regardless of customer, market or product. While there may be some differentiation based on category, the margin often does not consider a distributor’s true cost to serve a customer. This one-size-fits-all approach also doesn’t consider the customer’s price sensitivity around an item. Customers tend to be less sensitive, for example, if it’s a part that is required – at the last minute – to get a production line back up and running. They may also be willing to pay more for add-on items to an order.
If you’re only operating on a cost-plus philosophy, you cannot be sure you are covering freight, handling and other costs that often go unchecked. Distributors need to build margin protection into their system to ensure they cover not only their costs but get paid for the value they are adding to a customer relationship.
Obstacle 3: Resistance to technology.
Distributors can’t compete with rivals like Amazon on price. Amazon also offers convenience and delivery speed that are nearly impossible to beat. But distributors can identify and selectively invest in technology that drive greater efficiencies in how they go to market. And they shouldn’t wait to do that until it’s common practice – as that would negate the competitive advantage they would gain.
For example, technology like e-commerce can take rote tasks like reorders away from more expensive sales reps. Distributors can also invest in chatbots that give customers the ability to access order updates they need – satisfying an immediate need without a call to their sales rep. Managing costs and pricing within their ERP system can also reduce pricing exceptions and drive consistency in margins.
The goal is to leverage technology to reduce the cost of serving a customer – without affecting customer service levels. When you use technology to make a customer’s experience better and their job easier, you also reduce the role price places in your relationship.
Enavate’s new Pricing and Costing App for Wholesale Distribution was designed to help distributors maintain complex pricing strategies in an easy-to-use yet flexible and functional format, enabling a high volume of pricing changes while protecting and growing margins across a diverse customer and supplier base. Learn more.
Matt Petersen is a Senior Director of Industry Solutions for ENAVATE and has spent his entire career in the enterprise software industry. Matt was a founding member of the SAP for Wholesale Distribution Industry Business unit and in 2014, he joined Microsoft to lead the U.S. Dynamics Retail and Wholesale Distribution Industry practice.
Matt has a Bachelor's Degree in Economics from the University of Illinois in Urbana - Champaign and a Certificate in Distribution Management from Texas A&M as well as a Certification from INSEAD in Business Strategy and Financial Acumen.