Pricing for Digital Commerce

One of the biggest factors limiting the success of B2B distributor eCommerce is pricing. James Dorn looks at pricing strategy and two schools of thought on how distributors look at the ROI equation for their eCommerce revenues.

Listen to this episode of The MDM Podcast now:

James Dorn is a regular guest on The MDM Podcast. Listen on your favorite podcast platform. 

Thoughts? Questions?

As always, feel free to reach out to talk in greater depth about these and other issues impacting your business.

Podcast Transcript:

Tom Gale: Welcome to this edition of MDM’s quick take. My name’s Tom Gale. My guest today is James Dorn, president and CEO of Dorn Group, a strategic advisory to manufacturers and distributors. James, welcome.

James Dorn: Thanks, Tom. It’s great to be here with you.

TG: I’d like to talk this week about pricing for digital commerce. There’s a couple angles here that prompts this. One is, I’m in a lot of conversations lately around sales transformation process, this struggle around outside, inside, and digital platform selling. It’s a wrestling match. But the other aspect of this that I think is a critical component is around the pricing component of this. And this is, again, something that people struggle a lot with. I’d like to dive in and get your thoughts about what some of the biggest factors you’re seeing out there.

JD: So yeah, this is an extremely timely topic, Tom. We’ve been getting a lot of questions from distributors recently who they’re in a situation to where they’ve invested millions of dollars into their e-commerce websites, both in software and data and in overall resource headcount. And they’re asking the question, “Hey, we’ve invested all this money, but we’re just simply not seeing the ROI yet. What are we missing?” And that’s where we come in and we have a conversation, and it starts with attribution of just how they actually are looking at return on investment. And for the majority of distributors, they fall into one of two buckets.

The first bucket is they view attribution in the e-comm business as part of a larger corporate strategy of omnichannel, right? So the e-comm channel is just simply there to help their customers find the right information at the right time, and they can still pick up the phone and place the order, or they can still go into a branch and place that order. So the e-comm channel is just there as an another form of communication, if they want to check out through the cart, that’s there as well. But the measure of success with this group of distributors is, “Hey, is our account base and our revenue growing to where all of these channels combined are helping us capture more wallet share and helping us capture new customers?”

TG: How do you manage the attribution as far as with your sales reps in terms of them having a fear that they’re not going to get credit for that sale? I mean, that’s a fairly common thing.

JD: That’s another really big topic, Tom, because a lot of this is so new, we’ve actually seen a lot of distributors take the approach of, “Hey, we’re still going to give commission to our sales team because at this point, we care more about growing the customers and really figuring out where a lot of this is headed.” So they’re not looking to create this huge conflict internally with their sales teams and whatnot. But over time, as distributors progress into this, they create inside selling teams and they create digital selling teams. And a lot of those commissions move from field to inside and then just to, say, house accounts, if you will.

TG: Makes sense.

JD: So on that side of it, there is a progression there over time as you get more sophisticated. But the second group of distributors out there, the way they look at the attribution for e-commerce investment is they are extremely critical about measuring the revenue and the profit that’s generated from the e-comm channel itself. And they want to make sure that the ROI obviously exceeds what they’ve put into it from an investment standpoint. So they’re treating this as simply another revenue channel that’s competing with their other revenue channels, such as branch, such as fields, such as inside.

This is to where they’re measuring success based on growth, based on increasing lines per order and looking at just reducing overall cost to serve with certain customers. The one cautionary tale that I would lay out for the first way of measuring ROI success from your e-comm channel is if you’re just managing e-commerce as a part of your larger omnichannel strategy, you might be missing out on some critical things such as, “Hey, do we have the right pricing on the website?” And this is the situation that I think a lot of distributors can relate with because somebody might start their search for a product on the website and then they find out that the pricing’s wrong. So they call their account manager and they place the order with their account manager. To some that might make sense of, hey, we’re still getting the order. But if you can take your website further of being able to actually have the proper pricing, accurate pricing at that customer level, you could actually increase the ROI of your website by simply capturing that order and converting that customer into the order.

TG: Talk a little bit more pricing strategy and what you’ve seen that works most effectively in terms of driving performance.

JD: The way I would frame this is in order to get your pricing accurate on your website, it’s not about buying the latest and greatest software because there really is no magic bullet out there when it comes to software to fix this. But I would emphasize to distributors to really take a hard look at their pricing strategy across their organization. And pricing at the distribution level is probably one of the most complex things out there. You’ve got thousands of customers, thousands of SKUs, hundreds if not thousands of suppliers, and you’re trying to manage customer-level pricing with all of those variables. And it’s extremely complicated to do that. And it’s even more complicated to do that across all of your revenue channels, at the branch level, with e-comm, in person.

And there are still a lot of distributors out there who have a lot of human intervention in their pricing. So if you’re a customer walking into a branch, you’re doing really a high volume of business with this distributor, and you might not have the best pricing across all of your product categories. So a branch associate would be able to make that determination of, oh, you’re giving us a lot of business. Let’s adjust your pricing for this product that you’re buying today. But the problem is that concession is made only one time at that single purchase. So if that customer were to come into the branch next week, you’d have to do that whole process all over again.

So a lot of times there’s this human intervention involved to where distributors never really address the root of their overall pricing strategy and get to a point to where they’re adjusting that pricing at a customer level. And that’s ultimately where you need to get to in order to have your pricing on your e-commerce website to be very accurate, to a point to where a customer does not have the need to pick up the phone and actually place that order through one of your associates.

TG: So you talked about the level of complexities, but from a success standpoint, how can you stand up a pricing strategy around this that’s going to be really workable and adopted and go through that change management process that’s going to be necessary as part of this?

JD: It’s a great question. The way in which distributors usually start this process is they start to structure their pricing by three levels. Say a floor, which is the lowest price that you can offer to any customer for any given product. A target price, which is ideally what you want all your associates to be selling those goods for. And then maybe even a stretch price of, “Hey, if you can get more for this product, get it, be more opportunistic in how you do that.” And that’s probably the simplest way to start structuring it. But the problem distributors run into is, it’s a short term win. They might gain in some of the profitability by adjusting the floor across their organization. But what happens is customers eventually start to push back because the pricing on all their goods is coming up and they start to really voice their opinion, and then it creates this backlash from the sales team back to the organization.

So we actually suggest approaching it both as an art and a science. And a lot of that comes down to getting to a point to where you’ve got customer-level pricing. And the way to do this across thousands of customers is by creating clusters of customers or segments of customers, and you’re doing blanket pricing across those segments of customers to where you’re applying custom pricing structures to those customer segments based on how much they’re buying, based on who they are, based on types of products they’re buying. And that way everybody in the organization could have confidence that this customer is always getting the right price based on the agreements that you have in place with that customer. And that even applies to special pricing agreements that you might have with some of your suppliers that would also live at that customer level.

TG: What’s the low hanging fruit as far as people think about how to increase the performance of their digital channels around the pricing aspects of this?

JD: I would say it’s threefold, Tom. Number one is if you want your e-commerce website to drive the highest level of return on investment, make sure that it’s doing as much as it possibly can to capture as many orders from customers as possible. And in doing so, you have to get pricing accurate on your website. Otherwise, you’ll never address the issue, and you’ll have customers calling into your organization at different aspects. To do that, you definitely structure your pricing for accounts who are just visiting your website and not logged in, have market pricing that’s very competitive for anybody who’s visiting your website. And beyond that, for the customers who are logged into your website, go the extra mile to create a corporate pricing strategy that establishes customer-level pricing and makes pricing as accurate as possible when they’re looking at buying products from your website.

Beyond that, I would say, Tom, the way to actually start implementing this is don’t go out there and just buy software thinking it’ll fix your issue. You have to start with that corporate pricing strategy, and then software can help you implement that and make it consistent. But don’t start with the software. And then finally, Tom, I would say if you’re looking across your e-commerce channel and trying to grow the revenue and profit, make sure you’re using these pricing strategies to help you effectively not only grow revenue, but also reduce the cost to serve your customers, thereby increasing your profitability.

TG: James, I can tell you’ve been in this consulting business for a while because every time I ask you this, you always have three recommendations, no less, no more.

JD: Yeah, there’s never a shortage of things to do, Tom, right? But this one, I think organizations can start slow and really just get more specific with how they approach pricing across all the channels of revenue across their organization.

TG: Pricing is going to be such a critical aspect. Nobody knows where the economy’s go, but everybody has an indication that it’s going to be softening.

JD: Completely agreed. And thank you for that. And I would also mention, Tom, that we’ve got a session with this exact topic at the Virtual Profitability Summit coming up here on July 19th. So that might be an opportunity for distributors to actually dig in a little bit more into this topic and maybe see some more examples as to how distributors are approaching maximizing the ROI for their e-commerce investments.

TG: You took the words right out of my mouth, James. I’m really excited to be co-hosting this event. It’s a one day, six hour free virtual summit on profitability that we thought was really going to be timely. We’ve got a lot of great speakers lined up. You and your team are going to be adding in a lot of content and value to that as well. And I look forward to talking to you in a couple of weeks again.

JD: Yeah, thanks, Tom. It was great being here. Look forward to seeing you.