Strategic Pricing for Heavy-Duty Vehicle Parts Distributors
December 2009 CVSN iNSiDER 8 CVSN GUEST ARTiClE BEFORE & AFTER STRATEGiC PRiCiNG The sales reps were taught how strategic pric-ing worked and were given margin goals for their customers, by item. Larger increases were sought on less sensitive items and for smaller customers. Smaller increases were recom-mended for more sensitive items and for larger customers. Most prices for larger customers were left alone, except for the least sensitive items. Prices under contract were not touched. The sales reps screened the proposed new prices and made decisions about trimming or postponing increases to selected items for some of their customers. Mahoning Truck's information system profes-sionals plugged the recommended margins and pricing look-up tables into the company's `ERP' system. Many of the thousands of special con-tract price and cost records were cleaned out of the system. Strategic pricing made most of those hard-to-maintain records unnecessary. After review by the sales reps, the new prices were applied to customer transactions. Margins on some low-profile items for small customers increased by several percentage points. Margins for other items increased by lesser amounts, or not at all. Mahoning Truck did not reduce mar-gins determined to be above the market level: the goal was profitability, not perfection. In spite of the fears of some of the sales reps, there was almost no significant negative re-action from the customers. The initial phase of the strategic pricing project resulted in an overall increase of 200 basis points, or a 2% increase in gross trading margin. The margin improvement translated into an immediate jump in gross margin dollars of almost $80,000 per month (approximately $4 million monthly sales @ 2%). Under Mahoning Tool's sales com-pensation plan, about 20% of the increased margin or $16,000 per month, went to the sales reps. The balance went straight to the com-pany's bottom line: over $60,000 per month, nearly $750,000 per year. For Mahoning Truck, at a $50 million annual sales rate, the $750,000 operating profit increase translated into 1.5% of sales. In terms of return on investment, a $750,000 leap in operating profit represented going from a $300,000 loss to a $450,000 pretax profit. As a group, the sales reps enjoyed almost $200,000 in additional an-nual commissions. The immediate improve-ment was enough to restore the bank's confi-dence in the company. Strategic pricing freed the sales reps to make a `highest and best use' of their valuable time: presenting new products and concepts, and building customer relationships. The reps learned to delegate most routine pricing activi-ties to the support staff, and with better mar-ket pricing information they became adept at negotiating deals with larger customers. Using the margin indexes and pricing look-up tables in the ERP system, the inside sales staff became empowered to quote market-driven prices to new customers and pricing on new items to existing customers. George and his imaginary management team dealt with a serious challenge in front of many wholesale distributors today. They responded to the threat in the usual waysÂstaff and in-ventory reductionsÂbut also with a creative response to a common problem: sales reps overwhelmed with pricing tasks, yet starved of market pricing information. The data you need is already in your system. It's up to you to turn the data into information, and the information into profits.