Recovery Requires Strategies

October 26, 2009
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In the current economy, focusing strictly on survival could cost struggling members of the HVACR industry their business. When economic hardships come, survival is understandably the main concern, but survival without preparations for the changing economic future can be deadly.

Distributors, especially, are vulnerable to this shortsightedness. No longer operating in an up market, they are forced to move past business-as-usual tactics to simply maintain their market share.

Growth and market share gains, however, demand even more pointed efforts and strategy that may not yield an instant improvement to the bottom line. It is these strategic moves that reposition distributors for recovery.

THINNING THE HERD

Different markets require different behavior to obtain business growth. In an up market, financial gains and market share often come primarily from improved execution and chasing sales dollars. These tactics proved to be profitable as the housing bubble grew, but when it burst and the economy went into recession, the landscape changed quickly and drastically.

“From my point of view, as we go through and we take a look at business expectations, I think it’s a whole lot better to not be planning on the economy coming back,” said Mike Marks, managing partner of the Indian River Consulting Group and a fellow with the National Association of Wholesaler-Distributors (NAW).

“We are in a fundamentally different environment, and I think the firms that recognize this and act accordingly - in other words, you are going to do new things instead of just doing the same things better - are going to gain share and market position from those firms that are waiting for the recession to be over.”

Marks discussed some key strategies for distributors in the recent Webinar “New Paths to Sales Growth: Reset Priorities Now!” Hosted by Modern Distribution Management, and sponsored by Sage Software, Marks thinks the economy will end up looking much like it did in the 1980s; a whole lot of up and down, but at the end of the decade, the household net worth was up approximately 9 percent.

Some growth will come by default. As the number of distributors and suppliers in the market lessens, the surviving distributors will benefit with more customers. “Essentially, you are going to get growth because the competitive landscape changes and competitors leave the market,” explained Marks.

To further capitalize on this natural progression, he suggested, “Instead of running and chasing orders in an effort to deal with the collapsing market structure, distributors should shift their focus to the customers of their weak competitors or weak suppliers. If the distributor successfully takes these customers, it effectively closes the door of the weak supplier, changes the landscape of the supply base, and, in turn, causes growth for the stronger supply house.”

CUSTOMER SEGMENTATION

The recession and some strategy will take care of “thinning the herd,” but handling customers in lean times requires a different approach as well. “It is time to ask yourself, ‘Am I aligned with the right people?’ ” said Marks. “The focus is on improving supply, not necessarily sales. The bottom line is this: What is the return we get on sales time investments?”

Marks instructed distributors to define their customers and look for unrealized potential.

“Fundamentally, a group of executives sit and take a look at why customers choose to buy from a distributor instead of just assuming that the reason they buy from us is because salespeople go out and make them,” explained Marks. “You cannot build a meaningful strategy without really having effective customer segmentation. You may go through this process, and it reaffirms what you are already doing, it may not change an awful lot about your positioning, but you really need to have this analysis.”

After defining the customers and revealing the company’s sweet spots, distributors are then able to search the market for other customers that fit these criteria. Instead of chasing increased volume from the same top five customers of each sales territory, it is now possible for each salesperson to identify the top five customers with the highest probability of growth in the next 90 days. Focusing sales efforts in this manner can increase market share and gross profit.

It was also suggested that distributors create a framework to track and measure customer departures. “This is about having a process to catch the stuff going out, instead of just saying we lost an order,” said Marks. “I am much more concerned about losing a customer than about losing an order, and the distinction is very big in a down market.”

According to him, this positions the distributor to focus and manage resources instead of just managing top-level numbers.

STRATEGIC PRICING

The final weapon Marks covered in the Webinar was strategic pricing. With market prices lower now than last year, pricing to meet the market can help increase profit and possibly save a distributor from shutting its doors in the midst of fierce competition.

“Don’t lead the price cutting, but you must supply the customer with their target price,” cautioned Marks. “You need to be able to participate, and if you think you can get above the market, and you think the market is the way it was last year, you are just missing the boat.”

Strategic pricing requires the skills of one person in the distributor’s organization. According to Marks, if everyone is in charge of pricing, then no one is in charge.

“The market drives pricing on primary products, and you can’t change that because the market is very elastic around high-volume primary products,” he explained. “What you can do is raise the prices on the tertiary products, even up to 20 percent, and few will notice or care. There will be pushback from the sales force, but you will receive little to no pushback from customers.”

Getting the sales field out of pricing must be a primary objective in order for this measure to succeed.

What comes in the future is unknown, but while “hunkered down in the economic trough,” distributors can position themselves to gain share and to prepare for whatever market returns come. Marks encouraged distributors to analyze their strategies and cautioned them to remember, “What worked in the past is not going to work going forward.”

For more information, visit www.ircg.com.

Publication date: 10/26/2009

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