Friday, July 24, 2009

Guest Article: Use Suppliers' Pricing Mistakes

This week I am happy to feature a guest article from PPS Board Member Jerold Bernstein.

Use Suppliers’ Pricing Mistakes

Now more than ever, getting the best price from your suppliers is a vital skill. It requires clear knowledge of the markets, good negotiating skills and shrewdness about supplier strengths and weaknesses. Sometime mistakes your suppliers make can work to your advantage. Here are 10 supplier errors that can put dollars in your pocket.

Mistake 1 – Lack of Attention to Pricing

Many process and automation suppliers do not pay enough attention to pricing. They lack the pricing discipline and pricing processes that would enable them to get more money from their customers. Their lack of attention can be your gain.

Mistake 2 – Weak or No Controls on Discounting

Unnecessary discounting is perhaps the largest source of profit loss for a supplier, and one of your biggest opportunities to get a better price. Some suppliers have a discount policy, but these policies are often ignored. Test your suppliers for opportunities. For example, once you have negotiated an initial price with your sales rep and are now placing regular orders, call the customer service or order entry department and tell them you need a better price. If the supplier has little or no oversight, you might the price you want or at least more discount.

Mistake 3 - Poorly Managed Strategic or Partner Accounts

Suppliers work hard to develop strategic or partner accounts. However, for many suppliers, these accounts are not partnerships, but a one-way ticket to a significant loss in profitability. Consequently, it’s unfortunate, but many suppliers do not make an effort to determine if partners are fulfilling their end of this agreement. This lack of oversight can work to your advantage. For example, a partner agreement may have a discount for a certain volume of product. You may be able to order less volume than your agreement requires and still get the better price for high-volume sales. Show your desire to be a strategic or partner account, and see how much faster you can reduce your costs.

Mistake 4 – Suppliers Don’t Know Competitors' Selling Prices

You know more about competitive selling prices than your supplier. Most suppliers have non-existent or woefully inadequate systems to track competitor market share and selling prices. At the same time, many suppliers do not want to lose business on price. Take advantage of your knowledge of competitive pricing to negotiate lower prices.

Mistake 5 – Providing Line-Item Pricing

Some vendors are still providing line-item pricing for large projects and systems. They lose the pricing advantage provided by a lack of transparency. Always insist on line-item pricing. Use this opportunity to challenge every item line by line while nibbling away at the suppliers’ prices.

Mistake 6 – Cost-Up Pricing

The days of cost-up pricing should be over, but fortunately for you, customers can exploit this still common pricing method. Manufacturers view cost-up pricing as low risk and easy to administer. A result is that list prices often have no basis in market reality. The smart customer will identify those products that are over-priced and use these as leverage to drive lower prices across the complete product portfolio.

Mistake 7 – Poorly Executed Price Increases

Challenge every price increase, particularly across-the-board increases. When a vendor puts a price increase in place, it may not need to affect you. Vendors know that only a portion of their price increase will stick. You might be able to get an exception, especially if your vendor perceives you as a valuable strategic or partner account.

Mistake 8 – Poor Negotiation Skills

Suppliers and sales reps don’t want your procurement organization involved in the negotiation and decision-making for your products. In addition, sales reps sometimes have comparatively poor negotiation skills if you have well-trained and motivated procurement department employees. As a result, you should take advantage of your procurement department. Make them your allies. Also, involving your procurement organization is a salesman’s nightmare, but you’ll sleep well knowing that you now have the initiative to get the best price.

Mistake 9 – Worldwide Pricing Inconsistencies

Suppliers have a difficult time understanding and managing worldwide pricing. Local offices may not coordinate account activity. As a result, there’s a wide variability of prices for a supplier’s product or system. This is another opportunity for you to take advantage of a supplier’s lack of attention to detail. Get bids from the widest number of sales offices possible and pick the lowest price. Many companies are plagued by their "rogue" sales office that always offers the lowest prices. Find that rogue office and get a better bottom line on your purchases.

Mistake 10 - Sales Incentive Plans Based on Dollar Volume

Most sales representatives have little or no incentive to boost the profitability of a sale. Many commission plans reward only on the sales dollar volume which is booked. For example, a sales representative bids a price of $50,000. On an incentive plan of 5% commission, the representative earns $2,500. If the representative reduces the price to $45,000 as a no-risk way to make a sale, the commission is reduced to $2,250. The customer just received a 10% discount, and the representative only loses $250. Knowing your suppliers’ compensation policies can work to your advantage. Your sales rep can be your best friend in getting better prices because he has little incentive to do otherwise.

Jerold Bernstein
Value Pricing Group
Price Improvement Team LLC

Copyright 2009 Control Magazine

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Tuesday, July 14, 2009

Retailers "Fine Tune" Discount Pricing Strategies

U.S. retailers are getting creative in their discount and pricing strategies, according to reports from multiple news outlets this month. In addition to continuing to follow the schedule of sales - preseason, post season, school's out, school's starting, holidays, etc. - retailers are starting to take a more focused approach on how and where they are applying their discounts and price breaks, all the way down to the individual store level. As The Wall Street Journal recently reported:
"At the Banana Republic store in New York's World Financial Center, a white pleated skirt was on sale for $39.99, marked down from $69. The same skirt was discounted to $33.99 at Banana Republic's SoHo store, just two miles away.

"The $6.00 difference wasn't a mistake. It's part of Banana Republic's parent Gap Inc.'s (GPS) very deliberate move to tailor prices to fit local demand and inventory - right down to the individual store level.

"The payoff: Gap's merchandise margins have either matched or topped year-ago levels in each of the past five months through May..."

Smart strategy? Without doubt. Setting prices differently to meet varying demands in diverse geographic areas is an effective strategy if you can properly manage your discounting and accurately predict changing demand patterns.

We have been publishing numerous articles on our blog and in our publications recently that point to this kind of segmentation in numerous industries - strategies all aimed at encouraging consumers to spend their reduced pools of expendable cash. We have seen demand and dynamic pricing strategies at play in air fare, software systems and professional sporting events. One PPS expert recently published an article (which will be in the July 2009 PPS Newsletter) highlighting how further price segmentation could help the ailing concert industry.

Marketwatch goes on to point out that these strategies, in addition to being developed for clearing inventory, are also being put in place to make up for limited expansion capacity in the current economy:
"Gap isn't alone. Other retailers, including Wal-Mart Stores Inc. (WMT 48.11, +0.28, +0.59%) and Home Depot Inc. (HD 23.58, +0.47, +2.03%) , have taken on or expanded some form of "localized markdowns," rather than slash prices the same amount at the same time across all markets. This helps boost profits whenever items selling well in one region offset the need for deeper discounts somewhere else.

"It allows you to be more surgical and dynamic," said No. 1 home-improvement retailer Home Depot Chief Financial Officer Carol Tome in an interview. "Rather than marking down by entire market, you can use your markdown strategy depending on the sell-through in each store."

"As the weak economy forces retailers to close stores or trim expansion plans, they've scrambled for ways to maximize returns from each existing store, analysts said. How much, when and where to slash prices can make a big difference to the bottom line, especially so soon after having to discount merchandise at least 70% off over the holidays to clear excess stock, analysts said."

Many retailers are also looking to implement "market optimization" software systems to further perfect their discounting and segmentation strategies by more closely targeting pricing by market demand(making it a good time for innovative pricing software systems and consulting bodies to make their mark).

Not all companies are slashing prices just yet. Sony is a great example. Despite threats from Activision - the company known for market leading games such as Guitar Hero World Tour - to pull support for the PS3 if Sony refuses to cut prices, Sony CEO Howard Stringer refuses to cut the price below its current level of $399 in order to meet short term capital goals. Another Sony spokesperson further explained the company's position (reported in USAToday):
"We feel that we're sacrificing the short term to pay dividends in the long term. People are having short-term thinking -- the platform is not even three years old. It was $599; it's now $399. The focus on pricing is something we appreciate, but you have to have the conviction and the confidence that you are on the right path for the long term and ultimately you'll get all the consumers you want."

At least some companies feel that they can still hold true to their value proposition instead of engaging in a price war to attract dwindling consumers. More to come. Warmly, EM

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