CVSN Insider : December 2009
Strategic Pricing for Heavy-Duty Vehicle Parts Distributors
7 CVSN iNSiDER December 2009 CVSN GUEST ARTiClE STRATEGiC PRiCiNG FOR HEAVy-DUTy VEHiClE PARTS DiSTRiBUTORS Mahoning Truck Parts, doing $50 million of business, faced an all-too familiar problem: year-to-year sales were off over 20%, and the company had breached its bank loan cov-enants. The bank was threatening to call Ma-honing Truck's loan because projected cash flow would not cover payments due to the bank. Management at this imaginary but not atypical distributor made the two most obvi-ous moves: they laid off excess staff and tried to dump bloated inventory. Unfortunately cut-ting staff and squeezing cash out of inventories was not enough to satisfy the bank. What to do? Would you consider raising prices if your company were in Mahoning Truck's situation? That is exactly what George, Mahoning Truck's CEO, did! He had the disadvantage, and the advantage, of being new not only to the compa-ny but also to the distribution business. George could not understand why the distributor's sales reps spent so much of their precious time managing prices, even on low-volume prod-ucts at their smallest accounts. The reps were constantly on their phones quoting prices and negotiating with vendors for lower cost. They spend much of their office time auditing orders and making price changes on the computer. George also found that his reps had little or no market pricing information. They had some feedback from a handful of their own custom-ers, of course, as well as their general impres-sion (right or wrong) of what margins should be competitive on a few of the company's prod-uct lines. The lowest `jobber' prices in the Ma-honing Truck price book were too high out of touch with reality so if referred to at all they were only a starting point for discounting. When quoting, the sales reps just wanted to know Mahoning Truck's cost for the item, and then they would apply an arbitrary percentage to come up with a selling price. They mostly used the same margin percentage for all items in a product line. They also used the same margin percentage rule of thumb no matter what industry segment the customer was in, and also the same margin percentage no mat-ter how small or large the customer. George engaged an expert to help his staff do a statistical analysis of all transactions for the previous 12 months. It took less than 3 weeks for the analyst and his computer program to segment the customers, organize them by size, group the product lines and analyze price sensitivity. The program then calculated a margin index for each item. The last step was producing pricing look-up tables to be used to adjust the margin indexes based on customer segment, buying power and item sensitivity. The result was recommended pricing for ev-ery item that customer bought. Below-market margins were to be brought up to market lev-els whenever possible, all at once or gradually depending in the situation. brent grover Evergreen Consulting LLC