Years ago, an Ohio-based specialty metal business made the decisionnotto charge for freight costs, even though their products were extremely heavy. The rationale? None of their competitors were charging, so they couldn’t either.
In reality, this company was No. 1 in the industry, so all those competitors were actually just followingtheir lead. When the company realized what was going on, it had the opportunity to change the policy for its entire industry.
And so it did—collecting more than $1 million in additional revenues.
Smart companies know pricing strategy isn’t just about the price on the invoice.To have an immediate impact on your bottom line without formally raising prices, here are three areas to tackle first.
1. Freight Costs
If you’ve been operating for decades, your freight policies have probably been in place just as long. Maybe you don’t charge for freight at all, or fees are the same across all territories—or you charge the same as you did 50 years ago even though shipping rates have risen dramatically.
To start, ask yourself:
When was the last time our freight terms were updated?
What is our justification for our freight policy?
What are our competitors doing in this space?
This line of questioning can help internal stakeholders determine if there’s opportunity for improvement without much effort, as the aforementioned specialty metal business discovered.
2. Rush Orders
When you place an order on Amazon.com and you want 2-day shipping, you understand you’ll have to pay premium pricing—in this case,$99 for a year of Amazon Prime.
Your customers realize this, too. Yet many manufacturers and distributors don’t charge extra for rush orders.
If your lead time is two weeks, but your buyer needs his order in three days, are you charging extra? In order to get that order to the buyer within his limited time constraint, you’ll have to disrupt your operation, move around other orders and pay higher shipping costs. You might even put other orders at risk. You should be paid for those efforts, but many manufacturers don’t actively seek compensation.
Remember, if a buyer needs an order faster than usual, they’ll gladly pay to get it sooner.
3. Volume Discounts
It’s natural to want to offer discounts to your biggest customers, but if you don’t have a discounting strategy in place, the practice can steadily erode your bottom line.
Discounts shape your customers’ perception of your pricing: With every discount your give, the lowered price becomes the new standard. The next time that customer calls with an order, she will expect that same price, even if the order is only half the size.
The key here is to communicate early and often regarding volume discounts. When buyers understand why they are receiving discounts for aspecificorder, they will begin to understand the rationale behind your invoicing and, therefore, not expect discounts with every order.
Additionally, the threat over-discounting poses on profit often goes undetected since most companies don’t truly know how much profit is lost when sales reps offer discounts. Your company does not need to ban discounts all together, but a discount ceiling should be put in place to keep your profits from decreasing too drastically.
Start Small (and Risk-Free) with Freight, Expedites and Discounts
Raising prices throughout each of your product lines can be a highly complex process that demands a lot of analysis. Freight, expedites and discounts are areas you can impact quickly without upsetting current customers.
Start by identifying improvements that can deliver the most profit with the least amount of risk and effort. The extra revenue you uncover can be used to support larger-scale strategic pricing efforts in the future, such as increasing product prices, which will require more time, effort and commitment.
Bad pricing practices are more common than you’d think. Find out why bad pricing happens to good companies in our free guide.
BEREA, Ohio – December 2011 – Sonnhalter, a communications firm marketing to the professional tradesman in the construction, industrial and MRO markets, released three new podcasts in its Marketing Insights podcast series.
The new podcasts offer interviews about trends in distributor-supplier relationships, breakthroughs in supply chain planning and execution as well as a review of the 2011 STAFDA Convention.
The first podcast titled, “Trends in Distribution and What it Means to the Distributor-Supplier Relationship,” is an interview with Lindsay Konzak, editor of Modern Distribution Management (MDM) newsletter. Konzak discusses the trends in distribution and what they mean for the supplier-distributor relationship.
The second podcast titled, “Breakthrough in Inventory and Supply Chain Planning and Execution,” is an interview with Howard Coleman, principal of MCA Associates. Coleman explains the new “pull” inventory management system.
The third podcast titled, “Review of STAFDA 2011 Meeting and Trade Show” is a compilation of interviews with several manufacturers and representatives in attendance at the 2011 STAFDA convention in San Antonio. The manufacturers and representatives interviewed discuss the STADA convention and their outlooks for 2012.
“These podcasts provide interesting insights into how things are changing for manufacturers and distributors, especially since the downturn in the economy,” said John Sonnhalter, rainmaker journeyman at Sonnhalter.
Established in 1976, Sonnhalter is the leading B2T marketing communications firm to companies that target professional tradesmen in construction, industrial and MRO markets. Sonnhalter’s brand identity highlights its expertise in marketing to the professional tradesmen. Its tagline, “Not Afraid To Get Our Hands Dirty,” promotes the employees’ willingness to roll up their sleeves and dig deep into clients’ businesses, also, it refers to the market it targets: the tradesmen who work with – and dirty – their hands every day. Sonnhalter developed the acronym “B2T,” which stands for “business-to-tradesmen” to capture the essence of its specialty. In 2009, 2010 and 2011, Sonnhalter was named one of BtoB Magazine’s Top Agencies. For more information, visit the company website at www.Sonnhalter.com or visit the company blog at www.TradesmenInsights.com.
About Modern Distribution Management
Modern Distribution Management (MDM) is a subscription newsletter that covers the critical management issues facing wholesale distribution executives. MDM coverage includes business intelligence, industry news, seasoned analysis, practical ideas from leading experts and valuable resources for navigating the industry. For more information, visit the MDM website at www.mdm.com.
About MCA Associates
Established in 1986, MCA Associates is a team of senior consultants providing ideas and lean thinking leadership to wholesale distribution and manufacturing companies that are committed to operational excellence. For more information about MCA Associates and the services they offer, visit www.mcaassociates.com.
About STAFDA
The Specialty Tools and Fasteners Distributors Association (STAFDA) was founded in 1976 and has approximately 2,500 member companies. STAFDA holds an annual convention each November for members to convene and take part in educational programs, seminars and a trade show that is well attended by leading manufacturers, distributors and representatives within the industry. For more information about STAFDA, visit www.stafda.org.
A friend of mine, Abe WalkingBear, developer of a copyrighted profit system that focuses on improving cash flow, has agreed to share some of his insights (some are truly unique) on how manufacturers can help distributors. He’s written books, is an international speaker and co-authored STAFDA’s Foundations of Business 2007.
Old military funny money finds new life in business. During this time of slow sales and extended delays in business credit customers’ payments, an old idea is reborn.
During the Vietnam War, U.S troops and sailors in Asia were paid in funny money, i.e. MPC (military payment certificate). This funny money, which was also called “monopoly money” or “script,” was in use up until 1973. Members of the American military could convert MPCs to US dollars upon leaving a designated MPC zone, but while in these zones, all you could do with it was go to the Post Exchange (PX) or the Ship’s store and convert it to the local currency. MPC in Vietnam had pictures of movie stars on it and I can’t remember for sure, but I think that Marilyn Monroe was on the $20 bill.
Interesting, but what does this have to do with improved cash flow and more sales?
Distributors sometimes offer their business credit customers a 2-10-N30 payment term. i.e. the customer can take a 2% discount off the invoice amount if they pay it within 10 days, otherwise the full invoice amount is due in 30 days.
The idea behind the early pay discount being to spur cash flow.
Any business customer not taking advantage of a 2-10-N30 early pay discount fails to do so for one of two reasons:
1) they don’t have the financial ability to do so…no money
2) the sales and credit guys failed to explain that a 2-10-N30 is worth a 37.24% Annual Rate of Return…where else can you get 37.24% return with no risk?
Formula:
The Problem:
There are several problems with early pay discounts:
First, business customers sometimes will issue a check for payment on an invoice, less the 2%, on the the 10th day, but will not release the check until the 30th day or the 60th day thus defeating the very reason why the discount was offered in the first place.
Second, the taking of “unauthorized discounts” by the business customer by failing to pay within the 10 days creates additional work and cost for both the distributor and the business customer in the pursuit of the unearned discount. And this in turn can actually lead to the loss of customer good will and of future Sales.
I’ve never liked 2-10-N30 terms for these reasons.
The Best of MPCs and Early Pay Discounts
There is a way to use an early pay discount to improve cash flow and also bring business customers back to buy again thus gaining the most profitable sale, the repeat sale.
Instead of offering a 2-10-N30 term, a distributor can send out, along with an invoice, a VCDC; A Valued Customer Discount Certificate for 2% of the invoice amount…and they can put the selling company’s CEO’s picture or the selling salesperson’s picture on the certificate…or Marilyn Monroe’s picture.
Each VCDC would carry the same # as the invoice it applies to and thus would be easy to track.
The VCDC would clearly state that if the invoice that the VCDC applies to must be paid within 10 days of the invoice date for the customer to use the VCDC on their next purchase.
If a business customer pays within 15 days..they should be cut some slack and the VCDC accepted…on that next and most profitable purchase, the repeat.
The end result: Improved cash flow and repeat sales.
All too often in business we walk a mental rut, we do the same thing over and over again in the same way, until the rut becomes a mental trench and then we think we can see the horizon for oncoming danger or new business opportunities when in effect all we really see is a wall. And that’s not to say that a trench can’t be comfortable and easy to navigate, but God help you if things change and the walls give way.
During this time of slow sales and extended delays in business credit customers’ payments, manufacturers can add value to their distributors by sharing with them an old idea reborn anew on how to gain a competitve advantage while improving cash flow and repeat sales.
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The current economic conditions have managers looking for marketing options that they may have not considered in the past.
The decision whether to use a direct sales force or an independent rep to call on distributors so often is one based primarily on control and not necessarily effectiveness.
I asked Bill Via, President of CSV Marketing, a leading independent rep firm for his thoughts. Here they are:
Everyone understands that utilizing an independent rep is a fixed cost of sale, but in my opinion that should not be the most important factor.
What is important is that an independent rep gets you accessto those customers that have already said no to your direct man, fact is that they are probably already selling them products and the day will come when the opportunity for your products presents itself, will your direct guy be there when that happens?
Sure you do lose a certain amount of direct control and accountability and maybe you’re of the opinion that a focused “direct” guy brings your product an elevated perception of creditability.
One would argue that if you invest the time and energy into product and market training, your independent can bring the same level of professionalism to your product, and most importantly, you get that criticalaccess.
What are your thoughts on this…Direct or Independent?
Many manufacturers are so focused on the features and benefits of their new product that they sometimes forget about educating and motivating their distributors to insure a successful launch.
Distribution is a key link in the launch and if your distribution isn’t on board or even understands what or where this product fits into your overall strategy, it’s going to be hard for them to sell. Let’s face it, especially in today’s economy, a distributor needs to understand why he should invest in inventory of this new widget.
Here are some tips to help make sure your distribution is on board:
Give them plenty of notice – They need to know 45-60 days in advance so they can get the new SKUs into the system, onto the promotion calendar and most importantly, get you that initial stocking order.
Incentivize the initial stocking order – Give them an additional discount on that first order or give them extended dating or waive your minimum order requirements. The key here is to make sure they have your product on the shelf so when the contractor comes in and asks for it, they have it.
Train/educate distributor sales force – It’s an important step in the process that’s often overlooked. Many manufacturers assume they understand the big picture, and most of the time, it’s not the case. With time and travel expenses being what they are, traditional things like lunch-and-learns may not be the best way to introduce the new product. You might want to use an online training tool like BlueVolt that can both train, verify and motivate the sales team.
SPIF sales – For at least the first 3 months, put some sort of incentive on the product to get the sales folks excited. Put yourself in their shoes. Most distributors carry anywhere from 15,000-25,000 different items. Which ones do you think they will be talking about? And oh by the way, don’t overlook those inside and CSRs. They have 5-7 times the number of contacts with customers everyday and can talk up new products and create add-on sales (do you want fries with that?)
Make key end user calls – This seems like a no-brainer, and while you the manufacturer might be making those calls, you don’t always include the distributor in them. Chances are that key potential for you is already a key customer for the distributor. He can make sure you get in front of the right people and brings a relationship to the table.
These are some simple ways to insure your new product launch is successful.
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