TO CUT OR NOT TO CUT PRICES —THAT IS THE VITAL QUESTION

In addition to serving as national sales manager for AOPD, Tom Buxton, founder and CEO of the InterBizGroup consulting organization, works with independent office products dealers to help increase sales and profitability. Tom is also the author of a book on effective business development, Dating the Gatekeeper. For more information, visit www.interbiz group.com.

A fascinating question has recently appeared among the dealers that we create pricing plans for, in partnership with ECI. The overall volume of the dealers that work with Margin Accelerator (MA) is approaching $300 million per year, so their questions are vital to us; and maybe your dealership should consider them too. The main question they have been asking themselves and us is: “Is our company priced too high for the current marketplace?” This article will hopefully provide some insight into whether your pricing could be too high and whether there are cases in which cutting prices to some extent would be the best option for your dealership.

Within our program, we attempt to make all changes minor and almost unnoticeable, unless the dealer requests otherwise. But there are still some instances where a customer or a rep complains about a high price. This is generally caused by a product in the matrices that has had very little or no sales in the prior months. And in most cases, either the cost from the wholesaler rose or the margin was always quite high. So, it is understandable when a customer or rep “freaks out.” For some dealers, we have lowered all items on matrices that have had no sales in the past six months to 40 percent gross margin or lower, but have always counseled caution, because there are many “A” items where the dealer’s margin is less than 15 percent. Margin degradation can and does occur quickly if care isn’t taken to ensure that overall yield is maintained.

In summary, our sales data reveals that the following three issues are the most prevalent drivers of pricing complaints:

• location (MA dealers are headquartered in either very high or somewhat low areas in terms of the amount of competition);

• sensitivity of the salesforce to price changes; and

• the level and type of customer complaints, which can vary dramatically.

Oddly enough, the location of the dealer seems to have the least impact on the levels of pricing pressure, while salesforce concerns—at least with the dealers we serve—result in the most fear. Customer comments about price increases within the dealers we manage pricing for rank somewhere in the middle, but never approach the “DEFCON 5” level that rep complaints can reach. Please don’t misunderstand—reps often have the ear of their customers; but the ironic fact is that the dealers we serve that don’t have their salespeople involved in pricing analysis generally maintain the highest margins. This is something for every manager and owner to consider as we discuss whether to lower pricing when your costs go down.

We brought this conundrum to MA dealers a few months ago when one of the wholesalers told dealers that they were going to lower their private label pricing. A few dealers decided to lower the prices whenever the costs went down, while others determined to make up for lost margin in the past by maintaining their prices. In this case, there were no wrong answers. The dealers who maintained the same prices didn’t receive many complaints (at least that we were told about); and those that did lower their prices didn’t hear anything one way or another. I think you will agree, quiet is good when it comes to pricing.

However, we are beginning to see more price decreases in the marketplace; and very recently, a few of our dealers have been asked to reduce prices on specific items in order to come closer to the prices of Amazon, Office Depot and Staples. (You can’t afford to match the market unless your company buys as well as your large competitors, which is very doubtful.)

With these concerns in mind, we have come up with some possible solutions:

• You can begin to manage margins based upon your July 1 cost files and ignore the increases from earlier in the year if you want to. To be clear, these changes won’t eliminate all “one-off” complaints about your price being higher than, say, Amazon’s on a given day.

• If you haven’t considered lowering your non-selling items to a lower margin, please consider it now.

• If possible, take your reps out of daily margin management. They are generally terrible at raising prices and can destroy your margins quickly if they cut too many prices. (But remember, I love reps and I am one, so don’t think that this point is an attempt to denigrate them or their value to your dealership!)

• Matrices are designed to price your least emotional items and if you are receiving numerous complaints from customers about a specific product, it should be placed on a custom contract, or the customer should be moved to a lower matrix.

• If you haven’t agreed to ignore list price before, please allow prices to move above list in the future. List price is different depending on which wholesaler you use, and which competitor you are being compared to—Office Depot’s list price, when it can be found, is up to 20 percent higher, especially on private label, and is not easily obtained except on some independent dealer websites. The margin improvement will be large, because so many items that you buy from a wholesaler are within a few points of the list.

• If you have bargained for a lower copy paper price, lower the price to your customers by a little bit and let your reps “brag” to them about it. (This can make everyone happier and more loyal.)

Obviously, if you feel like you can’t move forward with these ideas without assistance, we would be eager to hear from you. But if you have a team involved in margin management, please consider these suggestions, and implement them quickly. Many of your costs are now in the process of being reduced, so make changes if necessary. The rest of 2023 will be much different than the last few years have been in terms of pricing. Be sure you have a plan and work it.