Building Products Distributor Remedies Excessive Price Discounting

SUMMARY

A leading building products distributor with more than 100 branches, hundreds of thousands of products and 20,000 customers across North America faced external pricing pressures as more buyers turned to e-commerce or direct-from-manufacturer purchasing. Internally, it experienced significant margin leakage caused by pricing noncompliance at its branches. Although the distributor had a multi-level pricing matrix set at headquarters, many customers---regardless of type---were quoted the lowest price. The lowest price was then frequently discounted further using overrides to the extent that these low-margin transactions accounted for nearly 55% of transactions.

The PROS pricing solution focused on upgrading branch operations and processes, enhancing price governance and visibility, minimizing leakage and improving margins. After an evaluation period, marginkilling overrides decreased from 55% of transactions to 39%, while gross margins had improved 310 basis points – a value realization of $3.5 million dollars.

CHALLENGE

Major process changes were required to ensure correct pricing and proper margins. Excessive discounting had become standard practice at many of the company’s branches. Gaps in the pricing and quoting processes created inefficiencies and errors. Approvals and escalations were not required, and poor price guidance and visibility made it virtually impossible to optimize pricing and improve margins.

The IT environment posed additional challenges since the distributor utilized a combination of homegrown and off-the-shelf software to manage pricing. The distributor also required an accelerated time-to-value: A pilot project involving eight branches was scheduled to be completed within four months, followed by a six-month evaluation period.

Major Challenge: Many customers, regardless of type, were quoted the lowest price, then given additional discounts using overrides. These low-margin transactions accounted for nearly 55% of transactions. 

SOLUTION

The company chose PROS as its pricing/quoting toolset for its ability to fill the critical gaps in its processes and deliver value quickly. A pilot project for eight branches was designed and implemented over a four-month timeframe, and included PROS Insights, Guidance, Control and Quoting (Sales Optimizer) functionality.

The distributor’s project team included nine staff from the business side (sales managers, quote coordinators, branch managers) and 10 IT resources. PROS provided a team of implementation/ configuration experts. Working together, the crossfunctional team implemented and configured the software, then focused on optimization: retaining best-practice processes, eliminating unnecessary processes and improving the remaining processes.

Key opportunity: Eliminate excessive discount pricing and overrides using enhanced processes and advanced tools for price management, quoting and governance.

“We presented a business case that focused on three strategic levers: improved visibility, efficient quoting and optimized price – and projected an uplift of 100-plus basis points. Our solution far exceeded that number.”

— Erin Cihak, PROS Customer Value Team

CONCLUSION

The distributor pilot program was a prime example of a PROS implementations in which the customer-owned a major part of the configuration. The distributor pricing team handled insights and price management, while PROS led the segmentation and price guidance work and deal desk configuration. The full solution went live in four months, with branch managers, sales reps, quote coordinators and IT staff playing active roles.

Throughout the project, the pricing initiative had exceptional support from senior leadership, and a significant commitment to change management and value capture. The executive team understood that going all-in was the key to achieving the successful adoption of new processes.

RESULTS

The PROS solution delivered significant improvements in price governance – by closing the gaps in the pricing process, improving processes, enhancing price governance, enabling greater visibility, minimizing pricing leakage and improving margin.

  • Before implementation of the PROS solution, the number of overrides exceeded the number of quotes using the correct populated pricing. At the end of the evaluation period, marginkilling overrides had fallen from 55% of transactions to 39% – a 16-point improvement.
  • The drop-in override transactions resulted in a big boost in the number of transactions at all other price levels, along with increases in average prices.
  • Margins improved in parallel. Ten months after go-live, gross margin had improved 310 basis points – a value realization of $3.5 million dollars
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