Pricing is the tip of the profit spear. It is often said that profit is made on the buy side of the equation in wholesale distribution. That is a true statement. However, it only holds true if you are disciplined enough not to give that profit advantage away during the quoting and pricing process.
The Quotation - Pricing Process“Your customer has no need for you to make a ‘fair’ profit unless there is no other distributor willing to take your place.”
This is quite a sobering thought, but one that we should keep fresh in our minds. Pricing strategy starts by providing guidelines for your quotation process. If we do not have a vehicle, a scorecard or some methodology to determine how we are doing, then we are driving through a tunnel with our lights off. Not having a formal quotation process increases our chances of becoming the Dumbest Competitor in the market, giving away valuable margin.
Quotes have to be recorded with a timeline lifespan. Preferably, your IT system supports this activity and allows you to turn a quote into an order quickly and easily. If it does, chances are you can create a number of scorecard tools to determine what exactly is happening in your market from a competitive standpoint. These tools include:
- Quote kill rates
- Trend analysis on quote success
- Re-quotes and negotiated pricing
- Quote number tracking
- Follow up triggers
- Margin exceptions
- Number of quotes generated by sales rep
- Percentage of quotes sold by sales rep
- Lost business report
Quote kill rates and a trend analysis are two of the most important tools to understand the effectiveness of your pricing strategy.
Are you Market Based?Quote Kill Rate = Total Business Booked
Total Business Bid
If your kill rate is high, it may indicate an opportunity to raise prices. If it is low, you may need to lower prices. Of course you should investigate all factors before coming to that final conclusion. If you track your kill rate by month it can give you an indication as to what may be happening in the market. If your kill rate rises dramatically, again, you may be lagging in a market that is demanding a price increase. Conversely, if your kill rate drops dramatically, it may mean that market prices have dropped and you are not in sync with what is going on. Keep in mind this is an indicator that is telling you to investigate. Do not react impulsively without getting all the facts.
NegotiationContrary to some beliefs, negotiations in distribution are not about persuasion, closing, overcoming objections, compromising, accommodating, getting the order off the street or blowing away the competition. Negotiation in distribution is about the exchange of information and action planning that results in a mutually beneficial exchange of resources between two companies. There are five underlying facts you must understand when you are negotiating:
1. You are negotiating all the time.
2. Everything you want is owned or controlled by someone else.
3. There are predictable responses that you can count on in the negotiating process.
4. There are three critical factors in every negotiation - power, information and time.
5. The proper mesh of personality types is important to negotiating success.
Negotiating is not just about price. You negotiate many things with a customer including the rules of engagement; how you are going to do business together. The better your relationship, the more predictable the responses both you and the customer perceive. However, you must never forget that the buyer you call on has most likely been trained in the art of negotiations. That is his job and his job has three basic elements:
1. Ensure a reliable source of supply.
2. Ensure quality meets requirements.
3. Without compromising items 1 and 2 above, minimize raw goods inventory and purchase price.
You should recognize that 90% of performance-related buyer terminations occur for failure to perform items 1 and 2 and not because of the price paid. That is a very important fact to remember when negotiating. The buyer has been trained to develop a rapport with you and then tell you your price is too high. Many professional buyers will keep a log on how you respond to the statement, “Your price is too high.” That is why it is extremely important that you not only understand the difference between price and cost but that you also have the ability to educate your customer on the difference between price and cost. There are numerous classes available on negotiations. It is worthwhile to attend one.
Being successful at negotiation means you have to know your buyer’s needs and goals. The only way to accomplish this is to ask open-ended questions and have the discipline to shut up and listen. Skillful questioning and good listening skills will help you uncover the information you need. Specifically, the objective of your questioning process is to:
Gain information - Don’t assume anything when you are negotiating a sale.
Check understanding and interest level - Ask questions to uncover how knowledgeable your customer is technically. Can they understand your true value propositions?
Overcome obstacles - Your major challenge is dealing with your own fear of rejection. It is easy to deal with this fear by lowering the price. That is the biggest mistake most sales rookies make. You must overcome your own fears by understanding all your value propositions including the personal value proposition you create in your relationship with the customer. Value propositions are provided by the benefits of the product, the company and you personally. Make sure you understand and are able to explain in detail all of them.
Your belief in yourself, your product, your company and your service is the secret to successful negotiations.