Driving Profitable Growth in Distribution
September 22nd, 2021 | 28 min. read
Driving Profitable Growth in Distribution
For distributors struggling with vendor allowances, rebates and deviations, and then how to marry all of this when negotiating with the customer to understand their true profitability, it makes it difficult for them to get sharper, more efficient and more scaled and yet still ensure the economics of running their base business as tightly as possible.
Join Gabe Smith and Stephanie Yee, Management Consultant at Bain & Company, as they discuss how distributors can adopt a mind shift to help them explore new ways of creating value for their customers and operate more effectively in the current climate than their competitors.
Listen to the podcast with the embedded player below or read along with the transcript. You can listen to the podcast on Apple Podcasts, Spotify, Stitcher, or wherever else podcasts are hosted. Want to see the conversation and not just listen? Watch on YouTube.
Gabe Smith 0:00
Hi, everyone, and welcome to Pricing Matters. We are pleased to have Stephanie Yee, a pricing expert and associate partner at Bain Consulting.
Stephanie Yee 0:06
Gabe Smith 0:07
Can you tell me about your experience in terms of helping to enable profitable growth at distributors or other companies?
Stephanie Yee 0:14
A couple of different ways. Not all customers are in the same starting base, right? So you’re gonna have, once you start to get a better view of your customers and their profitability and how much share you have, you start to build an understanding and a view of what are the customers that are like: “we have most of their share. And we’ve got great margins on.” Well, for those kinds of customers, you’re thinking about retention, but then you’ll have these other kinds of customer segments that are, “We’ve got a lot of business with you. So we’ve got high share, but maybe the profitability isn’t great.” So how do you think about that mix changes or raising pricing on certain items, if they make sense, and all of those kinds of things? But how do you think about like improving the overall profitability of that customer without losing your share in that customer? And then there’s some other ones where you might be highly profitable, but actually, their share potential is much higher than what we currently have. And that’s when you start to think about not everything is always about raising prices, you start to think about like, “Well, you know, what are some give get kind of programs where we can increase the share in total profit dollars with that customer, but maybe we lower price on other things or we do bundling or some other tactics to basically try to grow our overall dollars and share with that customer.” And so as we’ve done work with different clients, we try to understand, build out that view around profitability of the customer, what’s their share potential, and then you think about pricing as a strategic lever for how can I use that to grow overall gross profit dollars with the customer?
Gabe Smith 1:46
Absolutely, yeah. So one of the kind of distribution-centric models around that segmentation that we’ve used before, we were actually introduced by one of our distribution clients, is this idea of customer stratification, which is looking at customers and kind of segmenting them along a few different levers. One is loyalty. Are they buying across a lot of different categories? Or is it growing or shrinking? Things like that. Then how much purchasing power do they have? Right? So how big are they? What’s the total wallet that you’re looking at? How much it costs you to serve them? So we talked about the freight cost? And then what is their profitability? And how is that trending. One of the keys to price optimization, I’d say actually, the key, is really understanding how to segment your customers and products and doing that in a way that’s going to reflect the strategy and the direction and being able to flex that and be agile with it as well.
Stephanie Yee 2:33
I would say that what you described in terms of understanding the importance of a customer to a company makes total sense. I think where most distributors that I’ve seen struggle is understanding the full potential. In a lot of these industries, that data is just not very readily available around like the total purchase size as it is in some other industries where you can easily buy like third party data to understand what that is. More and more companies understanding that potential is really important, not just the size that we currently have, but what they’re capable of buying. And understanding what that market opportunity is and working through the analytics of it to figure that out. And, you know, Bain has a great partner toolset that we use to help folks figure that out. I think the other part of segmentation, I would say, is based on the use case as well. How I want to think about customer segments in terms of understanding their buying patterns, I would use different criteria for how I would think about those segments. And so in those segments, where I’m thinking about cross sell, upsell, things like that, I’m looking more around, like purchasing behavior segments, you know, and so I do think that segmentation should be fit for purpose in terms of the use case that you’re trying to solve for. Because I think you’ll find that different levers matter in different situations. And you might want to group customers together, depending on those. Value buyers versus like, you know, price buyers and all that kind of stuff. There’s also too some attitudinal things that can also come into play for how you think about that.
Gabe Smith 4:10
Yeah, yeah, absolutely. And then what is the pyramid strategy and tactics? And are they poker players? Are they gonna bluff you into believing that they’re a price buyer when they’re really a value buyer and that whole thing?
Stephanie Yee 4:20
But also too like you just said, like, if you’re, if you’re a procurement buyer, and you get incentivized on a large rebate, you know, showing that you can, you’ve saved this much, it’s very different than the person that might be buying from location who’s not in the procurement organization who’s looking at the bill that they’re paying and trying to make decisions on pricing.
Gabe Smith 4:41
I mean, definitely in our in our own negotiations, oftentimes, you have a certain relationship with the business and IT people that might be driving a project of ours, right. And then you get kind of handed off to the procurement person and they have a whole different set of boxes. Right? And then, so the key is to understand what are those boxes and then how can I create a win win where we can both get our boxes checked. And I’m not giving away the things that are key to me. But I’m giving you the things that you need to get to look good in front of your manager, whatever it is at the end of the year, right? Pretty early on in the podcast, I had Chuck Davenport and Paco Jimenez from Bain on and we talked about digital transformation of the quote to cash process. And it was more holistic than just price setting. It was price setting negotiation, promotions, off-invoice incentives. And we talked about kind of what are the keys in doing that and the benefit of doing it and kind of the process and everything. Can you just talk about your experience in digital transformation, your perspective there and the value of doing it? And also, what’s the risk of not doing it?
Stephanie Yee 5:39
As we were building out the pricing and revenue management work, we definitely knew technology had to be an enabler. In the place that I was at, we had 1000s and 1000s of sellers. So whatever we had to do had to get at scale. And it’s very difficult to do that without technology, it’s difficult to be agile without it. And it’s difficult to make things easier actually, for the end user to do without. With all of the cloud-based software that’s now readily available, it’s just much faster and a lot easier to start with a digital transformation. I mean, we always kind of recommend at Bain, you know, as we work with our business customers, always to think about, like, let’s first understand what you’re trying to solve for as a business. You know, and let’s make sure you’re clear on what are the business changes you want to make. And then let’s make sure the technology enables it. But gone are the days I feel like where your option was, “Hey, you know, it’s gonna take you a year and a half to get rolled out with something that can scale at enterprise level.” And I think now, there’s a much lower entry cost point to get started with thinking about how you enable things at scale, from proof of concept all the way to end state. And so we kind of have done things that are more maybe the longer route. But I think I’m excited for all of the options now where if we would have had some of the capabilities that are available now, we could have shortcut, you know, some time it took for us to really deploy and implement things. The application of advanced analytics in places where you have a transactionally rich data set can also create a ton of value in terms of, you know, digital transformation and unlocks.
Gabe Smith 7:26
We always talk about organizational attention span, if you can’t produce value within three to six months, you’re losing.
Stephanie Yee 7:33
Most of our clients are exactly what you described, you know. They want to install long term capabilities, but they want to make money that right from the get to try to pay for these programs as they journey through so completely agree
Gloria in Excel Sheets?
Gabe Smith 7:46
In what you were talking about before where procurement people, especially I think millennials that are in procurement roles, they don’t want to deal with contracting and all of this process necessarily, they just want to get what they need at the right price. So it really puts the onus on suppliers to get that price, right, they use some of the technology that’s available and they use advanced analytics, especially where they do have the transaction data to support it to just put that right price out that doesn’t need any approval, doesn’t need a contract. And it’s just like, okay. Because more and more companies are going to be doing that, right. I mean, that’s why Amazon grew 10 billion on the b2b side and three years by doing that, right. And as you look at more and more transparency, and more industries that they’re operating within, like, they just announced that they’re moving into aftermarket now, right. And so that’s going to keep happening, whether it’s Amazon or other players. And so, you know, if companies are still trying to do this stuff in Excel or manually, you just can’t keep up with it. Right? And especially at scale.
Stephanie Yee 8:44
Yeah, Amazon’s in a lot of different spaces. Yeah, their office supplies, they’re MRO. You know, they’re, you know, a purchase food company. I mean, like, they’re in a lot of different spaces. When I think about distribution, I would say that if you would look in your own company at the areas where there’s a high profit margin in certain categories, it’s not that hard to ship or deliver or differentiate it, and customer experience matters, those categories are prime for a digital native player to come in. And so I think that as I look forward, I think what I see a lot of distribution companies doing and thinking about is how do they add value? A lot of distribution companies are more heavy in terms of the cost model, right? Because they’ve got more people, they’ve got, you know, often direct sales force, sometimes technical specialists, you know, they have feet on the street, so to speak. And so they’re a much heavier sales model in terms of costs. So the thinking is like, how do you know, in your value chain, add value to your end customer? That is very difficult for some digital natives to replicate without like creating an army of people or you know, a new capability that’s very outside of their core DNA. And I think that they should be thinking about those kinds of things to build more of a moat around their business. The other thing is that, you know, in some spaces, it’s kind of, it’s already too late. And so I think there are some distributors that are thinking about like, “Well, are there new spaces, adjacencies, and things like that, new products or new offerings that I could get myself into that could create value for the customer, where there’s not this intense commoditization competition, where I can find and develop new profitable growth? And so I think, you know, as I look ahead, the story is how do I get sharper, more efficient, more scaled, make sure the economics of running the base business is as tight as I can get it, but also to explore new ways of creating value for customers who are my existing customers or new end market.
Gabe Smith 11:05
One of our clients is Watsco. They’re like a $4 billion HVAC distributor. And they’ve had a lot of success on the digital commerce side. And they made a lot of investments in their mobile apps. At first, you said, “Well, everyone has mobile, what’s the big deal?” But they really took a very customer centric mindset. And they went and developed a set of capabilities for HVAC contractors, that really made it easier for them and really illustrated that knowledge that they had of that market and that customer, and that puts in that kind of competitive mode. I think distributors that are more general and have like, traditionally competed on having a wide assortment and good pricing, those are the ones where they got to be feeling the pressure, a lot of you know, Amazon and digital natives. But so I wonder like, if there is like how much room there is for those types of models versus the more niche players, because, in order to focus on customers, you really have to figure out, you know, what customers are going to focus on right, and then how you’re going to build that mode. So it’ll be interesting to see how things shape up here. We talked about rebates and kind of incentives on the customer side. But one of the things that often distributors struggle with is all of the vendor allowances, vendor rebates, deviations from the vendors, and how to marry that to when they’re negotiating with the customer to understand their true profitability. Is that something that you’ve had some experience with? And can you talk to that and how companies can bring those things together and make them better?
Stephanie Yee 12:32
I think oftentimes, you know, if you can imagine, you know, on the supply side, typically what’s happening is you’re negotiating pricing for the product. And so you’re often you know, getting some kind of contracted price and volume based tiering that says, Okay, if you buy this many widgets from us, you’ll get this kind of pricing, and then you better pricing if you buy more widgets, and then even more widgets. And I think where a lot of companies fall down is they don’t, they’re not able to connect what’s happening on the buy side with on the sell side. So you can imagine how powerful it would be that if, for example, we know we’re about to hit a much better volume tier from a purchasing standpoint, on the supply side, if I’m able to bring that information into the sell side of the cycle to say, “Hey, you know, let’s sell these products instead of these other products because I’m about to hit this volume tier where I’m going to get a major cost break for this particular item.” And I might even be willing to reduce my price or give a temporary discount or whatever it is to increase the volume on the sales side of this particular item. Because of where my volume tiered rebates are happening on the supply side. I think oftentimes these systems are disconnected, I think technology could go a really long way in trying to build that bridge and, and feed in more real time information around when you’re about to hit those tiers, so that you are actually maximizing the profitability completely end to end.
The Multiple Objective Factor
Gabe Smith 13:59
I think one of the unique things about the way that we approach price optimization and the AI technology that we have is the ability to actually factor in multiple objectives and constraints like that. So, not just looking at what am I going to sell for and not understanding that? Well, if I’m $10,000, away from a million dollar revenue threshold, and I get a 2% rebate out of that, that last 10,000, I could sell it at whatever I want. Because I’m going to get such a huge reduction in my cost and increase in my profitability as a result. We’re only getting to the point now where the technology platforms are capable of actually helping them solve that. So it’s, it’s kind of an exciting time. So one of the things that you mentioned that you did was set up the pricing and revenue team at Sisco and the process that you went through and what you’d like to share with pricing leaders on if they are in that position where they’re either building it from scratch or building out the function or increasing the focus there.
Stephanie Yee 14:52
In the beginning. I really wanted to hire people that had pricing experience in the industry, and I found that was difficult to do so because we were trying to do transformation and pricing, which, you know, wasn’t being widely done, I think in a lot of places. And so what I learned very quickly was actually much more helpful. And the best resources I ever brought on the team were the people who are analytically inclined, who had a high IQ, you know, and a real good commercial, business, general Manager mindset type of person who was ridiculously, like ambitious and hungry for learning, and all of that kind of stuff. And I found that if you found people with that kind of, those kind of core skill sets, like good problem solving skills, all those kinds of things, that you could teach them anything you needed to teach them about the business, themselves. Work that they had done in other places was helpful in the way that they would think differently about some of the problems that we were trying to solve. And I think I also found that the organization got built out over time. And so especially in the beginning phases, what I would say was most helpful was hiring like these folks with these certain profiles, because they could also be utility players, because we were finding ourselves in working on different programs and initiatives and evolving the agenda as we were learning, you know. If you’re having folks that had what I would call core essential skills that you can then flex in different ways was incredibly helpful. Sometimes organizations can get super stuck on, you know, this conversation, right? Well, who is he going to report to? And how many people am I going to have, and how many layers and all that kind of stuff? And I think bring to the organization a conversation like that is always kind of a little bit difficult, because it’s asking for an investment right in front. One of the things we try to get really good about was, here’s the work we want to do, here’s what it’s worth. And then here’s the people you really need and the capabilities you’re going to need to support it. And like having the conversation around an organizational model in that order really made sense, because then folks can really get their minds wrapped around, “Well, do we all believe this is an opportunity? Yes, we size this opportunity (I’m making these numbers up) at like $50 million. Okay, do we believe that there’s $50 million? Check? Yes. Well, in order to do that, we’re going to need to invest, you know, $3 or 5 million in organizational you know, people heads, tools, whatever it is, it’s going to take, we think to do this work. And oh, by the way, you know, we’re going to prove it out that there’s this $50 million worth your proof of concept before everyone believes in the numbers. Then the conversation about, okay, well, now you guys need X number of heads, these kinds of tools, that’s a much easier conversation to have if you’ve built up the proof point for what it’s worth to the company. And so I would say, we did not start with a “Hey, you know, my name is Stephanie, I want to build out a pricing team. Here’s the 20 people I’d like.” That would have been dead on arrival, you know. It was much more of a “Hey, we want to build these kinds of capabilities to solve these kinds of problems to generate this kind of revenue or benefit. Okay, well, we’ll need this kind of team.” And so over time, we scaled the team size to match appropriately with the work that we were doing, which, if you’re able to deliver value to the organization, you can only imagine that year after year, you’re you will be asked to do more things to deliver more. And so we found ourselves in this space, where in the beginning, it was new programs, initiatives. And then you know, as we built those out, there was the keep the lights on water running baseline event, keeping those programs up and alive and ensuring we’re still continuing to generate value from those programs. But then there’s a team that always kind of consistently did what I would call new programs, experimentation to then further the agenda and capabilities of the revenue management and pricing agenda. Over time, the organization grew. And it was ended up being a mix of capabilities of keep the lights on water running, you know, program is alive, working with the field on feedback on existing tools, and programs and systems, which was really, really important in ensuring like changes that we implemented really stuck. But then a team that would experiment with how do we then take the agenda even further in terms of capabilities, and all of that kind of stuff, generating new revenue streams, you know, those kinds of things that would do some of that, like tests, proof of concept pilot, you know, put new things in the hopper to continually increase the value to the organization.
Gabe Smith 19:38
So let’s talk about the future. I was alluding to a couple talks that I’ve given on the future of pricing, and I came up with this idea of the five DS that are going to shape the future. So it’s about being more Distributed. So I mean, we’ve seen that with a pandemic and working from home and, you know, there’s going to be lasting implications of that, most of the studies have absolutely shown that productivity has increased as a result. I just read one that was about a 2.3% increase in productivity and even with juggling the additional things that we have to do as parents and homemakers as a result. So that distributed piece, it’s kind of forever changed I think in some industries. The increasing level of Diversity that we’re seeing in the in the workforce and not just traditional diversity, but also like diversity of opinions and the diversity of ideas, right and where people get their news from is all different now. And so I think that’s a big deal. And Digital native players in the market, but also, digital native people. My professional career has been pretty much digital, I feel like I’m digital native, because I actually feel like there’s activation energy for analog processes that I feel like is a waste, right. And so if something’s digital, and I can get it done efficiently, I’ll just get it done like this. But if there’s something like, “Oh, I need to print that out and sign it and you know, fax it in.” That’ll just sit on my desk, like waiting, and I’ll get through 100 things digitally until I get to that one thing, a lot of times. The analytical mindset, the Data Driven, those are the last two Ds, I think that’s, that’s gonna play a big role in shaping the future. And so I’m just curious to get your, as you know, someone that’s built teams like that, and are talking about digital transformation and looking across a lot of different industries, what you see as some of those shaping forces, and what you also see in the future for pricing teams, or teams in general, or the pricing function?
Stephanie Yee 21:22
I think a lot of what you said totally resonates. I would say the other piece I would think about is, I think sometimes when I see kind of the maturity journey of pricing teams in b2b, often it starts out more of a kind of transactional deal desk, like teams, you know. You know, call this group and they’ll do your pricing for you or call this, and they’ll do some kind of, you know, more administrative in nature. And more and more as people understand the power of pricing and the discipline and the incredible value it can unlock, I see pricing having more of a commercial seat at the table and a more strategic seat at the table. And I think that that’s a natural evolution. Because I mean, if you read through the you know, the differences in performance, you know, in a company that thinks about pricing at the start of the product offering versus like after the offer is out, and then I’m going to try to fix my prices that are already out on the market, it’s just orders of magnitude difference in performance. I think that as we think about these cross functional teams, and I think the siloed functions needing to now compete more effectively, needing to be much more cross functional in nature, you can imagine how being in pricing, and much more of a strategic role really should be working side by side with sales, for sure. Marketing as well, and all the promotions and how you think about those kinds of activities in finance, from a value perspective to the organization. And so I see the transition of that being where either maybe historically, pricing might be more administrative in nature in terms of teams to be more strategic in nature, in the companies that are trying to fire on all cylinders.
Pulling the Pricing Lever
Gabe Smith 23:10
I mean, I’m definitely seeing that happening. A lot of the companies that purchase pricing software are those companies that are kind of on the leading edge of that, that are thinking about pricing as a strategic lever. I remember Charlie Peters was at Emerson, he was, I think, the chief pricing officer or the pricing czar or something like that, he actually was on the board of Emerson, right. So that’s probably the highest that I’ve seen, but you’re getting more of those, like senior level pricing individuals that are fostering that collaborative type of approach with the commercial teams, and it is a huge lever. And I think part of what we’re all trying to do a lot of times is to educate more and more people on this and, and hopefully get an understanding at the C level that pricing is important. And it’s a discipline and it’s not just an art, right, and that you can use people, processes and systems to drive dramatically improved results for companies, right?
Stephanie Yee 24:00
Yes, definitely needs to be data-driven, analytically sound, has a very logical thinking kind of mindset. But some of this nose for commercial outcomes, you know, IQ, working and collaborating with these other teams become really, really critical as well to have a part of the talent profile you have in your teams.
Gabe Smith 24:21
Yeah, and I think that learning mindset, you can’t get stuck in what you’ve been doing in the past, right? Because when something like the pandemic happens, or even, you know, supply chain disruption in general, or the Tariff and Trade war, you have to be able to kind of shift mindsets and say “Okay, now, how do I operate more effectively in this environment than my competitors? And how do I enable our commercial teams to compete?” One thing I like to ask people though, as we wrap up, is favorite blogs or journals, articles or books on the topics or just in general business or pricing. Be interested to get anything that you’re reading or that you’d like to recommend
Stephanie Yee 24:58
A couple of different thoughts. I do have a voracious appetite for learning on all kinds of different topics. I think I’m fortunate at Bain, you know, we’re constantly like developing new IP, and writing new publications and articles and things like that. And we get curated sets of like, here’s all the latest kind of industry publications that are going on. And so, you know, I like to read what we we’re putting out what our competitors are putting out, you know, in terms of articles and learning around pricing. There’s quite, there’s quite a few regular players in the industry that always put out different pricing articles and things like that. In general, I’m always kind of curious about business, you know, and all those kinds of things and trends. And so I do, you know, watch quite a few like Ted Talks and all those kinds of things. I’m reading Zero to One right now, I mean, just like different books, and then in the more personal space, you know, I’m always kind of interested in all of the things around, you know, self-growth, and actualization, and all these kinds of things. So, I’m a fan of Rene Brown, and some of the works that she’s done. I read Untamed recently, but they’re all these different kinds of things that I read that talks about your personal growth, and you know, how to be your most true self that you can be, so I’m interested in those kinds of things, as well. So reads stuff around this.
Gabe Smith 26:24
Well, thanks for sharing, and thanks for all your insight, really enjoyed having you on. Anything that you’d like to add, in conclusion here for the audience?
Stephanie Yee 26:32
At times when there’s a lot of pressure in certain industries, there’s a real opportunity to set yourself apart. And I think that it can be done and I think, now more than ever, there’s the right kind of tools and, you know, help that’s out there to really think through and solve some of the more complex and challenging business problems. So, you know, I think, you know, staying focused and, you know, learning from other spaces is some of the things that will serve companies well as they think about the future.
Gabe Smith 27:02
Well, thanks so much for your time. And thanks, everyone, for tuning in to Pricing Matters.
Stephanie Yee 27:07