Lindsay Duran: Welcome to B2B Reimagined. My name is Lindsay Duran, and I'll be your [00:01:00] host for this episode. I'd like to welcome John Gunderson, who's the Vice President of Analytics at MDM. John, thanks so much for joining us today.
John Gunderson: Thank you for having me, Lindsay.
Lindsay Duran: So today we're going to talk about how distributors are faring during this unprecedented time, as well as the commercial trends that you're seeing specifically as it relates to pricing and sales. But before we get started on all of that, why don't you tell us a little bit about yourself?
John Gunderson: Thank you, Lindsay. I'm Vice President of Analytics at Modern Distribution Management and have been doing that the last two years. We get a chance to work with distributors all over north American and Europe.
And prior to that, my career was as a distribution executive with four or five different companies. And I led pricing while I was at HD Supply and in the Anixter Company and also a division of Genuine Parts. And at one time I [00:02:00] was a Zilliant customer. So I've used the platform. I’m excited to talk to everybody today about distribution pricing and unique challenges you face as a distributor or manufacturer pricing professional.
Lindsay Duran: Excellent. MDM, I think you guys always are putting out really great research and really have your pulse on what's happening in the distribution community at large. What are some of the trends that you've seen in this very rocky year?
John Gunderson: It's been an interesting year from the COVID disruptions, but it's really put an enormous amount of pricing pressure on the distributor.
It's one of the first times in my career that there were supply side problems - trouble getting product. And there were demand-side problems where, sometimes you were open on Monday, and Tuesday you were shut down. It's created a lot of pricing [00:03:00] pressure on the middle person in the channel, which is primarily the distributor.
It's also been very difficult for manufacturers. But it has created a pricing panic out there right now that a lot of distributors are facing. Uncertainty makes people make rash and what I would call reactive pricing decisions. And we're seeing a lot of that right now in the marketplace.
We always saw it during downturns. Like when I was in distribution in ’08 and ’09. There's always pressure. But this one has been unique because of the unique COVID shutdown. And the supply side and demand side problems have just made it a lot more challenging.
Lindsay Duran: Absolutely. We've been seeing much of the same with our customers and different industry verticals within distribution have been hit harder at different times. Certainly, we saw food service distributors take a very big hit early on when all of the [00:04:00] restaurants closed down and, building products has looked spotty depending on the geography. Have you noticed any kind of peaks or ebbs and flows in some of the other industry verticals based on just what the economy is doing and especially with the inventory challenges, as you mentioned?
John Gunderson: Yeah. Across industrial and construction distribution, it's been very interesting. If you remember early on during the shutdown period, the price really shot oil and gas down here in the United States.
If you were in the oil and gas business, now that you had no investment from a customer side, plus you had the disruption of they may not even be able to accept material. It's been unique, in those certain industries that fared better than others. Currently, in the HVAC industry, HVAC building supply - that sector is holding up the best of all of them. Construction is holding up better than [00:05:00] industrial. But that being said, the marketplace is different in New York than it is in Georgia than it is in Arizona than it is in North Dakota. Each state's position and how they're handling the lockdown is really making it much harder to track.
It's very spotty and it's everywhere. Is that what you are seeing, Lindsay?
Lindsay Duran: Absolutely it is. And so, we've been working very closely with our customers to help them then weather that storm as much as possible. And, as you noted earlier, pricing is one of those things that becomes much more reactive at times like this. What are you seeing companies doing to combat the constant downward pricing pressure that they're likely facing?
John Gunderson: I think right now, if you're a pricing professional, you have to make sure that you have some guard rails and processes in place [00:06:00] to eliminate what I call the work from home panic. Much of the time at a distributor level, your inside and outside team are driving your pricing decisions.
And many of them are doing it now out of their kitchen. And because of that, there's a very “My gosh, things are tough. I've got to go low to win.” And you also don't have managers working with people in a pool where everybody's in the same office, everybody's remote. When you've got all that time in your kitchen to work on lowering the price, if the business doesn't have proper floors and pricing approval and guard rails in place, you're really opening yourself up for a lot of panic behavior that you’re going to be selling products at 11% and your SGNA is 13%. We'll lose 2% every time it goes out the [00:07:00] door. I think right now you really have to be thinking about your processes.
Lindsay Duran: Absolutely. And once you lower those prices to a certain floor, it can be really hard to get the prices back up, once we are recovered from this. I think that's another risk that companies have to watch out for.
Certainly, there are instances where lowering price can help you pick up a bit of additional volume. I would tend to argue that the vast majority of the time, that's not the case. And the decline in business is more due to just a decline in demand. How do you get sales reps to buy into the fact that lowering the price isn't necessarily going to be in the best interest of the company - as they have a tendency to want to over-discount right now?
John Gunderson: You have to review the guard rails you've got in place and look at what you got in backlog, look at the orders that have been released the day before and have conversation with [00:08:00] your individual associates about; “Okay, why did you make this decision to sell this at 12% yesterday?” Even though I'm just in this example, maybe the floor is exactly a 12% on that SKU. You've got to over-communicate and understand why they're making the decisions they're making. I think it all starts there. And I think having pricing guardrails, working on your pricing profiles, looking at your customer-specific pricing, your contract pricing, is something that you need to, as a leader or a pricing leader, be doing in overtime today.
Make sure you've got your customer tied to the right price profile, and you're communicating with your team about it. Because right now you're going to see a lot of behavior that is panic about: “Hey, I got to get the order. And if I don't get the order, I'm worried about them bringing me back to work or letting me go” unfortunately.
And it's just going to drive a lot of what I call panic [00:09:00] behavior. And that's really what's going on with a lot of the people that I work with today and a lot of the friends that I still have running pricing teams. I hear that a lot
Lindsay Duran: For sure. And you mentioned something that I think is really key about making sure customers are tied to the right price profile or slotted into the right matrix. And I think in normal times, we even see that there's a tendency to have what I often refer to as ‘matrix price drift,’ where all of a sudden, all customers are getting the absolute best price when perhaps their spending behavior with you doesn't necessarily warrant that.
How frequently should companies revisit the customer assignment to the right price profile or matrix?
John Gunderson: I think it's ongoing, but one thing I see that a lot of distributors don't do a good job of, Lindsay, is: When they do make a change, they don't log [00:10:00] the change. For instance, ABC plumbing; I tied them to the best contract or one price profile I have.
And I did it in 2017. They don't put in proper review dates of: “Okay, should they be tied to that?” You have to have review dates. You also have to have review dates on what's inside each price profile. “When is the last time we, as a company, changed the price on this skew?” in the example I'm using the contractor one-price profile. What I find a lot of times, they don't track the timestamps properly by customer. And that's something that you can do right now very effectively. And having that conversation - customer about customer - with your sales team, just having the conversation, it will be able to hold price better because [00:11:00] that way they know you're working with them.
And I really think it's all about timestamping your review process.
Lindsay Duran: Absolutely. You want to avoid that ‘set and forget’ mentality that we see so often. I want to come back to something that you mentioned earlier about folks working from their kitchen and setting prices that way. Certainly, the nature of how we work and how we sell is drastically different.
And for the guys and gals that were used to driving around visiting customers and in person, that's no longer the case as much. And the role of outside sales and inside sales seems to be blending a bit, blurring the lines there. What are some of the trends that you're seeing and how would you expect things to look after we get back to some semblance of normal?
John Gunderson: There's certainly a blending of the roles. In many organizations it was set up that the hunter - the outside salesperson - [00:12:00] is out making a call in the morning, making a call in the afternoon, calling into their insight team, or sending them a note. Or then, having the customer send the inside team the order - who does a lot of the pricing and the order fulfillment.
Now you've got outside people in a role where they can't have that contact. What I'm hearing a lot of, is that they're getting more involved in the price setting and process than ever. Their outside teams at home, are much more involved in general in the pricing levels than they were previously.
Coming out of this, I think we will have the roles go back more to normal. But I also think one outcome is that I do think more distributors will be more likely to invest in the inside team and less in the outside team simply because of this disruption has changed how you [00:13:00] sell. And it is more digital. It is more email. It is more Zoom calls. I think that will continue going forward.
Lindsay Duran: Speaking of digital, have you seen a rise in investment and interest in really building out eCommerce platforms or accelerating investment in those areas?
John Gunderson: Yeah. Without a doubt for the distributors that we get to talk to at MDM, there's a rise in investment.
And frankly, Lindsay, there's a rise in panic from distributors that haven't invested properly that really don't have a platform; from going to: “I don't really need a platform because I've got really good outside sales team” to the shutdown and not having a way for them to order electronically has been really disruptive and scary for a lot of traditional distributors. Right now, I would say: “What do I need [00:14:00] to do an online transaction?” is probably one of the first questions inmost distributor and manufacturers strategic planning sessions.
Lindsay Duran: Absolutely. We're certainly hearing more and more of that from our customers.
And I think one of the things that companies often underestimate is just how difficult it is to get pricing right on an eCommerce system, especially when you may be used to having your salesperson act as the buffer between the price that comes out of corporate and the price that actually gets presented to a customer. What do you recommend for companies that are finding themselves in that position?
John Gunderson: You got to plug the leaks in the system. And then you have to work - I really strongly believe if you're a distributor with 100,000 or more skews that you're selling - to find a partner to help you manage the [00:15:00] pricing online. It's going to be difficult for you to manage it properly.
There's a reason people like you, Lindsay, exist in the channel. I think you're fooling yourself if you're going to manage your pricing online effectively with your team, unless you've got the most extraordinary team of pricing people that I've yet to meet in distribution. I think you got to be smart about your partnership opportunities because online pricing is different.
And I think for a lot of distributors that I know well, and some I've worked for, this story probably rings true. There are account managers out there for the last five years that have told their clients: “Look at the price online but call me and I'll get you a better price.” I would imagine if you look in the mirror as a distributor manufacturer, and you're honest with yourself, that's going on.
You've got to find a way to end that. Because, by the way, they're not willing to pick up the phone and call you anymore because you're not in there knocking on their door every Tuesday. [00:16:00] They're going to be like: “Oh, I'll just buy it from somebody else.” And you're fooling yourself if you think your account manager has that much power over the customer anymore. They do not.
The customer in general will say: “Hey. Why am I calling Joe? I can get it cheaper over here and it's close enough and I'll buy it.” And at this point, they don’t even really care where it comes from.
Lindsay Duran: Sure. That's actually not the first time I've heard that anecdote about ‘just call me and I'll get you the right price if you don't like the price you see online.’ And certainly, Amazon doesn't tell its customers that. There's no call center for Amazon to renegotiate that price.
It’s certainly key to getting it right the first time, especially if you're looking to win the business. You mentioned using solutions like Zilliant. I know that you are a former Zilliant customer in another life. Can you talk a little bit about how you were using the Zilliant solution at the time?
John Gunderson: [00:17:00] Really to build price profiles, to build system price in an organized way; using the algorithms, based on velocity, an ABCD type skew fashion to set price profiles, to do what you refer to as matrix pricing, Lindsay, to find the right balance of system price, customer-specific price prices tied to price profile and manual price. Because in some industries, when they're building a very large bid for, building a stadium, so to speak, most of that pricing will be done outside the system because you're talking line by line million-dollar type orders. I think it's tough to do yourself without some outside intelligence to set the proper price profiles. Because every time a price change [00:18:00] comes in from your manufacturers, you’ve got to have a system to help you absorb that and get it out. And it's tough to do it by hand.
Lindsay Duran: Sure absolutely. You guys at MDM do a really great job of going out and serving distributors and trying to understand what the landscape is and how companies are feeling about the market and their success.
Can you share any recent survey data with us that you guys have gathered?
John Gunderson: There's one I've been doing for the last seven years. We have a database of probably 10,000 distributor associates who had taken it. These are distributor inside people and outside people who set pricing - who decide what's a fair price to sell things at. And one question we always ask is: “When a customer is thinking about the last three times, they asked you to lower a price, how many times [00:19:00] did you lower it?” And the answers are three out of three, two out of three, one out of three or never. So those are your four choices.
We just have done a couple recently - about 2000 people. Since this started the numbers of “I change it never” are at an all-time low. And the number of people who change at ‘three times out of three,’ is that an all-time high from a statistical standpoint.
Lindsay Duran: Oh, wow.
John Gunderson: So that tells you that people are feeling the pricing squeeze and that relates to the kitchen analogy I gave to you earlier.
When you're not in the branch and you've got time for somebody to say: “Hey, I can get it cheaper elsewhere.” We're finding the people are going: “Okay. I'll get down to that level. I can sell it to you at that level.’ So just to have that understanding, I think is critical. Things will improve over the next 90 days as things settle down, I hope. But [00:20:00] the numbers are high right now. And I think if you're honest with yourself, you're having a lot of price changing going on today as a distributor or manufacturer.
Lindsay Duran: If you're a distributor or manufacturer, who's still using older methods to price with a lot of spreadsheets and things are maybe slow moving.
What advice would you give to those companies so that they can try to make some improvements while maybe they have a little bit more time on their hands with less business travel?
John Gunderson: Most ERPs and or distributors have a floor that they can set on an item level or in a product group level.
Let's say I'm not taking an order below 15.0 and the screen will flash, or there'll be some sort of low margin, both below floor warning. And that order has to route to management for approval. I would right now be adjusting my floors a little bit because most distributors that I know [00:21:00] will set a floor and you as an associate, you pretty much find out where the floor is very quickly. And you know what you can go down to, to be above the floor, you to get the order approved. And I think this is a time to mess with that and say: “Hey floors were at 15.5. Right now, we're going to move them to 17 guys and gals. And the reason we're doing it is because, if you need to get below the floor, here's the procedure to get management approval.”
Whoever you are, you should have a system that allow you to set floors and I would set floors. I would mess with my floors right away. Just to give yourself more conversation between you and the person writing the order to make the best decision,
Lindsay Duran: Absolutely. I think that's great advice. From your experience, John, when do you feel like companies might need to invest in more [00:22:00] software and technology. At what stage, what size of company or complexity do you feel pricing technology begins to become critical and can maybe put you at a competitive disadvantage if you don't have it?
John Gunderson: Great question. It's a lot to unpack there and a lot of data there. I think you got to look at how big you are. I also have to think you have to look at your margin profile over time. I'll give you an example. If you're in the electrical business and two years ago, you were at 20.1 total margin, and today you're at 18.8 and you've had 130 basis point drop over a two-year cycle, even pre-COVID.
You need to look at some partnership opportunities. I think you need to look at your trend really specifically. If [00:23:00] you're under margin compression and it is at a considerable slope and it has been for some time, I think you've got to look at it, no matter what your size is. I also think if you got a great breadth of skews; let's say you're selling a half a million skews a year and maybe not a great depth of that. Maybe you don't have incredible inventory on all 500,000. I think the more skews you have to manage, the harder it is to manage by yourself. And I think if you're in that situation, if it's 1 + 1 there, margin compression and a lot of skews, I think you got to look at it.
And I also think there's a size component to it. If you're at $20 million and you get a 200 bps improvement to your bottom line, that means a certain amount of dollars to you as an owner that you've got to wave versus the investment. But if you're a $100 million [00:24:00] dollar distributor, you can make that investment and get a return on investment quicker.
I also think you've got to do the ROI. Do the math and say: “Okay, here's my investment. Here's my expected return.” Figure out if in under one year return investment, it probably makes a lot of sense. I think those are the three elements. Do you have any thoughts on that to add to my high-level look?
Lindsay Duran: Sure. One of the things that we often do to help companies determine how much essentially wiggle room they have to improve margins, is we run their data through a statistical analysis to actually measure how much margin losing. Because it'd be their pricing and consistencies or price misalignment, just to give an example of price misalignment - where you might have all else being equal - small customer is getting a better price than a large customer. And that's happening [00:25:00] because you have very distributed decision-making. It can be hard enough to set prices correctly, upfront that account for all of the rational price relationships that you might expect to exist within a business. But then when you have humans out in the field, working off of their anecdotal knowledge, generally some subjective decision-making are being heavily influenced by their last experience, those challenges with keeping prices rationally aligned and consistent across the board can become even more difficult.
I think if you take a look at the data and actually see that there are dollars being lost because of fundamental pricing decisions, as well as the way in which you're setting prices, that can clue you into just how much margin opportunity you actually have available to you and if it makes sense or not to invest in something.
John Gunderson: I would agree with that. The other thing that occurred to [00:26:00] me while you were talking; your pricing types - that there's a lot of movement between your pricing types - that tells you that you may have an opportunity. I'll give you an example. System price: What percentage of orders in dollars in business, or take the system price and use it at the line-item level, at the skew level: What percentage of orders and at the skew level are tied to a customer-specific or contract price or a price profile? And then what percentage of your orders in skews are done at the manual and an associate puts them in?
If you're unbalanced there, if you've got heavy on manual, in general, I've never really worked with the distributor that their lowest price type isn't the manual decision-making process and margin. If you're unbalanced there and you have a lot of manual pricing decisions made, usually working with a third [00:27:00] party professional, you can make a lot more money on.
Lindsay Duran: Absolutely. I think that's a great way to look at that. We often refer to those as price modes and trying to get to the ideal mix of price modes is key, especially as much business that you can shift back on to the system price. That gives you much greater control, especially if you're operating in an environment that has a lot of frequent cost jumps.
You have much more control over changing those system prices as costs move than you do with other price types or price modes. I think that's really insightful.
John, I have one last question for you, around Amazon specifically. We talked about the rise of eCommerce and I know with Amazon business, that's an increasing threat to distributors What advice do you typically offer to your subscribers and distribution businesses at large for how to best deal with that very real [00:28:00] competitive threat?
John Gunderson: I think you have to have a system that you're aware of where they're at - which you can get by partnering with someone like Zilliant.
You have to be aware of the price points they're at, in order to establish a fair online price. I don't necessarily believe that you have to be at their buy box pricing in order to win online, unless you're on the Amazon platform, mind you. But if you're doing it, I think you want to be aware of their pricing.
Also be aware of their value proposition. They are a factor. I'm sure you're hearing from your team: “I can buy a cheaper on Amazon or I can find a cheaper on Google.” That's why you got to have a system that allows you to understand where your price is, because if you're double what they are on a skew level, you're probably not going to sell much.
You've got to have that intelligence, but I also think as a distributor, you don't necessarily have to be at that level that [00:29:00] they're at online. And I do think you do have a different value prop that you're delivering a little bit. And you said something earlier that I thought was really interesting: If you've got a problem with Amazon, have you ever tried to call customer service and get it resolved?
You really can't get to anybody. That is something that you'd do differently as a distributor. So, you are adding some value. And I think you're not going to be able to get as low as they are consistently. You have to be aware where they are and be within the ballpark of their price. Not necessarily at their level.
And the last thing I'd say is, they’re really where you really got to be careful is when they have an item that you can put in a box that ships easy, let's say like the fitting. People don't really care where they get the fitting from anymore, as long as it meets the specs and gets it at a reasonable cost. I think you got to be more aware of what I would call [00:30:00] ‘the stuff that goes out in a box’ that you're shipping UPS, versus the big value engineered motor that you're building in the back. What do you think of that advice?
Lindsay Duran: I think that makes a lot of sense. We've heard that companies that are in the building products space, where maybe it's a larger item, that's harder to ship, certainly faces less online competition than someone selling screws and nuts and bolts that can be shipped in that tiny box. think that's really key to thinking about your pricing strategy and certainly being aware of the prices that are out there online, and then, responding and reacting accordingly.
John Gunderson: One thing I'd add, Lindsay, that like in the B2B distribution arena, most people are aware or aware of Grainger because they're in so many channels.
And they sell what I call ‘stuff you can throw in a box and get there easily.’ [00:31:00] Grainger, three years ago, had to go from their list down pricing to a more competitive price online. If Grainger has to do it, I would advise if you're in that footprint, you're going to have to do it also. And I think that it does really vary on the type of products.
Lindsay Duran: Absolutely. John, any final words of advice on how distributors can better weather the storm that we're all facing at this point and time?
John Gunderson: Sure. I just would like to say this now more than ever, you have to have your pricing guardrails in place as a distributor, manufacturer. Your floors and your approval procedures right now are critical.
I would say watch the temporary skews that are built into your system. And the lot billings. I put in a temporary skew to get to a price level that I want to, or I had to do a lot billing for a big job. Those are ways the associate will use to get around the [00:32:00] pricing system and guardrails that you have in place.
It's not a criticism of your team. They're fearful of losing the order today. But the temptation right now is to go where you have to go to get order. And I would just make sure you've got the procedures in place to talk through with your team about fighting that emotion and making good pricing decisions for the business.
Lindsay Duran: I think that's great advice John, I'd like to thank you for joining us today for this episode. It was a pleasure having you on. I hope you'll come back another time.
John Gunderson: I will. Thank you as always. It's great talking to you, Lindsay.
Lindsay Duran: Excellent. Thank you all for joining and listening today. For more information, you can certainly visit mdm.com as well as zilliant.com.
I hope that you will check out the show notes for a link to a recent MDM spotlight video, where [00:33:00] Zilliant discusses ‘intelligent, automated negotiation,’ which is a relatively new capability that we're offering, and distributors and manufacturers alike are taking advantage of. And we have Todd Pate discussing that with John.
You can hear more from John if you check out that video. Thank you all for joining. And we look forward to seeing you on the next episode of B2B Reimagined.
