Listen to Jason Bader of the Distribution Talk Podcast ask Dave Roller how he got into pricing analysis and about pricing incidentals.
Jason Bader: Welcome to distribution talk with Jason Bader, the show where we dive into the stories struggles and solutions from business owners and thought leaders in the wholesale distribution market. Hi, friends Jason here. In this episode I had the pleasure of speaking with Dave Roller founder and President of Profit2. Profit2 specializes in helping distributors optimize their pricing strategies so that they can unlock stronger profit potential. As you will hear, Dave is one of us. He isn’t a software guy. He comes from a distribution background and recognizes the tremendous challenge in building a winning pricing program. He and I talked about some of the common mistakes in distributor pricing and how those can be found and modified without a degree in computer science. This is the blocking and tackling of making more money. I enjoyed learning more about his philosophy, and I hope you do too. All right, Dave. Hey, welcome to distribution talk. Thank you for coming on the show.
Dave Roller: Jason. It’s a pleasure. Nice to talk to you again.
Jason Bader: Absolutely. I think pricing is one of those things, it’s just absolutely fascinating. It’s an art and a science. And I’ll tell you, it can be one of the most baffling and confusing things for most companies. So, I’m glad there are people like you out there to help make a little bit of sense of it
Dave Roller: Well, thank you so much.
Jason Bader: You know, Dave, as you’ve heard a couple episodes in the past. One of the things I love to dive into is your history. I mean, why are you involved with distribution? And now why are you involved with pricing?
Dave Roller: Well, the short answer is I worked myself out of a job.
Jason Bader: Okay…(laughs)
Dave Roller: …in distribution. I started in the business really part time going to school, I worked a counter for a plumbing distributor. And after I got out of college, I started as a salesperson, and kind of went through the ranks and eventually led a couple companies. About 20 years ago, I had an opportunity to lead a mid-size industrial distributor in the Kansas City area and we decided that we were going to work to try to improve profitability, and then merge it into a portfolio of other companies. So, my wife and I were living in Kansas City at the time, we had a couple of school aged kids and didn’t want to move. And so we decided that it was time to look at some other opportunities.
Jason Bader: Now essentially, was that a rolling up of different company. I know roll ups not really an in vogue term any longer. We call it M&A work and those types of things. But, it was this that you were trying to basically put together a series was it in that same plumbing space or what area were you in?
Dave Roller: It was actually in the general industrial, selling to manufacturers.
Jason Bader: Okay, great. And then really, you did not want to move was that basically the reason you said “okay, I need to find another job. I need to do something different”.
Dave Roller: Maybe it was more desperation than inspiration. When I arrived at this company, what I found is that they had been growing sales in double digits for five years. And so overall profitability was going up a little bit. But the margin as I used to say at every board meeting every quarter was stagnant. And what I really meant was it was kind of slowly eroding, bit by bit. So we were falling behind industry benchmarks. And I think really out of desperation, we decided to really just go in deep in a way that I’d never had a chance to do in my career, to really look invoice line by invoice line, at how we priced and why we were pricing that way. And there was kind of an aha! moment for me along the line. I quickly figured out that my team and I knew a lot about pricing on 70% of what we sold- the key items, the commodities, things that were very competitive where the market provided a lot of feedback and our pricing was consistent. The other side of it was, though on about 30% of our sales, it was chaos.
Jason Bader: Why do you think that? I mean, why do you think it was chaotic compared to the other 70?
Dave Roller: Well I think part of it is just the sheer nature of our business. You know, as you know, there are very few businesses that have the scale of the pricing challenge we have. You think about it, a restaurant, they might have a few hundred pricing decisions to make. A manufacturer, maybe thousands. Our average distributor client makes 200 to 300 thousand pricing decisions a year. Here’s something else that I didn’t know at the time. If you take those 200,000 pricing decisions, about three quarters of those are on very incidental items where a customer is buying that item two or three times a year. They’re spending a few hundred dollars. To go back to your question of why- there’s not much market feedback and when I was selling, I’d get one of these opportunities where they might buy an odd item for $50. I had a very scientific formula Jason, I’d take my average margin and add five more points.
Jason Bader: There we go. Yeah, so…
Dave Roller: And I did that consistently. And here’s the thing, I really thought I was doing the right thing for the business. But the guy beside me, his rule was 10 points. And maybe the other guy’s was zero points. And so, it’s logical when you’re in a situation where each item isn’t very important., you’ve got no market feedback, it becomes idiosyncratic.