In a recent column, while making the case for how technology can helps us in the aftermarket improve our business practices and fight inefficiency, I cited an example of resellers using technology to enable market variable pricing. I confess that I used it as an illustrative example of a relatively simple capability that spreadsheets possess (the ability to perform multiple routine arithmetical calculations) and with little thought or consideration that I might be addressing some great or profound industry issue. But apparently I was wrong.
At a recent industry event, I was surprised when someone commented on the article and cited the specific example at the ensuing discussion it sparked. It seems that there is a bigger issue and one that stimulated some pretty lively debate. My imagination now piqued, I started to ask myself the question, “Why do we continue to use the antiquated system of ‘manufacturer suggested jobber price’?” as the basis for all pricing in the aftermarket? Isn’t a system that assumes a part should be sold for the same price without regard for local conditions pretty outmoded?
The aftermarket is a price sheet driven market. Expressions like “j” and “blue” are heard in most every conversation about price. More appropriately, we are a discount off, price sheet driven market. That is, price paid by a reseller is defined and expressed as a percentage off of the published jobber blue sheet.
A look back
To understand this issue better, it helps to start with a bit of history as to how we got here. Back prior to World War II, the jobber was the only step in the supply chain between the manufacturer and the garage. In fact, the term “jobber” literally means “one who buys goods in quantity from manufacturers and sells them to dealers.” A pretty apt description of what a jobber did pre-WWII.
Manufacturers published two price sheets –– a blue one and a green one.
The blue sheet was the wholesale price, not some arbitrary “suggested” reseller price. In effect, the manufacturer was establishing the actual selling price for their parts and publishing it for their customers to use to order.
The other price sheet was the green sheet which “suggested” a dealer price and a list price. “Dealer” (there is that word again from the jobber definition) was the moniker to identify the garage since they typically also sold gasoline, tires, batteries, auto parts and service. The manufacturer used a set percentage over the actual cost of acquiring their parts and created this “dealer” price sheet for his customer to use when reselling his parts. Simpler times...simpler pricing structure.
Shortly after WWII, market conditions caused a new player to emerge; specifically, a jobber who kept more substantive inventories and resold to other jobbers. Since they were performing some of the functionality of the manufacturer, they sought and were granted a functional discount by their suppliers on a reported basis. That is, if they sold to a dealer, they purchased at the blue price, however, if they serviced one of the manufacturer’s other jobber accounts in their region, they could report those sales and receive a credit for performing a service for their vendor. Hence, the whole concept of discounts off blue was born.
Over the years the percentages of those functional discounts grew and expanded to accommodate a variety of other services that program groups, buying groups and retail chains argued reduced the role and expense of the vendor. But through it all, we clung to the price sheet structure and the practice of benchmarking price off of the “suggested price” created by the manufacturer.
As the deals grew deeper, the inevitable price battles started. One reseller that had gained an edge reckoned that they could capture a little more business with a little lower price. They take their discount to the street. The competitor that suffers the loss bangs on his suppler for a better deal and runs back to the street with his new lower price –– and so on. Eventually, people are on the street touting how they will sell at some greater percentage off blue than will their competitor. As such, many of our pricing and margin woes can be traced back to this manufacturer driven pricing model.
But I digress. If one reflects back on the history, one can see how a relatively simple pricing model has become quite convoluted. We began with the makers of parts establishing their selling price and suggesting a resale price for their direct customers. It has evolved into the parts maker suggesting a price for their customer’s customer and negotiating a discount off that suggested price to establish their selling price. When you look at it that way, convoluted may be too meek a word.
That then begs the question; does clinging to a pricing scheme that was initially created more than 75 years ago and has morphed, changed and bastardized itself over that time make sense today? The short answer is no. It’s time to start over.
Three key flaws
There are, in my estimation, three key flaws in the pricing model we live with in the aftermarket. They are:
- Rigidity
- Speed
- Comparability
Rigidity. The issue of rigidity relates to inflexibility of the manufacturer suggested pricing scheme to adapt to local or regional price pressures. It is inconceivable to think that a reseller located in a major metropolitan area where taxes, labor and real estate costs are high should have the same price for a part as a reseller in a rural area that enjoys relatively lower operating costs. Yet, an astonishing number of major national auto parts resellers either do not have, or have elected to not develop the capability of pricing their products regionally.
I contend that it is because they have a business model and a culture that clings to the old paradigm of “buyers,” and doesn’t focus on rewards of being better “sellers.” Again, if we reflect on the history, one can see that the rewards for most reseller have come from negotiating concessions on the backside, rather than looking for pricing opportunities on the frontside.
I’m not advocating a complete reversal, rather a balance of better managing both the buying and selling functions. With only the most modest technology capabilities, a reseller can receive net pricing files (his cost) from their vendors and construct their own resale price that is driven by their business objectives and local market realities. That adds a dimension of control, plus and huge opportunity to add precious points of margin in a business starved for same.
Speed. Tom Peters brought the issue of speed to the forefront in the 1990s when he started preaching the importance of “competing in time.” Peters insisted that just making the right business decision was no longer good enough, but making it and implementing it swiftly was the new order. The introduction of technology has served to make that point even more relevant. At the most recent Aftermarket eForum, Dana’s John Washbish focused the concept of speed by contending that in a technology enabled market, “the quick will eat the slow.”
If you accept the notion of the pundits that speed in today’s business is essential, then as a reseller you must ask yourself, how swift can I be if I am counting on my vendor to update my pricing? I think you answer yourself, “not very.”
The immutable concept of supply and demand dictates that spikes in demand should move prices up. Anyone who has pull up to a gas pump in recent weeks should have a pretty clear understanding of this point. Yet, I have witnessed countless instances in the aftermarket where market conditions like plant closings, bankruptcies or labor actions will drive down supply or where demand will spike for a variety of reasons and our pricing doesn’t change. Or it doesn’t change for weeks or months after the event.
To be effective, pricing decisions should be made as close as possible (in both location and time) to place where products are sold. The best retailers have mechanisms to adjust and adapt on a market by market basis, if not store by store basis. When pricing decisions are being made two and three steps in the supply chain above where the conditions driving them are occurring, they will never be in sync with the market.
One could argue that a national reseller that clings to the manufacturer pricing model is priced right one third of the time; is uncompetitively high and loosing sales one third of the time and is leaving money on the table with too low a price a third of the time. A .333 batting average might be OK in baseball, but if it’s your broker or your doctor, it’s time to try something else.
Comparability. Perhaps the most insidious aspect of the manufacturer pricing model is the issue of comparability. The existence of manufacturer price sheets creates a mechanism for customers of resellers to make quick and accurate price comparisons between their suppliers. Imagine walking into a Kmart store and a greeter welcomes you and hands you a piece of paper that compares their price on every item in their store with those at the Wal-Mart down the street. It doesn’t make much business sense. But effectively, that’s what standardized price sheets enable the customers of resellers to do.
When a parts store or garage gets their hands on a standardized manufacturers price sheet, his price negotiations are quickly reduced to “how much off this will you sell me?” And a reseller has little alternative than to play the “how low can I go game.” If the pricing at the street level was more like it is in the rest of the world, it would be a lot more difficult for buyers to make simple quick and deadly accurate comparisons between suppliers. Back to the Kmart/Wal-Mart analogy, you may have an opinion or a sense of which has better overall pricing based on a comparison of items you purchase regularly. But there is no way that you can determine that one’s prices are 7.5 percent better than the other’s, as you can in a manufacturer provided price sheet environment.
Technology can help
Technology must play a huge role in this transition away from manufacturer suggested pricing. First, resellers must have the ability and system flexibility to receive net pricing information on a part number by part number basis from their vendors. To do this, the cooperation of distributor system providers must be enlisted.
Not surprisingly, the major distributor system providers include manufacturer suggested pricing as a part of their data services to their customers. And (also not surprisingly) those prices are jobber blue. It the way we have always done business, so they simply have mirrored that practice. Also, it provides them a simple neutral price point that they can share with all their customers. Imagine if they had to maintain separate price files based on the different “deals” struck by every reseller with every vendor. And then imagine if the wrong price file was sent to the wrong customers. What a mess.
But the fact remains that resellers need net pricing updates to facilitate market based pricing. This can only mean that those updates must come directly from their supplier, and not some third party. Our industry has standards called PIES (Product Information Exchange Standards), which provide a template format for the reliable transfer of such information, as well as the Partnership Network, which delivers an inexpensive and secure means for the transfer of such data. But the distributor legacy systems must be equipped to communicate with the outside world.
The direct updating of net price is symptomatic of a broader issue related to the need for distributor system providers to make their platforms more open to communications with others in non-proprietary ways. But that is a discussion that will have to wait for another time.
Once a reliable and confidential method of getting net pricing to the reseller is established, the resellers are limited only by their creativity and market forces in constructing their own pricing scenarios. They can vary their margins by popularity code, keeping a sharper price on hot movers in their area and picking up a few more points on slower movers that their competitors don’t stock. They can address specific competitors who use a completely different pricing structure like direct to installer import specialists or OE dealers. The point is that once a reseller takes control of the pricing function, they have more control over their own destiny and profitability and are less venerable to direct price comparison.
This transition from manufacturer suggested pricing to market based pricing is one that resellers must make. I have heard arguments by resellers that “by taking the pricing function away from the manufacturer, I should be entitled to a greater discount since I am performing some of their functionality.” That’s like arguing who had the right of way after a horrific auto crash. In all the carnage, who cares who had the right of way? Those who want to fight for an additional concession are mired in to old model of the functional discount. While vendors have been providing a sort of national pricing starting point, their pricing research has never been done on a market by market basis. Arguing that taking control of the pricing function on a local level is replacing the vendor’s functionality doesn’t hold water. However, the printing and distribution of a physical price sheet does represent a saving for vendors; one I’m sure they would be happy to share with customers who assume that function.
Moving away from a business model where the manufacturer dictates an arbitrary price point without regard to local market conditions is an idea whose time has come. The historical reasons for this antiquated system have been washed away by technology. Those who cling to it will be mired with a slow and unresponsive pricing model that doesn’t reflect the realities of their markets and provides their customers with an easy and effective negotiation tool to hammer a lower price.
Those resellers who take control of their own destiny by assuming the pricing function will enjoy a competitive advantage and put more money in their pockets at the end of each business day.
