Quoting the Best Prices in Any Market Condition
To help their salespeople win business without leaving margin dollars on the table, leading metals service centers are embracing a scientific, data-driven approach to determining the optimal prices for every quote.
For salespeople in metals distribution, quoting high-value transactional business is an activity loaded with risk. Quote too high and profitable business could be lost to competitors. On the other hand, quoting too low leaves sorely needed margin dollars on the table and hurts overall financial performance.
Unfortunately, salespeople are often ill-equipped to face this double-edged sword with confidence. Price books are often inconsistent and outdated, providing little in the way of useful guidance for specific quotes. Manual analysis of individual quotes is not only tedious, it’s virtually impossible given the high volume and short quote times that typically exist in the transactional business. And when available, competitive pricing intelligence is usually incomplete and can actually be somewhat misleading.
So with little to go on, it’s no surprise that salespeople tend to rely heavily on their “gut-feel,” “the last price paid,” or “cost plus” when determining what price to quote for any particular mix of products and processing. But while experience and history can indeed lead to an educated guess, a guess is still a guess. And in the volatile metals industry, guesswork around something as crucial as pricing can cost a company millions in missed revenues.
Replacing guesswork with science and software
Recognizing just how much all of this guesswork is really costing them in terms of lost sales and margin erosion, some service centers are taking innovative steps to correct the situation. Looking to replace their intuitive or reactionary quoting practices with much more rigorous and data-driven approaches, these companies are employing price optimization technology.
A relatively new concept in the metals industry, price optimization technology has been used for years in a number of other distribution verticals, from high-tech and office products to building products and industrial supplies. In technical terms, price optimization technology applies a variety of analytical and statistical processes to a company’s existing data to calculate the relative levels of price sensitivity under different order circumstances.
In simpler terms, the technology can identify the customer’s walk-away price.
For every line-item on every transaction, price optimization technology can determine the maximum price the customer is willing to pay in that unique situation. Not the price the salesperson thinks the customer is willing to pay. And certainly not the price the customer claims they are willing to pay. With scientific rigor and accuracy, the technology can calculate the maximum price that can actually be commanded, given the specific circumstances of each deal.
Price optimization technology is sophisticated stuff, certainly. But in reality, the analytical processes involved are fairly straightforward. In fact, most of them could be performed manually by human beings. It’s just that it would take a massive army of highly trained pricing experts, all working at the speed of light, to match the level of scale, speed, rigor and granularity that’s achievable through software technology.
Delivering benefits beyond the bottom line
The potential financial benefits of providing salespeople with this type of deal-specific pricing intelligence are somewhat obvious. With customers’ true walk-away prices right in front of them, it’s not difficult to imagine how a service center’s salespeople would be able to win more business and maximize margins at the same time.
In one case, price optimization technology enabled a major metals distributor to provide their salespeople with optimal markups for tens of thousands of unique order configurations. Prior to deploying the technology, salespeople had to rely on markups based on a combination of branch, customer size and order quantity that were often stale and far too general to be very useful. With the price optimization technology, however, the company’s salespeople could see up-to-date pricing recommendations that were specific to the circumstances of each individual deal and reflected the differences in willingness-to-pay in each unique situation.
Having this kind of information at their fingertips, this company’s salespeople were able to improve their margin rates by over 100 basis points and increase margin dollars by over five percent. For this metals distributor, these improvements were worth well over $20 million dollars per year.
While the financial benefits this company achieved were substantial, there were other positive outcomes as well. Because the price optimization technology is relatively unobtrusive, it requires minimal change management and organizational upheaval. While the technology itself performs a variety of sophisticated functions, the outputs are very simple. By presenting the optimized pricing intelligence within the company’s existing sales tools, salespeople could do their jobs the way they always had, using familiar tools and processes.
Another important outcome had to do with the company’s responsiveness. With better intelligence instantly available, salespeople could turn quotes around much more quickly. This not only had an impact on customer satisfaction, it increased the chances of winning the business before the competition could respond. As one team member described it, “Now we can often sell the quote right on the spot before competitors even have a chance.”
And because the technology is constantly monitoring buying behaviors and recalculating price sensitivities and willingness-to-pay, it allows the company to be much more responsive to overall market dynamics. In fact, the technology can often detect subtle changes in the marketplace long before they become obvious to everyone. In a volatile market like metals, this kind of early warning system can provide significant competitive advantages.
With rapid and dramatic fluctuations in demand and input costs becoming the new reality, metals distributors need to take a hard look at their selling processes and practices. They need to look for opportunities to innovate, mitigate risk and gain advantage. They need to question the conventional wisdom and standard approaches and explore new ways of doing things.
Price optimization technology should be part of this exploration. Now, it’s not a panacea or a silver bullet, and it can’t change global economics or overall market dynamics. But what it can do is provide salespeople with the information they need to win more business at higher margins. And that can make the difference between being at the mercy of the market and controlling your own destiny.
Zilliant Inc., Austin, Texas, offers B2B price optimization and margin management solutions. For more information, visit www.zilliant.com.