Finding opportunity in economic uncertainty

By Greg Peters -- Industrial Distribution, 9/4/2008 8:06:00 AM

During an economic slowdown, most distributors are content to do what they’ve always done—hunker down and start playing defense. They go into survival mode, pulling out all the stops to protect their market share and top-line revenues. And along the way, they hope that cost-cutting measures and efficiency improvements will somehow lessen the blow to their bottom line.

Leading distributors have a very different perspective.

They understand how efforts to improve efficiency can quickly reach a point of diminishing returns. They’re leery of gutting their core competencies and differentiating capabilities through cost reductions that cut too deep. They realize that aggressive discounting to protect market share can easily wipe out gains in other areas—destroying their profitability and crippling their companies’ long-term ability to compete.

So how are visionary companies growing their profits and gaining sustainable competitive advantages in the current economic climate? How are these companies positioning themselves to emerge from this economic slowdown in a stronger position than before? What hidden opportunities have these leading companies found that aren’t so obvious to their competitors?

Many of these visionaries have now discovered the hidden opportunity in price optimization.

Given the financial variables at play, pricing has a tremendous amount of leverage in a distribution environment. Even relatively minor improvements to realized price can have a major impact on profitability. In fact, many distributors have found that the bottom-line impact of optimizing their prices and discounts dwarf those of cost reductions and volume increases combined.

For most distributors, price optimization has largely remained a hidden opportunity, because as powerful as it is, pricing just doesn’t get much attention during a market upturn.

In a positive market, the rising tide of growth covers a variety of pricing sins; distributors can get by with fairly rudimentary pricing practices across their thousands of products and customers. As long as revenues and profits are growing at some level, distributors give little thought to “what could have been” or, more aptly, “what should have been.”

But when growth begins to stall, those inferior pricing practices become a major problem. All of the pricing guesswork, intuition and rules-of-thumb that seem sufficient in a growing market conspire to deprive distributors of the margin dollars critical to weathering a down market.

So while their competitors are focused solely on back-end cost cutting and process efficiency, leading distributors are also leveraging price optimization technologies on the front end. By doing so, they are able to automatically analyze every deal in real time, pinpoint the profit-optimal price points for every product on every order and, ultimately, maximize their margin contribution and profitability—all without sacrificing top-line revenue.

And because price improvements drop straight to the bottom line, the impact of price optimization technology is a game changer for distributors.

For example, after deploying price optimization software, one multi-billion dollar reseller armed their sales force with deal-specific price recommendations. In aggregate, the team averaged 250 basis points of additional margin on the thousands of orders placed each day, yielding a 10 percent increase in profit dollars—and added over $800,000 to the bottom line every month.

Simple as it sounds, the reseller also recognized the opportunity to optimize prices charged for freight and, as a result, added close to $1 million in profits in the first year of use, over and above the almost seven-point margin increase on the order items themselves.

In an economic downturn, financial improvements like these can entirely change a company’s fortunes.

The incremental dollars generated through price optimization can be invested in new distribution capabilities and product innovations. Or they can be used to pursue entirely new markets and distribution channels. They might also be leveraged to acquire the other companies that aren’t faring so well in this economy.

The point is that while everyone else is just struggling to protect their current levels of profitability, the ability to actually grow operating margins is clearly a significant competitive weapon.

It should also be clear that there’s a significant opportunity cost associated with lack of action. When it’s possible for a distributor to grow operating margins 10 percent to 15 percent by deploying price optimization technologies, every day of indecision or inaction effectively costs them that same amount. For one company, every day of indecision cost $75,000 in incremental margin dollars that could have been claimed and captured.

Recent reports by industry analysts are also reinforcing the value of price optimization in tough economic conditions. AMR Research states that “establishing fact-based pricing, improving margin realization and rectifying unprofitable pricing practices can help companies continue to be profitable during a downturn.”

Another analyst firm (Gartner Inc.) cites price optimization as “having a more direct impact on revenues or margins than any other CRM technology through 2010” and clarifies in a recently released report why it is so compelling.

“The price optimization and management market differs from most other applications because it offers strategic benefits (helping organizations grow revenue and margins) and operational efficiencies (helping companies save time and cut costs),” the firm notes.

So what’s the catch?

Even though the opportunity to change the game through price optimization is available to every distributor, very few take any action. The simple truth is that most distributors will just continue to do what they’ve always done. Even knowing that there’s a better way, most distributors will instead choose to hunker down, get defensive, and discount their way into a corner just trying to survive.

Some readers will recognize that this is exactly how sustainable competitive advantage is created.

The “hidden opportunity” of price optimization is available to everyone. But in this economy, what will separate the winners from the losers—the emerging leaders from the lagging survivors—is the willingness to take action to turn that opportunity into a reality.

 Greg Peters is CEO of Zilliant Inc., a provider of price optimization software based in Austin, Texas. He can be reached at greg.peters@zilliant.com or at (877) 893-1085.