Product Pricing: Price Check

One of last year’s ISSA/INTERCLEAN® speakers, Landy Chase, confounded his audience with the following maxim: if 20 percent of a distributor’s customers are not objecting to prices, the distributor is not charging enough.

Given the ongoing pricing “wars” that have dogged the industry — seemingly forever — Chase’s assertion caught the attention of many in the audience.

Pricing pressure has a way of subjectively clouding a distributor’s perspective regarding the so-called “right price.” Customers are constantly working to get a lower price, and the competition is all-too-willing to undercut for a quick sale. Or, the unpredictability of overhead costs — health insurance, fuel, energy — and increases passed on by manufacturers, might complicate a long-term margin strategy.

Charge too much, and you risk losing valuable business. Charge too little, and you open yourself up to a host of other problems. A no-win situation? No way. Fortunately, there are benchmarks and formulas that can point you in the right pricing direction.

Protecting Pricing
Volatile product and equipment costs resist what traditionally was a relatively simple formula for determining a sensible price: cost plus a set margin.

Today, there are countless variables distributors must consider when determining a product price.

“Pricing, of course, is based on the cost of acquisition and the cost of doing business,” says Bill O’Meara, president of Keene Industrial Paper Co., Inc., Keene, N.H. “Then there are the variables, which tend to be the quantities, the particular customer — all have somewhat different weights.”

There are often various people weighing in on pricing, any one of whom can negatively impact profitability with one poor decision. Distributor salespeople are often the guilty party; it’s quite common for them to negotiate prices that sacrifice margin in order to compete with a competitor’s quote.

“It’s common for the buyer to haggle to get a lower price,” says Chase. “Too many people in the business will give away their margins. When [customers] try to get your margins down, they don’t have a valid reason for doing so — they’re just fishing. In many cases, it’s unnecessary [to cut margins].”

Distributors and experts agree that in the jan/san industry, competing solely on price is a mistake that could drive distributors out of business.

“A lot of times, business owners set pricing based on subjective perceptions,” says Tim Cohn, president of Advanced Marketing Consultants, Nichols Hills, Okla., and author of the upcoming book, For Sale By Google. “Or, even more fatally, they set it because that’s what their competitors are doing.

“With few exceptions, 80 percent [based on the 80/20 rule] are pricing based on their competitor’s price. They’re all following the ‘Pied Piper’ of pricing,” he adds.

“If [distributors are] trying to compete toe-to-toe on commodities and are abandoning the perception of value on the services, they’re leaving money on the table, and they are underpriced,” says Cohn.

To combat this trend, distributors need to be able to communicate the value they bring to the buyer/seller relationship.

“They’re delivering a value, but unless they communicate that value to their buyers successfully, they will end up playing the institutional seller’s game,” says Cohn.

Distributors may end up with “poor quality” customers if they go overboard with price cuts, according to Chase.

“People shopping for the cheapest price they can get are the worst kind of customer,” he says. “They’re high maintenance, they’re a hassle, and they’re disloyal. If your pricing isn’t at a healthy level, you’ll attract the bottom feeders.”

How Much Are You Worth?
“The key to getting premium pricing is providing value to the customer,” Chase says. He adds that you know you’re providing that value when the customer says, “I can buy the product from you or from somewhere else for a little cheaper, but I don’t want to lose what you’re doing for me.”

Cohn agrees, and says business owners must work at defining — then promoting — the service they offer, whether it’s next-day delivery, training, inventory audits, special orders or something else.

“Every form of business delivers some form of commodity and [distributors] have to be able to differentiate how the value they add justifies the difference in cost,” Cohn says.

O’Meara comes up with sophisticated strategies for providing seemingly unparalleled value to customers, and charges accordingly. In fact, he makes it standard practice to steer away from too-price-conscious customers.

“We try not to seek out customers whose main motivation is price. We seek out customers for whom we can provide a service and there’s a mutual respect ... that we’re going to treat each other fairly,” O’Meara says.

“We don’t compete on price,” he adds. “We’re competitive in the marketplace, but we’re not trying to be the lowest priced. We spend a lot of time training and consulting. It all gets down to solving the customers’ problems, and what it costs to do that.”

O’Meara continues: “The value-added part of the equation is the key to whether you’re successful or not, and that becomes a key selling feature. If you’re going to add value-added costs to a price, you have to make your customers are aware that that value is being delivered.”

If the customer isn’t willing to pay a premium for value, direct them to someone else to fulfill their products needs. Some price resistance is a good thing, Chase says.

“It’s OK to lose a sale one out of five times for that reason,” Chase adds. “If no one complains about pricing, you’re not charging enough.”

Let The Customer Decide
Many distributors offer superior service that impacts their products’ prices; however, if they’re not able to convey the value of that service to customers, the customers end up making a decision based solely on a dollar figure.

“[Product] pricing is already transparent,” Cohn explains. “If they look it up, they’re going to find a way to find it cheaper.” Distributors must be able to “repackage” their product delivery services in a way that the customer automatically perceives value, he says.

Cohn recommends systematically finding out how that nebulous term, “value,” is defined in the marketplace. One good way to do this is by surveying customers. He suggests informal e-mail surveys, or customer phone calls. Distributors should focus on finding a way to get honest, telling feedback from a sample of trusted customers.

New product introductions can also benefit from customer feedback.

Chase suggests “testing” prices on customers by asking a number of them for their opinions prior to a launch.

“The best way to find out is to talk to good customers who will be candid and who are loyal and who have talked to some of your competitors. In a competitive situation, ask the customer,” he adds.

Put a product out there for a few select customers, then gauge their reaction, Chase suggests. “Sure there are some misses,” he says, “but leave it to the customer to validate the product and price.”

Make Pricing A Priority
Distributors should review their pricing at least once a year, Chase contends. A certified public

accountant (CPA) is a good ally. A CPA can help look at overhead and expenses to make sure product lines are profitable.

Chase says it’s not uncommon for companies to lose money on every sale. “There are more things now that you have to watch because you have added expenses that you never did before,” says Wayne Sullivan, president of Dumouchel Paper Co. of Connecticut in Waterbury. “The extra costs of fuel and insurances — even just heating a building — all goes to the bottom line of the product. So what was good last year might not still hold true.”

“To know your products, know your customers,” O’Meara adds. “Take the time to find out what their problems are, then solve them. And always maintain that you’re not doing this as a hobby; there has to be a profit there.”