Here is a perplexing contradiction in the heavy-duty parts and service business. On the one hand, it’s fair to say that every member of the heavy-duty supply chain would like to maximize their margins, improve their profit performance and ultimately, increase the firm’s value.
On the other hand, relatively few distributors or suppliers are focusing their attentions on the single, most powerful means to achieve all these objectives and more: pricing.
What’s preventing both successful and marginal players from leveraging the power of pricing to improve their performance? What often separates those who succeed from those who struggle is a series of industry-wide myths about pricing:
“The Market Controls the Price”
Everyone learns this within their first month in the heavy-duty market. Yet this particular myth has done more damage and cratered more markets than all of the rest of myths combined.
When executives and managers buy into this myth, they are essentially abdicating their responsibility to make sound choices for their company. Their margins are virtually guaranteed to suffer as a result.
The reality is that the “market price” for any product, no matter how commoditized it may seem, is never just one price — it’s always a range. In truck parts and service, the range is highly dependent on a number of different factors and can, in fact, be fairly wide. Within the range there can be dozens, or even hundreds, of valid price-points to choose from.
And the profitability impacts between the high and the low can be dramatic. So while both independent distributors, suppliers or OES dealers may not be able to control the ballpark, they can definitely decide where to play within that ballpark.
“We Have More Important Things to Worry About”
There are very few things that can generate as much financial impact, in as little time as heads-up pricing. After the dust finally settles, a new acquisition may improve earnings by 5 to 7 percent. Improved pricing can have a similar impact in a matter of months — with much less investment and organizational upheaval.
It’s hard to imagine anything being more important to the whole aftermarket company than pricing.
“Commodity Products Can’t Be Price-Differentiated”
Commoditization can be a self-fulfilling prophecy, as well as a crutch. ‘Drone-like’ players effectively eliminate even the slightest expectation of rational or thoughtful pricing by formally categorizing certain products as being ‘commodities.’ This commodity characterization is routinely thrown around to excuse undisciplined discounting and anything goes pricing behavior in the field.
In reality, there are few, if any, true commodities in this world. Take a hard look at any supposed commodity you can name and you will see lots of price variation and differentiation. There are always a variety of factors that determine what a customer is really willing to pay.
Some of these factors are product-related. But many factors have to do with the customer’s situation, unique relationship and services, and the circumstances surrounding the specific deal at hand. You get to decide what is a true commodity.
“Pricing Improvement Puts Revenue at Risk”
Like it or not, revenues are sacred for many aftermarket businesses. While profit is what actually pays the bills and creates real company value, these myth-driven drones nonetheless measure their success by revenues.
Strangely, for these companies, the very idea of pricing improvement is heresy — because they believe that improved pricing will necessarily reduce revenues. Of course, the objective of pricing improvement is to precisely identify those specific situations where you can charge a little more with minimal risk. Even an across-the-board 1 percent is rarely even noticed by most customers.
“Experienced Salespeople Know How to Price”
Established heavy-duty players (distributor, dealer or supplier) too often assume that the more experience their salespeople have, the lower the likelihood of having any pricing problems. They assume that because their sales reps have all been in the business for 15 years or more, their pricing has got to be pretty good.
Of course, seasoned sales professionals will often reinforce this belief with claims like, “Nobody knows these customers better than I do.”
The reality, however, is often very different. After all, experience is simply the accumulation of learning through direct participation. Obviously, the quality of that experience depends on what was learned. And over time, consciously or unconsciously, salespeople can learn a lot of behaviors that are not conducive to profitable pricing — gaming the incentive system, guessing instead of researching, short-changing the value proposition, groove pricing across different situations, assuming competitive responses, over-estimating price-sensitivities, and so on.
While it may seem counter-intuitive, heavy-duty companies with the most experienced sales teams are very often the companies leaving the most money on the table.
“Pricing Has To Be Simple To Execute”
Part of this myth is true — the notion that people in the field can’t execute something that’s too complex. But what makes this myth such a margin-killer is the direct connection drawn between sophistication in the underlying pricing model and ease-of-execution in the field. In the interest of simple execution, companies that embrace this myth usually end up using very basic and rudimentary pricing models — models that can’t help but allow millions of margin-dollars to slip through the cracks.
Simply put, the more granular and specific the pricing model, the more profit that model is capable of extracting. Using software, even the most sophisticated pricing models can deliver price recommendations to the field in ways that are very easy to understand and extremely simple to execute.
“Compensating On Margin Ensures Good Pricing”
A large majority of heavy-duty channel participant companies have come to understand how revenue- or volume-based compensation encourages bad pricing behavior among their salespeople.
Unfortunately, too many companies have also come to believe that margin-based incentive compensation is a ‘silver bullet’ that can knock out all of their pricing problems. These companies believe that good pricing behavior is virtually guaranteed when salespeople have a financial incentive to maximize margins.
The problem, however, is that it’s in our nature as human beings to overestimate risk. As such, individual salespeople will almost always overestimate the personal risks associated with trying to get a little more margin out of the deal at hand. In their minds, the positive compensation benefit of getting that additional margin is overshadowed by the negative compensation impact of losing the deal altogether.
This ‘something is better than nothing’ dynamic causes salespeople to play it much safer than they really need to, leaving money on the table in the process.
“Strict Compliance to Rules Ensures Good Pricing”
Distributors especially believe that their pricing problems are simply the result of renegade rule-breaking — branch managers going rogue and ignoring all pricing rules.
In turn, they believe that by strictly enforcing compliance to the established rules, their company has prevented pricing problems from even occurring. In effect, these companies are saying, “Our pricing is great because our people always follow the rules.”
The problem with this belief, of course, is that it assumes that the rules are accurate and effective in the first place. It assumes that the underlying pricing model has all of the granularity and specificity it should have, that the break-points and buckets are in the right places, and that differences in price sensitivity have been accounted for.
This assumption is not only flawed, it can cost heavy-duty companies millions. The equation is really pretty simple: strict enforcement of inaccurate prices, policies, and rules, will always — always — result in lost sales, lost margin, or both.
FOUND MONEY: Creating a More Profitable Reality
Clearly, pricing is one of the most powerful profit levers available in the truck parts and service business. There’s simply no faster way to improve profitability and gain competitive advantage than enhancing the quality and accuracy of a company’s prices and discounts.
Suppliers and distributors need to challenge the preconceived notions that may ultimately prevent them from capturing that opportunity. To achieve this more profitable reality, aggressively counter the margin-killing myths and unthoughtful ‘everyone knows’ beliefs that are holding them back.
Bill Wade is a partner at Wade & Partners and a heavy-duty aftermarket veteran. He is the author of Aftermarket Innovations. He can be reached at [email protected].
