- $85 million MRO Industrial Distributor
- A wide variety of OEM, General Industrial, Contractor and Institutional customers
- Significant variety of products to support multiple customer industries
- Client had Pricing Manager largely dedicated to system maintenance
This distributor’s margin had been stable for years. However, overall margin benchmarked at about -1.5 points lower than similar Profit2 clients. Through our Benchmark Pricing analysis we came to the following conclusions:
- 90% of pricing was done by Customer Type/Product Group matrices to simplify system maintenance
- Customer specific pricing was underutilized and mainly used net prices
- Margin was highly compressed with just a 5 point difference between commodity and incidental sales margin
- Customers were primarily segmented by industry (15 industry groups)
- Customer purchasing power had little impact on pricing
- Prices on key items for top customers were sometimes too high, while incidental pricing for small customers left money on the table
- Sales team controlled customer type assignments; most customers received the lowest margin type
- Number of product segments for pricing was inadequate
- Product segmentation was based on supplier recommendations with a common list margin by supplier product group
Plan of Action:
The client’s pricing group had been working on product segmentation over the past year. However, most of their capacity was consumed with maintenance. Together we created a 45 day plan to do the following…
- Create new customer pricing records to price the most competitive sales. Records were set up on a List Discount basis to minimize maintenance.
- Segment Customers into 4 basic industry groups. Then further segment into 5 pricing levels as follows:
- Let Sales Team review assignments with ability to make selective changes.
- Modify Product Groups by creating subgroups based on item price sensitivity.
- Where List Price wasn’t mandated by market, created new list pricing to vary margin by item price sensitivity.
- Set up new Customer Type/Item pricing for the most commoditized items.
- Develop new Customer Type/Product Subgroup matrices to increase margin differentiation.
- Establish a quarterly plan to simplify system maintenance.