Listen to Jason Bader of the Distribution Talk Podcast and Dave Roller discuss Customer Stratification for Pricing.
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Dave Roller: In our programs, we typically are spending a good deal of time up front talking about customer stratification for pricing.
Jason Bader: Okay, tell me, tell us about that. I have my ideas about customer stratification, but tell me what that means to you.
Dave Roller: Let me go out on the ledge and kind of give you my opinion on it.
Jason Bader: Yeah, absolutely, I’ll share, I’ll open the kimono as well. So…
Dave Roller: Well, I think that in past lives, running distribution companies, I’ve been guilty of offering best price to too large a portion of my customers. We walk in sometimes to a new client and find that 80-90% of their sales are going in out at best price, you have a chance, and it’s is particularly important in rough economic times to enrich the way that you’re segmenting your customers for pricing. Sure, do it by industry, or if appropriate, do it by sales and potential. Then bring in the factors that really impact your net profitability; cost to serve, how do they pay their bills, how many invoices are you doing, what’s the delivery cost look like, and the overall profitability and I’d be embarrassed to tell you how long I spent about 20 years ago trying to figure out customer segmentation. It was so complex, I didn’t understand it, nobody else did. You can use transaction data and a few other metrics to be able to enrich your customer stratification for pricing to allow you to differentiate what you charge one customer versus another. So that’s, that’s my opinion. I’m completely out on the ledge now.
Jason Bader: Yeah. Well, I’ll tell you, I absolutely agree with this. I think that too many times. I really hate using the ABCs and customer ranking, but I think that you know, too many people do it volume based and it’s almost like that look and feel way of you know, stratifying your customers. It’s like, oh, they’re big guys that there is so much potential and, you know, I really hate the word potential some days. You know, I just I think it’s so subjective. But when we get down to things like you know how they pay their bills. I love it, because I can I you know, that’s easy. I mean, that is logical. I can pull that number. I know exactly how that works. If I look at cost to serve…well, there is a little bit more voodoo in there, but not that much. I mean, I really agree with you. I look at number of transactions. I tend to look at, you know, how many transactions per year, you know, and then what is my cost of an order. And I know that sometimes people get a little funny about that one, and they spend an awful lot of time what does it cost me to process an order, but then you can get down to a really pretty darn good number as to whether this person is making you money or they’re costing you money from a cost to serve basis. And then
Dave Roller: And sometimes that’s a scary number.
Jason Bader: Oh, absolutely. Most people I used to so, okay when I do the report with people, you know, and I do have a format here. I’ll often call it the Jack Daniels or Maalox report because you better have one of those next to you when you do it the first time.
Dave Roller: Yes, sir. You’re absolutely right.
Jason Bader: I will say one of the biggest things that scares people is that you know, there’s a majority, you know, sometimes it’s upwards of 70-75%, you know, are technically net unprofitable when you do that.
Dave Roller: You see that time and time again. And there are some customers that regardless the margin, you’re not getting to make them profitable.
Jason Bader: Right, right. Absolutely.
Dave Roller: But at the very least, you can include that in your pricing decisions and make progress towards that. The small guys that may not be profitable, they help you with your buying volume and other factors. However, I see time and time again, the smallest customers who are never going to be profitable, are priced within 5 to 10 margin points of the most valuable, most profitable customer distributor has and it hurts to see it.
Jason Bader: Sure. Again, there’s just they don’t utilize that opportunity that they have there. I think that there’s a lot there that they can and, you know, maybe they like that person, you know, and there’s that whole, I like them so I’m going to give them X and like they don’t deserve it, and then they don’t pay me for, you know, three months, but I’d like them.
Dave Roller: Yeah well, I, we all value the relationships with the customers, but you must also step back and take the bigger picture like you’re suggesting.
Jason Bader: Yeah, absolutely, I think it takes a little bit of time to get through, to come to the realization that there is maybe a better way to look at those customers. But then, you know, applying that to your pricing matrix, I think that’s where the real opportunity is. Rather than the ABC- big electrician, medium sized electrician, small electrician, you know, that’s the kind of the archaic way, and maybe that’s more that’s more sophisticated than some people that I’ve worked with, But really then looking at if ABC then B is most profitable, mid-range and then least profitable. I think that could be another way to go about that. And it sounds to me like that’s something that you all do quite a bit of.
Dave Roller: Yeah, it’s kind of integral to our process.