A Special Series from North American Wholesale Lumber Association
Resources
• “Pricing Optimization: Striking the Right Balance for Margin Advantage” by Pradip Krishnadevarajan, Senthil Gunasekaran, F. Barry Lawrence, Ph.D., Brijesh Rao • “Customer Stratification: Best Practices for Boosting Profitability” by F. Barry Lawrence, Ph.D., Pradip Krishnadevarajan, Senthil Gunasekaran • “Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line” by F. Barry Lawrence, Ph.D., Senthil Gunasekaran, Pradip Krishnadevarajan
you learn more about your key accounts and your overall business value. It also helps you make decisions based on data—decisions that could assist in identifying potential areas to improve profitability for a certain customer or even learn where you can right-size others. Once you identify the cost to serve, think about what can be done internally to reduce it. This will allow you to beat competition during the quote process, while still maintaining your margins. When you think about pricing decisions, costs should not be excluded. This is an area business owners may not always consider when developing a pricing strategy, but it is important in pinpointing possible cost-savings, especially in parts of the business such as operations. Aside from the cost to serve, another factor to consider is the customer and item relationship. It is important to know which products are important to your customers. Too often, customers are lumped into a “level” price for all items. In order to achieve an optimized price, you should look at charging more for that customer’s “D” items and staying competitive on the “A” items. Customer stratification can help you determine exactly this. It helps answer the crucial questions that give you a more in-depth understanding of your customers. According to NAW Institute, customer stratification not only measures the cost to serve a customer, but it also details how much business a customer does with a company (sales), how profitable that customer is and how loyal they are. Research study Customer Stratification: Best Practices for Boosting Profitability focuses on these four key dimensions of customer stratification as best practices for wholesaler-distributors:
Building-Products.com
• Buying power • Customer loyalty • Profitability • Cost to serve While pricing optimization and stratification as a topic isn’t all that new (Texas A&M has been researching this for many years in its Industrial Distribution Program), it is relatively new to this industry. Being in the building products industry, cutting-edge technology and analytics that come along with it aren’t adopted as quickly as other industries. While this is true, I have seen an increase in interest and discussion in this area. Our customers are looking to see how this practice could help them improve their business. At the end of the day, the best way to develop a pricing strategy is to start with an open mind. Be open to new ideas and approaches—after all you are going through this exercise for a reason! Initially, this should not be a “set up and pull the trigger” approach to pricing. Start this process knowing that discussions and revisions will need to be made. I have seen people suggest that optimization systems can give you prices automatically with little effort and input. A software application can certainly take a variety of formulas and factors, chew on some data and spit out a price. However, I don’t think this is the best way to tackle the pricing strategy discussion. This should be a process or exercise in evaluating the relationships, processes and factors that are important to your business. Then setting a framework around those factors and implementing based on the framework is how you define a pricing strategy. – Anthony Muck is manager of customer support and Andrew Ryba project manager at DMSi Software, Omaha, Ne.
About NAWLA
NAWLA (North American Wholesale Lumber Association) is the association that delivers unparalleled access to relationships and resources that improve business strategy and performance through sales growth, cost savings, and operational efficiencies for wholesalers and manufacturers of forest products and other building materials that conduct business in North America. Learn more about how NAWLA can help your business at www.nawla.org.
October 2015
The Merchant Magazine
31