It’s a question that all dealers are familiar with, and on the surface one that seems fairly simple. A dealer needs to make money on his or her product, and a buyer wants to get the best prices possible. Factoring in personal relationships, current market prices, and how much margin you need to make a profit, an answer is reached, the two parties shake hands, and the deal is sealed.
At least that’s how it used to be. Today, dealers know more about their customers than maybe even the customers themselves. Combine that with all of the new technology available on the market and you’ve got the ingredients for a potentially better way to answer the question of price.
It’s called variable pricing, and it’s something that you probably are familiar with even if you’ve never heard the term. The last time you bought a car, odds are that the salesman checked your purchase history, credit scores, and more. The price he came back to you with (that you ended up haggling over) is variable pricing. When you bought a plane ticket to visit family during Thanksgiving, it’s no surprise the prices were higher than when you visited for Dad’s birthday in February, when demand is lower. That’s variable pricing, too.
And now variable pricing has come to the LBM industry, even though some will say—only partly accurately—that they’ve been doing it for years. The fact is, if you aren’t taking advantage of variable pricing’s possibilities right now, you probably are losing money. Possibly even with someone you think is your best customer.
“We had a customer who for years had negotiated a healthy payment system,” recalls one dealer who, as you’ll soon see, would prefer to remain unidentified.
“We were happy with the gross margin,” the dealer says. “So he’s a great customer, right? We then find out he negotiated an agreement with one of the previous owners that, if he paid by a certain time frame, he got a 5% discount. So now his margin is five points less,” this dealer says. “And the agreement lets him pay in 60 days, not 30. That costs us a half percent of margin.
“And for a time he was late, he ran up finance charges, but for years he was refusing to pay those. So you have an additional couple of thousands of dollars less per year; that’s maybe a percent of gross margin.
“And then he pays with American Express,” this dealer continues. “What is that charge? 3.25% of the payment. So he’s just come down again. Then we find out he over-orders materials and tells us to go pick it up. so we incur more trips than anyone else.
“And if you ask the operations guys, ‘What do you think of Mr. Smith?’, they’ll say he’s a pain in the ass. The credit department thinks he’s a pain in the ass. He always wants extra deliveries.
“But if you look at initial gross margins, he looks great. So the right solution to that is to talk to the sales person and say: ‘This is what’s going on. No more 5% discount.’”
Mark Ganahl, president of Ganahl Lumber in Anaheim, Calif., says that he has been devoting extra time lately to make sure the company’s general managers and top sales rep understand there can be a big difference between the gross margin on the cost of goods sold and the actual, all-factors-considered cost of making that sale.
“They think they’re doing a good job,” Ganahl says of his OSRs. “And they are! But to show them the spread between a good job and great ... there’s something there.”
Before the era of the cloud and data on servers, distributors were much more limited in their pricing flexibility. Calculations based on prices were limited to the home office and the data available wasn’t always current or accurate. Computer calculations weren’t as accurate yet and the most important variable was almost always the current market price.
“In a lot of cases, our best customers paid the highest price,” explains David Majeski, president of Consolidated Lumber in Stillwater, Minn. “The corporate office would send out white pages, buff pages, blue and pink pages. And they said if the volume was this, you sold ‘em at that.”
Whatever the market price was, dealers would work around it. If you could sell something for 18% markup, it didn’t matter if you sold 30 or 300—that was the margin. Salesmen worked with what management said, there was little negotiation, and what you knew about the customer was what you had on hand.
The computer was in your head, and discounts were based on things like the customer being a deacon in the local church or a family friend. Personal connections and emotions played a big role in determining price variations, and volume was one of the few variables that mattered.
Today, dealers have up-to-the-moment access to a wealth of information about their customers, particularly if they’ve put GPS units on their trucks. They know frequency of orders, time to pay, frequency of returns, and much more.
Some dealers will tell you they’ve been compiling this data for years on spreadsheets. “We used to do all that by hand,” says Scott Whiddon, president of Causeway Lumber in Fort Lauderdale, Fla. “We had quite an extensive list of customer characteristics that went into all of those things.”
But those lists were static, stuck on a sheet of paper or in an office drawer. The difference now is the accessibility of that information and the ability to manipulate that data. Some of these technologies existed in the early 2000s, but the downturn caused dealers to delay upgrading.
Faster, Better Data
Now, technology like GPS lets you see exactly where a delivery truck went each day and how many miles it traveled. Before, knowing the number of miles you made for each trip in the past month could take hours to compile. Add to that the need to track market prices for each order, payment times, and associated fees, and then compiling and calculating all of that in a way that makes sense. By the time you figured out that a customer is losing you money, you already had been selling to him for months.
Now, dealers can actually “take mountains of data and make sense of it,” explains Kevin McGirl, CEO and co-founder of sales-i, a business analytics company. “They don’t have to spend hours looking for the answer. There is now data that a manager or a salesperson could use.” (See “Mobile Movement,” page 46)
Having all of this data is one matter, actually using it is another. Knowing that one customer needs four deliveries a month but is 85 miles away is one thing, but how does that customer compare to one who needs 15 deliveries a month and is 10 minutes away? And what if one pays via American Express? Calculating how these differences affect margins is the challenge that many are facing right now—that is, if they think about them at all.
“If you’ve got a $100,000 customer and are losing 10%, you just lost $10,000,” explains Michael Cassidy, CEO of TW Perry, Gaithersburg, Md. “That neutralizes the one for which you’ve gained $10,000.”
“The market has gotten tougher,” says McGirl. “Organizations need to inject more science into their operations.”
Ranking Your Customers
“Distributors are under pressure to provide service but want to compare market value,” says Mike Limas, vice president at DMSi, a software company serving the building materials industry. “There’s just a lot of things that can go into making a customer more or less profitable than their peers. What can I do to increase profit?”
That’s the question forward-thinking dealers are asking, and business intelligence providers have a mix of answers. Epicor recently updated a customer segmentation program in its BisTrack management system that helps dealers sort their customers into tiers.
“The ultimate goal is that you keep and maintain your highly profitable customers,” explains Graham Rigby, director of LBM product management at Epicor. “Can you move a B to an A? And maybe you can move your D and F customers up.”
Using a combination of several dozen different variables that are updated regularly based on dealer feedback (See “The Right Variables,” this page), dealers can employ the Epicor software to decide what’s most important for them. Are they located in a remote region? Then delivery distance might have the most impact on a customer ranking, followed closely by number of deliveries.
“All of the metrics we use, the system is automatically calculating,” said Rigby. “We don’t want it to become a burden. Keep it simple, but give the data that dealers need.”
With customer-ranking systems, management and salesmen are still involved in the pricing process. High-tier customers might be offered personalized discounts to encourage them to buy more. Sales reps can still utilize all of the tools at their disposal and work on boosting low-tier customers into more profitable partners.
Computers in Control?
While this customer stratification helps keep the personal relationships that have long defined sales involved, there’s a method on the horizon that gets closer to the age-old sales goal of having an option and price for any potential customer. However, it’s a method that might frighten some dealers.
As more dealers take advantage of the software that’s available, simple tiered pricing becomes less valuable than it once was because it fails to maximize revenue and limit potential losses. There comes a point at which the most effective pricing solution is to just let the computer take the reins. In other words, remove all human elements from the sales process and let the program do all of the work.
“Take all of [the data you have] and come up with specific pricing recommendations,” explains Limas. “Take all of that stratification work, then load that back in so the pricing is prevalent and applied on a transactional basis on sales.”
Every time a customer needs a new order, the computer will take a look at everything it knows about the customer, what the current market trends are, and what exactly the customer needs. It will spit out a price that’s good for that moment and that customer. Just a day later, that same customer could come in and place the same order, and the system would re-run all of the numbers and could come up with a completely different price.
“The tech lets you get down to specific pricing for specific scenarios. That didn’t exist that long ago,” says Limas. It exists, but it’s in its infancy. So if it’s out there now, and it’s the inevitable future for pricing, why isn’t every company touting the death of the salesman and the rise of the machine? Removing that personal touch, the unique flair that one dealer brings over another, is a hard sell.
One key to future use of technology, Limas says, will come down to “management deciding how much they want to use it and still manage their customer relationships.” For the moment, however, the idea of variable pricing “is having the right impact,” he says, because it opens the door to questions about how to price goods.
Tried and True
While the technology for fully automated variable pricing is fast approaching, that doesn’t mean every dealer is ready to embrace the changes. Mark Ganahl isn’t ready to give up on salesmen just yet, partly because his are so successful.
“We have about a dozen outside salesmen,” said Ganahl. “We push down the decision for making the price down to them. They’re the closest to the customer, therefore they know how to price.”
Still, Ganahl is embracing technology that lets its salesmen and managers break down the data about customers. Automating that process isn’t in the cards, though. Instead, Mark Ganahl’s company is focusing on making more informed decisions fueled by human intelligence and communication.
“I have the silver bullet,” says Ganahl. “It’s sales management. Sales management needs to have a way more active role in reviewing sales. Improve the processes that sales management and salesmen are in.”
Part of that process includes a proprietary spreadsheet with variables about each customer and each product available for the salesman to check during any point in the sales process.
“They have access to the costs and our sales people price it,” says Ganahl. “That’s been a very effective tool for both our employees and our customers.”
And when he was described customer segmentation programs offered by many of the business intelligence companies out there, he said it was very interesting.
TW Perry doesn’t officially do variable pricing either, but it does believe in sales management. Several years ago, the company developed a sales scorecard that distills what normally is a bewildering array of choices into an easy-to-read, informative report that can deliver appropriate info to each level of management.
In seconds, a supervisor can use the report to assess how many dollars’ worth of 30 different product categories an outside rep is selling to a particular customer or customer type. The scorecard also shows the gross margins on those products and how those margins compare with the average for that particular product line at that TW Perry branch, as well as the overall margins for that salesperson and the company-wide margin average for each product category.
Most of the boxes contain colors to show when margins go above or below the branch average for that category. But even the boxes with no colors are have value, because they represent situations in which a particular product wasn’t being sold to that customer. That signals an opportunity to sell new product lines.
Formula for Success
Meanwhile, in Beaufort, N.C., Leonard Safrit of Safrit’s Building Supply has spent years building a formula to determine the true cost of serving a customer. In his highly competitive coastal market, knowing delivery costs in advance can make a huge difference in whether he does a deal.
“I think necessity is the mother of invention lots of times,” says Limas. “While these things have been out there for many industries for many years, the convergence of the industry and technology has made it easier to take advantage of.”
Dealers are getting smarter about pricing, whether they’re compiling their own databases or using one of the advanced software solutions from business intelligence providers. LBM operations already faced one recent downturn and were forced to adapt, and as more and more adopt advanced pricing methods, the move to true variable pricing appears to have begun.
“The old guys will get increasingly competitive,” predicts McGirl. “More people targeting their accounts. It’s a bit like the nuclear arms race. You’ve got to get technology to get on the level of your competitors.”