A little while ago we were analysing the pricing strategy of a manufacturing business that sold to industry through a variety of large national distributors. They told us that they went to great lengths to stay sweet with the purchasing directors of the three or four large chains that serviced their market. They agreed to large double digit rebate discounts and lavished corporate entertainment on these important individuals including treating them to a champagne lunch at international rugby matches.
One of the things we do when we get digging into the commercial affairs of a client is to perform a little test we call Switch Point Analysis. We carefully consider everybody in the supply chain – end-users, influencers, specifiers and various people working in distribution – and ask ourselves could this person decide to switch our product for that of the competition or vice versa? … if so what is likely to make them do that? …and what role does price play (if any) in their decision?
The unfortunate thing we found (or fortunate depending on your viewpoint) when we looked into this for this particular client, was that the purchasing directors that they lavished all this attention upon were very unlikely to influence their market share. They were always going to dual source their type of product and from their lofty tower in head office they had no way of controlling the amount sold of each vendor’s goods.
We became increasingly convinced that the day-to-day decision about who would get the market share was in the hands of the fork lift truck drivers at the distributors’ branches around the country and that the most likely criteria for their choice would be something like: whose product was closest to the door.
Our advice was to ease back on the rebate agreements, make excuses and not go to the rugby, buy a box of baseball caps to distribute to the fork lift truck drivers and persuade them to put the product near the door for their convenience.
The Moral of the Story is: That purchasing people want you to think their power to decide the fate of your business is second only to that of the almighty. Stop and think about it for a moment and you will realise that there is nearly always someone else choosing whose product to buy and it is very… very seldom on price.