Distributor pricing strategy: 5 factors that lead to revenue and profit loss
B2B business leaders of today are constantly challenged to find the best, most reliable path to profit and revenue growth. For wholesale distributors specifically, margins are the name of the game, as a mere 1% price decrease requires the company to increase its sales by nearly 6% to achieve the same profit outcome.
So, if a distributor’s pricing strategy is such a critical profit lever, why is the topic often left undiscussed? The evolving state of the wholesale distribution industry is a prime indicator, as distributors are continuously challenged by complexity brought on by:
New market disruptors
Global dynamics impacting supply chains
With each of these at play, it’s easy to let inadequate pricing and sales practices either go unnoticed or just unaddressed. And this leads to unnecessary revenue and margin loss.
Distributor pricing strategy: 5 revenue and profit draining factors
Research from the pricing experts at Zilliant, Distribution Edition: 2020 Global B2B Benchmarking Report, reveals the factors that can undermine a distributor’s pricing strategy.
“We found five key phenomena that are leading to either top-line opportunities that are missed or bottom-line leakage,” said Barrett Thompson, general manager of commercial excellence at Zilliant. “Taken in total [for a distribution business], the top-line revenue loss could be anywhere from seven to 25%, and the profit loss could be three to 15%. [Many distributors] never recognized the amount of impact that’s having on P&L.”
Customer churn. Salespeople are usually adept at bringing new customers to the business, but with their laser-like focus on prospects, they often lose sight of existing customers. The revenue gain provided new customers is undercut by the loss of current customers. Distributors can lose up to 15% of annual revenue due to customer churn.
Lack of cross-selling. Most salespeople know their top five to ten accounts very well. The other 200 accounts not so much; they simply don’t have time to learn about them and understand their needs. This leads to lost opportunities and revenue.
Inconsistent pricing. When transactions represent too wide of a range of pricing, a distributor risks margin loss. In these cases, prices are inconsistent with market conditions or a customer’s situation. Too many transactions wind up being overpriced or underpriced.
Misaligned market pricing. Without alignment to market conditions, wholesale distributors can lose margin. Common culprits are prices that are modified to standard margins or discounts, and pricing that doesn’t reflect cost changes.
Inefficient pricing practices. All too often, distributors rely on tools like Excel spreadsheets to manage pricing. The slow, error-prone process has a domino effect that results in margin loss. Price lists go stale and the time to get quotes to customers is too long.
Distributor pricing and the empowered B2B customer
The wholesale distribution industry has gone through several disruptive periods, with the COVID-19 pandemic further accelerating the need for digital transformation. This period has spotlighted distributors’ shortcomings around real-time visibility into market price and the customers’ ability to instantaneously compare pricing across competitors. If distributors aren’t careful, buyers are going to come into the transaction with more knowledge about pricing than the sellers have.
“The entire profit model has been disrupted,” says Magnus Meier, vice president and global head, Wholesale Distribution Business Unit at SAP. “These days, it’s not enough to update your price once a half year when your supplier sends you the new price list. You need to be able to adjust your pricing and pricing model as fast as the market needs.”
Reclaiming revenue and boosting profit
In a business where most have hundreds of thousands of products and thousands of customers and suppliers around the globe, distributors must automate the pricing process intelligently to stay aligned to the market and run efficiently and effectively.
Meier and Thompson have a lot of advice on this front. In this podcast, they discuss the challenges facing distributors today and provide tangible guidance to help you reclaim precious margin.
This blog post was originally published on The Future of Customer Engagement and Experience