The economy is expanding. Noting comments from economist Alan Beaulieu, of ITR Economics (view more here,) the 2017 economy looks like a great year for growth. The forecast calls for a bright, sunshiney sky with 3.7 percent growth. It’s been a mighty long time since we’ve enjoyed this type of up cycle.
Based on candid comments from a couple of interviews for a recent article in The Distribution Center, progressive distributors wondering if now isn’t the right time for distributors to raise their prices. They’re right on …
Why we’ve got low margins today …
Downward pressure on margins is the universal distributor complaint. New competitors, supplier sales teams setting prices at unsustainable levels, the internet and customer pushback are all finding their way into the discussion. Further, in spite of some major productivity advances, operating costs continue to rise. One distributor, who closely monitors operational costs, said costs had risen nearly 25 percent faster than offsetting gross margin gains over the post-recession era. Clearly, we need to do something.
When times are tough, margins get another squeeze. During “The Recession,” many suppliers instructed their field teams and distributors “not to let price be an issue” while grabbing what little business was available. We responded. Pricing levels extended on projects, and ongoing flow business took a gross margin nose dive for manufacturers and distributors alike.
Once the Recession ended, we found ourselves stuck with the lower prices and lower margins. On the customer side, they discovered new baseline low prices and latched onto the savings. With this fact freshly planted in their minds, many pushed and negotiated to extend the lower level.
Why we’ve got to do it now …
While there was a definite period of growth in the years immediately following the big economic storm, recent years have been mostly flat. The economy has moved, but it was definitely slow growth. While most distributors have only been able to maintain their sluggish margin position, reports from nearly every sector indicate faster growth on the horizon for the next year and a half.
Good times are the right time to ask for a little more. Fortunately, most of our customers are out of their own financial crisis. They no longer need to squeeze their suppliers just to survive. More importantly, customers are busy. They, along with their purchasing and procurement departments, are relying on you for expanded services and dependable deliveries, not record-setting prices.
If ever a time existed to push margins to a new level, it is now. The window, however, is narrow. Business cycles, by their very nature, move from great to poor. According to economists, this growth spurt will extend into mid-2018. Time is short. We cannot and should not procrastinate our plan.
What should we do now?
The following is a prioritized list of actions which will enhance margins. By the way, we have prioritized them based on how quickly they can add real and measurable margin dollars to your coffers.
1. Review all long-range pricing contracts.
Strangely, many distributors have long-term pricing agreements without expiration dates. The customer asked for longer range pricing stability, and the distributor pushed competitors out of the way with a pricing agreement. Some of these are well crafted, while others ask the question: Exactly when will the distributor ever be able to execute a price increase?
Any agreement more than a year-old is ripe for a price increase, regardless of your current margin. I recommend a proposed price increase of 2-3 points here.
When establishing new agreements, put in openings for new price increases in the future. Ideally, you should tie these to a six- r-12- month cycle.
2. Review all Manufacturer extended special pricing agreements.
These pricing agreements negotiated trilaterally with the manufacturer, distributor and customer. Typically, distributors raise the price only when the manufacturer raises the price. Sometimes, the manufacturer price increases are not passed along to the customer. You need to address this as soon as possible.
Whatever the manufacturer’s increase, move the gross margin up at least one full point. To illustrate, the manufacturer increases the distributor price by 2.75 percent, and the distributor increases the customer price by 3.75 percent.
3. Pre-plan for manufacturer price increases.
Some customers require a 30-day notice before price increases, while others do not. For those without this requirement, I suggest moving the distributor price forward on the first day that you announce the price increase. The distributor gets added revenue for a short time, and the money improves margins.
4. Get a pricing process in place as soon as possible.
Let’s be realistic. I attended my first distributor branch manager training session in 1991. We devoted a day to the concept of matrix pricing. Each of the 30-some attendees vowed to go home and create a matrix to maximize their revenues. Two decades later, only two of the attendees had anything worth talking about.
Developing a pricing process is tricky and difficult. It requires a combination of product skills, analytics and manpower. These skills are in scarce supply. It won’t work without assistance. Even if you get “cranked up” and start working full-time tomorrow, the uptick will be over by the time you perfect things.
I recommend Cleveland’s Strategic Pricing Associates for a pricing process. Why? First, they have experience in the distribution world. This translates into the right tools to pull data from your computer system and run the analytics. They do the heavy lifting, and you only provide feedback on products, customers and supplier types. The typical distributor employing their work gets a 2-point improvement in gross margin over 90 days. You’ll see results before the end of the growth cycle. In addition, the distributors we’ve seen using their system fair better in the downturn, too.
5. Get your sellers some negotiation training.
If you haven’t noticed, items 1-3 all require a bit of negotiation. It’s a travesty to note that most distributors completely overlook the whole negotiation thing. They lull themselves into a state of false security with three misconceptions.
• Our customers don’t or won’t negotiate with us.
• Our type of selling doesn’t lend itself to negotiation.
• Our salespeople already know how to negotiate.
Let’s examine these concepts.
If any of your customers have a purchasing person who is a certified purchasing manager, purchasing professional or any of the related credentials, they have not only been trained in negotiation, they have taken a refresher course on the subject in the past 18 months. They are constantly negotiating with you. The problem is, you are unaware of it.
Distributor style selling requires an ongoing relationship beyond those in other fields. The normal sales approaches taught in generic classes probably won’t work; however, negotiations are still present. See the comments above. Unless you rely on standard terms and standard pricing on 100 percent of your sales, you potentially face a constant barrage of small points which add up to big dollars.
If you do the research, you’ll notice SPASigma is the only company offering up distributor-centric negotiation training. If you haven’t seen this great video on the topic, you need to.
If you don’t raise your margin now, you might never pull it off …
Good times can distract us all from what’s important. Many distributors operate under what we in Iowa call the “Make hay while the sun shines” mentality. We are so busy taking care of business, we fail to carry out the truly strategic actions needed for long-term sustainability. Few things more strategic than fixing our margin situation. Now is a perfect time.
Let our motto be ….
Good times are here. We’re in this for the long haul. The next cycle will arrive sooner than we think. Time isn’t on our side. Prepare now.
Publication date: 4/28/2017