A Pricing Methodology Upgrade is in Order for HVAC Distributors

Considering the tumultuous nature of the HVAC distribution industry today, with its celebrated highs and anxiety-inducing lows, we’ve noticed leaders in the industry are rethinking their pricing strategies. They’re shifting from traditional structures to methodologies that leverage more real-time data and accommodate the pace of change they’re experiencing.

This echoes some of our core beliefs at ActVantage. HVAC distributors that skew traditional must make drastic moves to continue performing – and profiting – in this industry environment. Distribution has remained turbulent and undergone a massive transformation in the process.

As Drucker points out in our opening quote, the greatest danger would be to proceed with old logic that doesn't apply anymore.

Still, HVAC distributors doubt trading up to a more modern and responsive pricing method. First, just because you need it doesn't mean it's achievable. And as with anything new, there's concern different ways aren't proven enough or don't have best practices to follow.

If you’re thinking along these lines, rest assured you’re in the right place to get real answers and best practices. Pricing optimization in distribution has been one of our primary focuses over the past several decades. We know, from research and experience, that six truths hold about successful pricing in distribution:

1. There is room for pricing improvement at most distributors – and it is possible.

Our research has shown that the potential for pricing improvements exists. We’ve seen it in action at hundreds of distributors from multiple industry verticals. We’ve observed margin increases ranging from 150 bps to 750 bps, depending on the number of pricing drivers deployed. Some may just use customer rankings to decide the price levels, while others may use item rankings, customer sensitivity and many advanced drivers.

2. The best decisions come from both quantitative and qualitative information.

We’ve discovered one of the most effective ways to approach pricing optimization is with a methodology that uses quantifiable data and qualitative market intelligence, a balance of the measurable with the observable. Relying on only one or the other would result in sub-optimal decisions. While it’s true that “numbers don’t lie,” they can be misleading. You need context for interpreting that data.

3. IT teams are critical to success with a new pricing methodology.

The involvement of IT personnel in pricing implementation (from day one) is paramount. This is because of intricate pricing matrices and structures in decades-old ERP systems. Every pricing project recommendation should be brought into the ERP system for final execution; involving IT teams upfront will save quite a bit of time in navigating pricing structures in the ERP system.

4. The most optimal outcomes result from education and buy-in.

The essential factors in any successful pricing implementation are educating the tactical pricing team on the new methodology and getting their buy-in. Without it, your methods may gain some traction, but it's unlikely to soar. If your team knows why and how they're being asked to apply a new approach, they're more motivated to champion – and use – that approach.

5. Everyone must know their role in the pricing process.

Defining and detailing the roles and responsibilities of various stakeholders involved in the pricing process is critical. Many distributors know the best practices of pricing, but the execution is where it becomes challenging. Again, it's because of a lack of accountability and clarity in who does what.

6. Incentives and compensation must be linked and defined.

Defining quantitative metrics and connecting them to incentive or compensation structures is vital in sustaining successful best practice implementations. Also, defining price override policies and observing the same is critical for successful implementation.

Taking a new pricing methodology for a spin

Let's examine one company that participated in our research. This company implemented a new pricing methodology in its current enterprise resource planning (ERP) system. It's critical to note that the IT team played an essential role in this implementation process.

The firm's initial step was to distribute a graphical price band to the sales team. Based on the pricing rules calculation, this pricing band showed the current price against a potential higher price in a spectrum. Salespeople could see the price band on their screens and drill down into it for further details.

This initial step didn't include educating the workforce on the methodology. Still, the firm experienced substantial improvements in its gross margin.

The new approach garnered attention and curiosity, and customer service reps (CSRs) and outside salespeople wanted to learn more about it. In response, the firm conducted three one-day educational sessions that outlined the methodology's technical and business aspects. The session was open to the tactical pricing team, including inside and outside salespeople, branch management and marketing managers.

Within three months of these educational sessions, the firm realized another 200 basis points.

Okay, but where do I start?

If you're convinced, we have the next steps for you that are informed by our industry experience and implementation projects at distributors across various lines of trade. Our HARDI blog, 10 Ways HVAC Distributors Can Build a Value-Driven Pricing Culture, outlines what it takes to set the stage for and execute a new pricing methodology at a distribution company. The steps outlined in the blog are based on a roadmap we developed from our research.