You need a pricing manager

 

BY RICH SCHMITT
Management specialist

As a consultant, just like your spiritual advisor, I tend to talk in blacks and whites. In a presenting report or seminar, I always acknowledge that the world is really shades of gray and that the listener will have to translate my black and white suggestions into their real world of grays. When it comes to your need for a pricing manager, I will not allow that there is a gray. You must have a pricing manager. Period. 

By my definition, the pricing manager is someone who is fully responsible and accountable for the pricing of the company in all areas. As with all functional responsibilities in smaller companies, an individual may be responsible for pricing and other duties, while in large companies, pricing may be managed by a whole department of people. In our experience helping companies with pricing for over 25 years, sharing the responsibility is a slippery slope since other, more urgent, duties often seem to trump the critically important, but seemingly less urgent, duties of pricing management.

I shudder when I hear a president say that the pricing manager is busy organizing a golf tournament or the company’s hot-dog day at the counter. I know these are important marketing activities but, thus far, I have not encountered a company whose pricing is so well in control that the pricing manager should be spending time on other activities. Of course, emergencies come up and I fully subscribe to the policy that when the ship is on fire, everyone is a fireman. However, other than life and death emergencies, the pricing manager’s number-one duty -- to the exclusion of all others -- is pricing.

Some may think that their pricing is under control and fully optimized. (Borrowing a phrase from last month’s column, “You can’t handle the truth.”) Even companies that have some level of focus on pricing are probably leaving money on the table because they are not expertly performing all facets of price management. Further, most wholesalers are not providing any sort of price analysis or price management tools to their pricing manager, so the task becomes overwhelming and only partially accomplished.

Part of the problem might be that we have different definitions of what pricing management is, so the following is my definition of the job. Pricing management is the ongoing oversight of all costs and pricing for the company. It involves:

• Timely and accurate cost updates
• Timely and accurate selling cost updates
• Comprehensive price management
• Create market-based pricing
• Act as the focal point and repository for competitive information
• React to competitive promotions and special pricing initiatives
• Model, track and forecast profits.

The following sections will focus on each of these areas.

Timely and accurate cost updates

The cost of next acquisition or replacement cost should always be accurate in your computer system. This is the first discipline of the job. Frankly, this is a relatively straight-forward task that many companies have not mastered. In some companies, it still takes days or weeks to load new costs into the computer system. If you are not using electronic price updates from your vendors, you are missing a big time-saving opportunity. (If your computer system doesn’t make it easy to get the job done, write me for some suggestions rich@go-spi.com.)

Timely and accurate selling cost updates

You may call this something else, but I believe that you must also maintain a selling cost that is used in creating your pricing. So a properly crafted selling cost:

• Reflects your next acquisition cost -- Over the last year we have seen instances where the computer price to a customer was less than the next acquisition cost of the product on the next order from the manufacturer. Never use average cost for setting pricing.
• Includes inbound freight and handling -- Many products do not have additional inbound freight but some products do so that freight and handling should be included in the selling cost.  Also some products are susceptible to damage or theft so you should incorporate that into your selling cost.
• Protects any benefits, rebates or buying advantages that you enjoy from your buying groups or great buyers. The pricing manager is tasked with preventing buying advantages from automatically flowing into your pricing. If you are buying better than other wholesalers in your marketplace, you would load the real cost into your computer’s next acquisition cost but your selling cost should reflect the level at which others in your market are buying.

Maintaining a separate selling cost has two advantages:

1. It ensures that your people understand that the next acquisition cost only reflects a portion of your total landed cost of the product
2. It is used as the “public” or exposed cost in your computer system. I really don’t think you should show cost or gross margin percentage on your order entry screen. I have yet to see cost or gross margin percentage used for good (increasing the price) and have often seen them used for evil (price concessions).  Further, I call it the “public” cost since this is the cost that your sales team will be showing to the customer. You are kidding yourself if you think that cost disclosure isn’t happening in your company. Sometimes the customer looks over the salesperson’s shoulder and sometimes the salesperson just hands it over. So I would first challenge you to remove cost and gross margin from your sales screens but if you feel that you absolutely must show a cost, it should be a selling cost that protects your company from some of the stupid selling tricks that happen in companies every day. 

In a recent assignment, the wholesaler’s buyer had negotiated a great deal on a commodity product. The pricing manager had trapped the cost decrease before it hit their computer and automatically reapplied the gross margin percentage to create a new lower selling price. Bravo! He decided that their selling price would not be changed since the selling price already was very competitive. Again Bravo! The problems occurred when the sales team saw the high gross margin for this commodity product on the sales entry screen. Not understanding the situation and thinking “You can’t make high gross margin on this commodity product,” they started manually overriding all the pricing to the customers. If the wholesaler had maintained a selling cost, it would have been adjusted upward to hide their buying advantage and thus show a normal gross margin. This would have prevented the knee-jerk price reductions by the sales team.

Comprehensive price management

Every product has a managed price. Every stocked product, every non-stock product and every special order product has a price that is explicitly set by the pricing manager. For some wholesalers, just getting their act together allows them to make a little more money on many of the products that they sell. 

Further, in our industry, a staggering amount of profit is lost simply because the pricing is set “on-the-fly” by someone who thinks that 10% to 15% is adequate for non-stock or special order products. So this opportunity to make above-break-even profits is squandered and turned into a below-break-even deal. (To make matters even worse, this same person often uses markup instead of gross margin so the actual gross margin goes down to 9% to 13%.) 

Create market-based pricing

The pricing manager is responsible for insuring that your “normal price” is always fair and competitive. By “normal price” I mean, the price that your computer system shows for a customer when he walks up to your counter, gives his account and asks for the price of a product. When your counter person enters the customer’s id into the computer, looks up the product and sees the customer’s price on the screen, that price is what we call the “normal price.” Fair and competitive means that the customer feels he is being offered competitive pricing and being treated fairly. It also means that the wholesaler is making a fair profit on the sale. 

In a nutshell, the pricing manager is tasked with sending the sales team (outside, inside and counter) into battle with fair and competitive pricing that can be offered to the customer without the risk of being embarrassed. 

Many pricing problems occur because a customer’s normal pricing is outrageous. A contractor walks up to the counter, asks for the price of a product and, due to lack of price management, is given a price that offends him. He becomes aggressive and after some discussion, the price is adjusted to a reasonable level for this sale. (In some instances, the customer is so offended that the counter person over-compensates and adjusts the price to low-margin level that is not fair to the wholesaler.)

The event has probably damaged the relationship and the contractor has made a mental note to check every price in the future. He may also go back to the office and review previous invoices to see how long the wholesaler has been gouging him. If the contractor had been given a fair and competitive price in the first place, the sale might have simply continued without the problem. I will admit that some contractors gripe about even the best pricing, but your counter guys will find it easier to defend a reasonable price than to defend a stupid, outrageous price. There are three tasks, in priority order, for creating a market-based price:

• Product stratification -- the pricing manager is responsible for evaluating, then stratifying and coding every product in a product line based upon its price sensitivity. In our experience, you should have six levels of price sensitivity within every product line or product category. Why six levels? In doing this for 25 years, we have found that six is a good balance between too complex (more than six levels is confusing) and too coarse (less than six levels doesn’t offer the fine-tuning needed to really optimize your pricing). These are not the same codes that you use in your inventory ranking. These codes represent the customer’s sensitivity to the product’s price.
• Customer stratification -- the pricing manager next will understand and adjust pricing for the type of customer. This acknowledges the fact that contractors, based on the work they do, are tuned-in to the pricing for different products. For example, a residential new construction plumber may be sensitized to small copper pricing while the mechanical contractor may be sensitized to large copper. Your pricing should, ideally, provide aggressive pricing on small copper and fair pricing on large copper to the residential guy. Conversely, you should offer aggressive pricing on large copper and fair on small copper to the mechanical guy. Pump switches are a big deal to well-drillers and should be priced accordingly to them but there is no need to offer that same pricing to an hvac contractor customer.
• Geographical adjustments -- Every location should have pricing that is optimized for its situation. While the margins may be lower in a highly competitive, large metro area, it would be dumb to offer that same pricing in a less-competitive rural location. The pricing manager is responsible for understanding the market conditions and optimizing your situation.

Act as the focal point and repository for competitive information

The field team for many wholesalers does not forward competitive information that they gather since they don’t know who to send it to and nothing would happen if they did send it in. The pricing manager should be the first person to receive information from the field when a salesperson is able to get a catalog, flier, quotation or invoice.

That information should be organized and used to shape the company’s normal pricing. Further, the pricing manager can then act as a resource to the field team as competitive pricing situations arise.

React to competitive promotions  and special pricing initiatives

The pricing manager is responsible for knowing about pricing initiatives that are active in the markets you serve. If a competitor has a promotion in effect, your pricing person should be the first to get called from the field. The pricing manager will:

• Get a copy of the flier, catalog, quote, etc.
• Analyze and understand the details of the special initiative

                    ° Length -- how long is it valid

                    ° Terms -- cash only, normal credit, extended terms, etc.

                    ° Products -- normal products or did they bring in lower quality sale products to get the  

                    customer’s attention

                    ° Quantities or order size requirements -- does the customer have to buy a truckload or

                    order $20,000 worth of product to get the deal

                    ° Other incentives -- trip points, rebates, etc. involved in the deal

• Develop a thoughtful response to the initiative -- The object is to outsmart the competition, not to “outdumb” them.  You must understand the customer’s view of the competitor’s initiative, develop a creative response and then create the words that the sales team will use to explain why your offering is better for the contractor.
• Disseminate the information and response to the field -- In the best companies, the information and response are out in the field in a matter of hours. Your sales team really gains credibility when a customer asks, “What are you going to do about your competitor’s special?” When your salesperson replies, “We’ve seen their flier. Did you know that you have to buy a truckload and that their “special” price is our normal everyday price on a truckload buy?” The competition threw a great pitch but you hit it out of the park. Or when he can reply, “We stock that economy-grade product too but we cannot offer that price on the heavy-duty product that you normally specify, but if you want the economy product, here is our price which happens to be lower than the competitor’s.”

Model, track and forecast profits

As pricing is changed and managed, the pricing manager must analyze and model current and future pricing. He must then track progress and forecast profit production. This means price changes are analyzed, modeled in advance, implemented and then tracked to measure whether they produced the desired result.

My rule of thumb has always been that any company with more than $20 million in sales should have a full-time, dedicated price manager. If that person is only able to scrape out a single additional gross margin point, it represents a net profit gain of $200,000. Thus far, we have never had a good pricing manager produce less than a 1-point gain.

As we discussed my specification for the price manager job, one owner said, “I thought we had a pricing manager but he certainly doesn’t do many of the tasks on your list with any kind of regularity.”  That unfortunately is pretty much the norm for our industry. Many wholesalers do some of these tasks on a haphazard basis and call it price management. The effort tends to produce haphazard results. When wholesalers get focused on price management it improves their competitiveness and makes them more money.

For reprints on the topic of pricing, for information about our pricing analysis and modeling software or about our pricing seminars, write to me rich@go-spi.com.

Rich Schmitt is president of Schmitt Consulting Group Inc., a management consulting firm focused on improving the profitability of distribution and manufacturing clients. Rich is also the co-owner of Schmitt ProfitTools Inc. (SPI), a business producing print, CD-ROM, web and palm-based catalogs as well as pricing management and analysis software for wholesalers.