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Upgrade Your Customer-Specific Pricing to Win More Orders and

Improve Profits

Sponsored by:

Produced by: Modern Distribution Management | 6309 Monarch Park Place, Suite 203 | Niwot, CO 80503 | 303-443-5060

Download handouts (PDF): visit www.mdm.com/slides or email info@mdm.com

February 27, 2020

Brooks Hamilton, John Gunderson

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Brooks HamiltonVP of Services & MethodologyZilliant

John GundersonVP Sales, Analytics & E-Business, MDM

Speakers

Download handouts (PDF): visit www.mdm.com/slides or email info@mdm.com

Produced by: Modern Distribution Management | 6309 Monarch Park Place, Suite 203 | Niwot, CO 80503 | 303-443-5060

MDM Conclusions in Advance

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1. Customer Specific Pricing – one of the hardest areas of pricing to manage in distribution

2. Your Largest Accounts most often have the most CSP prices and the “highest factor” from your account managers

3. How to build effective contract review calendar or process. Beware of the Evergreen agreements.

4. Price increase pushback tactics with manufacturer partners

5. Contract Discipline Process – ask for SPA’s in advance, review process, Review your A & B’s make money on your C & D SKU’s

Why is there such a focus on price in distribution?What to Buy? (Item)-Product needed for the job-Hard to break spec-Brand Preference-Specific to today’s project

How Many to Buy? (Quantity)-Specific to today’s project-Limited internal inventory or forward buying- Lack of purchase power or authority

How Much to Pay? (Price)-Easy to Change-When Item and Quantity are set it’s only part of sales process to change-Customers expect price discussion

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1. How easy is it to get your customer to buy products not on their RFQ or project list?

2. How easy is it to get a customer to buy more of each product on their project list or RFQ?

3. How easy is it to price products on your customers project list or RFQ?

*MDM compilation of survey results on the above three questions of B2B distribution account managers and inside sales teams since 2015. Source: MDM Analytics 2020

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Customer Specific Pricing – (CSP’s)

• CSP’s is the hardest area of pricing to manage in distribution

• Bigger orders from your largest accounts make CSP’s impactful to your profitability

30%

45%

25%

B2B Distributor SKU %

Customer Specific Pricing -ContractSystem Pricing

Manual Pricing

40%

25%

35%

B2B Distributor Sales %

Customer Specific Pricing -Contract

System Pricing

Manual Pricing

*MDM Example data B2B distributor pricing type. Source: MDM Analytics 2020

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B2B Distribution Sales Concentration

• B2B Largest Accounts have the most CSP prices and the highest “fear factor” from your account managers

• Top 10% of customers are generally assigned to your outside sales team

88%

10%

8%

10%

3%

10%

1%

10%

1%

10%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percent ofTotal Revenue

Percent ofCustomers

Customer Revenue Distribution by Decile -- 2019

1 2 3 4 5 6 7 8 9 10Decile

*MDM Example data average B2B distributor sales concentration. Source: MDM Analytics 2020

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• Start with a contract review calendar or process

• Load your dates into a renewal process (60 day review before renewal)

• Watch the 99/99/9999 renewal dates

B2B CSP TRACKING SYSTEM

15%

3% 2% 3% 2% 8% 6% 3% 2% 2% 2% 3%

49%

JAN FEB

MAR

APRM

AYJU

NEJU

LYAUG

SEPTOCT

NOVDEC

NO RENEWAL S

ET

CSP CONTRACT RENEWAL

*MDM example of basic CSP calendar and renewal dates. Source: MDM Analytics 2020

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• Use your calendar to respond to price increases

• Price increase process with manufacturer partners

25%

11%8% 7% 7%

13%

9%

4% 5% 4% 4% 3% 0%

JAN FEB

MAR

APRM

AYJU

NEJU

LYAUG

SEPTOCT

NOVDEC

NO RENEWAL S

ET

CSP CONTRACT RENEWAL

Proposed Manufacturer Price Increase –Tracking system allows you to immediately convey the impact on customer agreements and renewal dates.

Creates an opportunity to push back increase on a customer-by-customer level to delay until renewal date, or formulate a joint strategy

B2B CSP TRACKING SYSTEM

*MDM example of complete CSP calendar and renewal dates. Source: MDM Analytics 2020

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• Review your A’s on CSPs closely make money on your B, C & D SKU’s

B2B Distributor SKU Definition SKU GradeSKU

ExampleMinimal # of SKU's that combine for Top 30% of sales A 300Small # of SKU's that combine for next 25% of sales B 900Moderate # of SKU's that combine for next 35% of sales C 8,000

Very Large # low selling SKU's that combine for 10% of sales D 40,800

B2B CONTRACT PRICING – KEY VARIABLES

*MDM example of B2B distributor A, B, C, D SKU process. Source: MDM Analytics 2020

• Review your A’s on CSPs closely make money on your B, C & D SKU’s

• Use your “system price” as soon as possible (B’s) and avoid manually pricing the bottom 50% of sales

Human Intelligence- Manual price selectively on the Top CSP ‘A’ SKU’s, Secure Special Pricing Agreements from Manufacturers, and avoid manually pricing every SKU the customer buys

Attribute Customer Exceptions Customer Contracts

Main Purpose Point Solution to Win Biz from a Variety of Customers

Typically Reserved for Largest & Most Important Customers

Owner / Creator Branch Sales / Reps National Accounts Team

Represented Pricing records in ERP / CPQ Contracts + Pricing Records

Analysis Little to none In-depth review & analysis

Set Just set price Price, Terms & Quantity Expectations

Product Scope Typically few items or categories Many Items (100’s – 10k)

Price Review Ad hoc; none Annually

Customer-Specific Pricing: Two Types

Customer Specific Pricing Challenges

Poor Price Setting

Margin Leakage

Excessive Dispersion

Record Creation

Lack End Dates

Net Price Terms

Fundamental Strategic Issues

Erodes Centralized Control of

Pricing

Misaligned with GTM

Pricing Strategy

Customer Exceptions Problems

Customer Exceptions: ProblemsWide Dispersions and Margin Erosion

Prices running from $75-$675 for the same product

COST

Number of Records

Margin Loss

Majority of records “Net Price” price type

Customer Exception Problems Over use of the “Net Price” Price TypeCustomer Item Price Type Price Value Effective ExpirationMom N’ Pop Calipers Net Price $ 12.34 2/29/2001 12/31/2099

Price Types Example Sales %Net Price $ 12.34 96%Discount - 15% Discount from Country List 0.1%Margin + 35% GM margin 3.0%Markup + 25% on Loaded Cost 0.9%

Customer Exception ProblemsMany pricing records have not been updated in yearsCustomer Item Price Type Price Value Effective ExpirationMom N’ Pop Calipers Net Price $ 12.34 2/29/2001 12/31/2099

Cost 2019 $ 16.35

Customer Item Price Type Price Value Effective ExpirationMom N’ Pop Calipers Net Price $ 12.34 € 2/29/2001 12/31/2099

Customer Item Price Type Price Value Effective ExpirationMom N’ Pop Calipers Net Price $ 12.34 € 2/29/2001 12/31/2099

Pricing Record has no end date

Customer Exception Problems Misaligned with Go-To-Market Pricing Strategy

Customer Exception Problems Erodes Centralized Control of PricingStrategic Consideration: Organizational function that sets pricing. Increased use of customer specific pricing erodes control.

Strategic Consideration: Pricing unable to execute margin improvement initiatives for sales outside of their organizational purview.

Initial Price Setting

Ongoing Management Renegotiation

Customer Specific Pricing Process Solution

Pricing & Sales Sales & CustomersSales & CustomersNegotiation

Point

Customer Exception FixInitial Price Setting: Approval Process

System of Record

Analytics Price Envelope

Sales Reps

AutoApproval

Submit for Approval

Notify Manager

RequiresReview

Evaluate KPI’s Review

ManualApproval

Notify Sales Rep

Return to Sales Rep

Approver

- 35.4% GM- $12.3k Sales

• Consistent KPI’s• Insightful analysis

• Price Guidance• Start/Target/Floor•Attribute based

§ Provide negotiation guidance for customer exception price decisions• Providing Start/Target/Floor guidance based upon Product/Customer/Order attributes• Displaying at the point of pricing decision-making (quoting system, counter kiosk)

§ Shift the distribution of prices, by:

Customer Exception FixInitial Price Setting: Provide Guidance

High Price Low Price High Price Low Price

Business Intelligence Guidance for Sales Reps

Start Target FloorStart Target Floor

Build a repeatable process to manage CSP• Repeatable and automated• Rooted in consistent KPIs and explainable rationale• Build the organizational capital – “Size the Prize!”

Scope to the “modify-able” group of customers• Types of records e.g. Customer / Product• Non-strategic customers• Lower visibility items

Update the customer exception records• Do nothing• Update values• Expire the record

Allow for Review• Establish rules of the road for engagement and review• Prior to publish

Customer Exception FixOngoing Management: Evaluation Process

Date Modification

Customer Specific Pricing FixOngoing Management

Source Application

Record Expiration

No sales over prior 18 months

Null or 31/12/2099 Set to EOY

Price Initiatives

Price set 2+ years Set to Matrix

Price Below Cost Min Margin

Price Below Floor Set to Floor

CSP price within 1% of matrix

Exception for X-Small Customer

Cost Increase Pass X%

Cost Decrease Pass X%

Cost Updates

Net Price (Small) Disc. from List

Customer Specific Pricing Records

Filter for:- Record types- Customer types / size- Business scope

Enhance Data:- KPIs: Margin, sales- Customer attributes- Elasticity

Run Update Process:- Price Initiatives- Cost Updates- Date Modification- Record Expiration

Review Process:- Verify changes- Tweak outputs

Publish

Customer Specific Pricing FixRenegotiation: Customer Specific Guidance

Move others beyond the fear of touching customer specific pricing.

Create Momentum: How to Start

Quick Takes on Key Metrics Market TestPrice Mode Snapshot

•# Customer / Product pricing records•# Without expiration dates / far

future•# Created more than 2 years ago•# Using the Net Price pricing method•# Net Price above Product level•BONUS

•# unique price points for one product e.g. 56 different prices •# Records where Price < Cost•# Records for very small

customers

Attempt a limited test under conservative conditions. For example: • Set of small customers• Choose conservative condition(s):

• Records well below cost• No end date

• Develop a reasonable response:• Move to equal cost• Set price type to discount

from list• Monitor the result• Present the evidence

MDM Conclusions

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1. Customer Specific Pricing – managing it effectively unlocks sales and profit growth

2. Your Largest Accounts have the most CSP prices and the highest “fear factor” from account managers. Work with them to improve using a process.

3. Build effective contract review calendar or process. Eliminate Evergreen no end date CSP’s. Understand impact by month to manufacturer price increases.

4. A process helps you actually “partner” better with your manufacturers

5. Contract Discipline Process – ask for SPA’s in advance, review process, Review your A’s make money on your B, C, & D SKU’s. Avoid Manually pricing all CSP SKU’s.

6. If you have great breadth of SKU’s (50,000 individual SKU’s sold per year) it is difficult to manage with internal resources. Real profit growth is difficult without a pricing partner.

Transform Your Sales Function to Higher Performance

Topics will include:• How to best transition outside, inside and service rep roles into more

effective teams• Sales comp programs that retain the right talent to grow your business• Integrating sales and marketing most effectively• Getting sales reps to support your online channel• Innovative sales models for creating a seamless, omnichannel

experience for customers

Visit salesgps.mdm.com to register

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Produced by: Modern Distribution Management | 6309 Monarch Park Place, Suite 203 | Niwot, CO 80503 | 303-443-5060