A friend, and now retired client once told me that after his 40 years in contractor-based distribution, he noticed most distributors herd cats when it comes to profitability. He had worked at an executive level for over half of his career, participated in numerous acquisitions, and retired when his employer had grown to over 500MM in sales. I think he knew what he was talking about and remembered his words as I recently reviewed the plight of two distributors, both in the top 3% of all distribution companies in sales, as they tried to manage their profits. 

One distributor had, some years back, implemented a sophisticated pricing system that included buying a license and software package. The firm has “target” prices by segment and with some transaction-based pricing also. They have a great “numbers guy” monitoring the pricing who showed me that over 50% of the sellers, both inside and outside, were not getting their target price. In essence, the “target” had become a level to discount down from. This was despite a considerable amount of research, statistics and money invested to show that sellers should and could get the target price in the market. Some segments of the business were small and out of the way and probably not all that price sensitive, yet still there was failure to maintain the target price.

The other distributor is developing a pricing system. They have good information and understand their costs better than most. Their pricing system has a market segment and product sensitivity-based logic. Their pricing system requires that branch managers and field operatives correctly classify accounts in segments, remove small accounts from specialized pricing exceptions, and not override suggested prices from the matrix. In starting up their pricing system, they noticed margins were nominally improving. Investigation found that the branch managers and field operatives were overriding suggested pricing, incorrectly classifying accounts to their correct matrices, and not removing specialized pricing “quotes” for small accounts. An expensive control system had to be programmed to understand the pricing variations and overrides.  

My comment, when reviewing both of these systems, is that they were herding cats in low gravity atmosphere. In essence, in trying to use an information “net” to catch the inside and outside sales felines, the wholesalers were spending an inordinate amount of time and resources trying to catch pricing exceptions. This was compounded by the low gravity atmosphere (sellers do whatever they want) in which the cats bounced all over the place and in every direction. My comments were not met with enthusiasm as the herders were convinced they were doing the right thing. I told them that at the end of the day, they would be foot-sore, scratched and covered in kitty dander with little to show for their efforts. “Herding cats is a bad idea,” I told them and it’s better, much better, to design a system where the cats are squeezed into a path that meets your profit goals rather than trying to herd them to where you want them.

Market Based Management and the Profit Squeeze

When cattle are branded, they are moved from a pen into a device called a squeeze, which is like a funnel in that it takes a population, directs it and narrows it down into a single file production line. Pricing and indeed much of distribution profit making is moving away from herding cats and going to a funnel-based design. In essence, the distributors’ marketing execs are charged with setting pricing, service levels, service platforms, products and product promotions before the cats ever hit the street or pick up the phone.

Good marketing can drastically improve profits by designing a system that gives a group of customers or a segment what they need in product, pricing, service and sales promotion. Good marketing can do this profitably and define the variables that matter for a successful customer relationship. To the individual customer, the marketing funnel looks like a custom group of product and services; however, the wholesaler has grouped common customers with common needs, which increases profit by decreasing variation caused by cats in low gravity atmosphere and who bounce all over the place with their little pointy ears mewing that all customers are different and all need different pricing, services and products. 

The corporate marketing approach is becoming a reality in distribution simply because the pressure on costs is mounting and most customers really don’t want and can’t afford significant variation (remember that variation increases costs). The marketing function is a must as we have chronicled in previous blogs detailing the decline of the branch manager of who, too often, is a breed of really big and proud felines that need to be tamed. 

There are real impediments to designing an alternative to cat-herding that maximizes profit. They include:  

  • Sales compensation based on margin dollars. Margin dollars are a poor means of driving long-term profitability and increasing long-term value. Margin dollars are an accounting period phenomenon and have little to do with the profitability of a customer, transaction type, segment and branch. Good marketing will develop some type of cost-to-serve analysis for these entities to help with their segment-based plans.   

  • Large customers, if they are profitable from a cost-to-serve perspective, are exceptions to the squeeze and marketers need to identify them and let the better cats, who don’t need to be herded, control their offerings.  

  • A significant amount of cats, who cause a lot of service and product variation, need to be removed from their feline activities as they often cause the accounts they call on to earn less margin dollars than they generate.  

  • Marketing must be staffed and given equal power to sales, especially when it comes to areas of the customer base that don’t contribute to operating income. This is a tough call for many distributors as they are sales driven and believe strongly that sellers are the “voice of the customer.” Good marketers know that cat sellers who spout such truisms are really spewing hair balls that only they like and can tolerate.  

  • Marketers are dogs to the sales cats. The two functions, historically, don’t get along and one shouldn’t expect them to. If, as a wholesaler, you establish a marketing effort and your marketers are best buddies with the sellers, then you probably don’t have much of a marketing effort.   

    As to the two examples cited earlier in the article, I told both companies to severely curtail pricing overrides for segments that were costly to serve and intermittent buyers. If the cats were determined to override the matrix for these customers or alter the service template, they better have a good reason or they would have their commissions reduced and their catnip taken away. In several segments, I told the wholesalers to remove sellers from the ordering cycle altogether. The segments were historically profit challenged and weren’t growing all that much, and one simply doesn’t need a lot of cats going feral on unprofitable segment. 

  • Herding Cats and the Competitive Disadvantage

    If you are herding cats and not getting the profits you want in your firm, my advice is to take action and quick. Too many decisions by cats who are paid on margin dollars with no measureable cost to serve, depletes operating profit.

    We typically find that some 40% of customers make up 130% of operating profits and some 40% of sales territories and segments are negative operating profit producers. With the advent of e-commerce and instant availability on pricing and service, the explosion in global manufacturing and reduction in product costs, wholesaler margins are being squeezed like never before. Too many cats just gum up the works and better wholesalers will judiciously use sellers where it makes sense and send low or no profit customers, transactions and segments through e-commerce. Instead of herding cats, distributors will be moved to employ less cats, put them inside a marketing funnel, and let only the best out to hunt for the big game.