Pricing Pressure

Regardless of the economic climate, customers have always been on the lookout for the best deal from their distributor. But in today’s recessionary environment where cleaning budgets have been slashed and end users are “nickel and diming” for the absolute lowest price, jan/san distributors are being pressured like they’ve never been before.

“There is an undeniable tremendous downward pressure on distributors today,” says Dan Merkel, industry expert and former executive director of RDA Advantage, Littleton, Colo. “There isn’t one ‘if you do this, here’s how you’re going to solve the pricing problem.’ That doesn’t exist today. You’ve got all these spectrums of end users and each of them brings a different challenge relative to pricing.”

By standing firm on their product pricing and offering customers lower-priced alternatives, distributors are doing their best not to wrinkle and fold from the intense pricing pressure being applied by customers. But while customers are fishing for the best price in the distribution pond, distributors are also finding themselves engaged in pricing wars with some traditional and non-traditional distributors. In fact, some small and mid-sized distributors are actually losing customers because they don’t have the means to wheel and deal alongside their larger competition.

“Larger competitors are swooping in and offering deals that we don’t have the wherewithal to do,” says Belinda Jefferson, president of Detroit-based Hercules & Hercules Inc. “In terms of bids or quotes, it’s becoming now, unrealistically low in terms of what our competition is doing in terms of winning the bid. We certainly have not been able to get down and dirty like that. Based on our original preference that we’re in business to make some profit, we have to cover our overhead and we have to make some profit.”

Distributors also say otherwise non-competitors — distributors who once only focused on servicing the manufacturing sector — are now entering into their markets and are threatening their business.

“What we’re seeing is non-traditional players are going into healthcare or education [markets] because their regular channels of business are hurting so badly,” says Tim Feeheley, president of Jan Pak Inc., Davidson, N.C. “And if you’re not careful and make sure you have multi-level deep relationships, a non-traditional competitor will lob in a low price and the next thing you know, you have to react to it. We’re in an economy right now where a lot of people are going to be doing unusual things. It’s a time where you really have to pay attention to the details of everything.”

While price-conscious customers are requesting the best bang for their buck, distributors must be mindful of protecting their prices.

Pricing Defense

When customers come calling for lower pricing, some distributors have been able to defend their pricing by analyzing each individual customer’s operational costs.

“If a customer’s first response is to say ‘my case costs are too high,’ what we try to show them, especially if we’ve had a lengthy relationship, is we find some kind of spend metric,” says Feeheley.

For example, if a distributor is servicing a building service contractor, they can talk to them about how much they are spending in a product category based on the square footage they’re cleaning.

“If we can show them trends over the long run that their cost per square foot has stayed steady or in many cases come down, we try to steer them away from the case cost issue and say ‘hey, look at your overall cost of operation and how we’ve helped you with that,’” says Feeheley.

But some customers only have their sights set on product pricing nowadays.

“There are times when some customers don’t have the time or the interest to even entertain that discussion. They’re just looking to take a lower case cost,” says Feeheley. “So then you have to evaluate if there’s a better product fit for the customer or if it’s a relationship that even makes sense for you to maintain over the long run.”

Offering customers alternative product lines that are similar in quality, but have lower costs has been a popular sales tactic in this recessionary environment, says Jim Smith, executive vice president of sales and marketing for Indianapolis-based HP Products.

“In almost every case, you can look at what they’re buying and move them to another product,” he says.

In fact, at Hercules & Hercules, when customers who are accustomed to using top of the line items, but their budgets no longer find it feasible, the company offers them private-label products or moderately priced items that they can better afford pricing on, says Jefferson.

Interestingly enough, changing a customer from a name brand product to a generic item or private-label product in order to drop costs for the client usually works out in the distributor’s favor.

“The generic or private-label items are higher profit centers for us,” says Joel Dreifus, president of Laymen Global LLC, Edison, N.J. “Futhermore, if the client comes to favor your product vs. the name brand, it puts the distributor in the enviable position of helping the client while improving their own bottom line.”

Giving in to customers and lowering product prices to save the account is a dangerous move. By lowering the price of an item, most distributors are wishful that customers will appreciate the gesture and continue to do business with them long enough to recoup any losses. But this isn’t always the case.

“I constantly remind my sales staff, that when lowering an item to cost, or below, while they are of the assumption that there will be other items on the order to cover the minimum profit shortfall, at times there are not,” says Dreifus.

By catering to customers and lowering prices, distributors’ margins are taking a hit by customers who are penny-pinching distributors and are hopping from one distributor to another rather than purchasing the majority of their products from one supplier. Often, distributors find it more beneficial to part ways with these particular customers rather than lower their pricing, as the price to service a particular customer may not be worthwhile, says Phillip Consolino, president of SouthEast Link, Atlanta.

“We’ve lost some customers to price,” he says. “When you look at the cost of servicing customers, whether it’s how fast they pay their bill, what the delivery requirements are, what the training and teaching requirements are, if the cost of doing business with that customer is not justified at a lower price, you may lose one or two because of that.”

If distributors are going to cut ties with certain customers, they’ll first need to decipher who is worth keeping around.

Customer Profitability

When cutting customers, what’s critical for distributors is really understanding their customer profitability and knowing which customers are their most advantageous customers, says D. Bruce Merrifield, president of Merrifield Consulting Group, Chapel Hill, N.C.

“They really need to get a better grip on cost to serve and where they make money and where they lose money on their customers,” he says. “You can have two customers with exactly the same sales and margin percent and one can be very profitable and one could be a huge loser because they have very different cost to serve scenarios. If there’s one guy you’re delivering $50 to every day, you’re losing money compared to the guy that calls you up every two weeks and gets you a 10 times bigger order.”

In order to calculate customer profitability, distributors must determine each customer’s lifetime value by adding up all revenue from a customer or group of customers and subtracting all costs, including product, sales and other service costs, says Merrifield.

Although customer profitability is nothing more than the result of applying the business concept of profit to a customer relationship, measuring the profitability of a distributor’s customers or customer groups can often deliver useful business insights, says Merrifield.

For instance, distributors can benefit from knowing exactly who their best customers are and how much they contribute to their profitability. At the other end, distributors also sometimes find that their best customers actually cost more to serve than the revenue that is brought in. These unprofitable customers actually detract from a distributor’s overall profitability, says Merkel.

“At some point, losing an account that isn’t profitable isn’t bad,” he explains. “Sometimes you have to quit a customer.”

Regardless of the economic climate, most distributors are looking at their customer profitability on a quarterly basis.

“What we want to see is that if there are customers that we think we have the right relationship with, we maintain it,” says Feeheley. “If we’re concerned about a negative trend, we actually turn it positive. And if we’re really concerned about where a level of profitability has fallen to, we have to make a decision and say is there a drastic change that we should make or can the relationship be significantly changed, or should we just not have that relationship anymore.”

When it comes to customer profitability, distributors who do deem a customer as profitable say they are willing to alleviate on their pricing if needed. The biggest determining factors that distributors cite in lowering prices come down to the length of the relationship and if a customer is one of their biggest profit generators.

Price Increases Just Don’t Fly

The rash of manufacturing price increases that troubled the jan/san industry during the last couple of years has leveled off in 2009 and has allowed distributors to ease up on passing rising product prices onto customers. In fact, passing along price increases in this current economic climate is not something that goes over too well with customers.

“That just doesn’t fly right now,” says Feeheley. “Now is about as difficult of an environment as we’ve ever seen to go into someone and say we’re not happy with the overall metrics of our relationship, we think we have to increase some prices.”

In years past, distributors may have had the luxury of getting more money off the end user, but it doesn’t bold well in this current economy. In fact, end users are digging their heels in around any type of price increases.

But if distributors are forced to raise product prices because manufacturing costs have risen, distributors must be prepared to offer customers alternatives that keep their purchasing costs down.

“What we have to bring to them is a lower cost of operations and alternatives and different choices of the products they use that make their facilities look better, perform better and be healthier and safer,” says Feeheley.

Ultimately, distributors say providing quality service will outweigh the pricing wars — even in recessionary times.

“If your service levels are good, customers are going to give you the opportunity to help them through this period of time,” says Smith. “Customers still need the services we provide. Just because things slowed down in the economy does not mean that customers don’t need on-time delivery, quality products and training. That never goes away.”