1. 1 Brent R. Grover EVERGREEN CONSULTING, LLC November 10, 2010 For Distributors, Strategic Pricing is RED HOT

2. About Brent R. Grover  Author of six books about wholesale distribution  NAW Institute Distinguished Research Fellow  Consultant, B-school faculty, distribution executive  Member of several W-D company boards  brent@evergreen-consulting.com 2

3. About Evergreen Consulting  Distribution experts  Strategy and profit improvement  Clients exclusively in distribution channel  Team of experienced staff devoted to pricing projects  www.evergreen-consulting.com 3

4. 4

5. Strategic pricing objectives  200+ “basis points” (2%) hidden gross margin  2% of sales generates ROI increase of 12-16 percentage points  Price based on value to customer – true market value – not cost to distributor  Build a better pricing infrastructure  Highest & best use of precious sales resources 5

6. 6

7. 7 BASE CASE150 BPS200 BPS SALES$50,000,000$51,000,000$51,370,000 COGS$37,500,000 GM$$12,500,000$13,500,000$13,870,000 GTM%25.0%26.5%27.0% EXPENSES$11,500,000$11,700,000$11,775,000 PRETAX NI$1,000,000$1,800,000$2,095,000 ROS%2.0%3.5%4.1% EQUITY$7,000,000 ROI%14.3%25.7%29.9% Profit Power of Strategic Pricing Frozen

8. Distributor Pricing Chaos ✓ - list Large number of customers Large number of items No one person accountable for pricing Sales staff sets prices autonomously; lack market info Large number of people involved with pricing Poorly-defined pricing structure & processes Large number of special pricing records Sales reps incented to maximize volume Recommended selling prices unrealistically high ERP system pricing module underutilized 8

9. Distribution is a highly complex, almost chaotic pricing environment  3000 customers X 8000 SKUs = 24,000,000 possibilities  Sales team pricing is often quite autonomous  Sales team does not have access to true market pricing  Information systems typically underutilized  No one person is responsible & accountable for pricing 9

10. 10

11. 11

12. Building a pricing structure from chaos  8000 SKUs  3000 customers  100 product classes  60 days  20 sales reps + 10 inside sales / customer service  6 customer segments  5 customer sizes  4 levels of price sensitivity  1 true market price for each customer/SKU 12

13. 13 Compare pricing scatter plots Customer Size GTM% Customer Size Example A: Pricing orderExample B: Pricing chaos Margin % Customer size Margin %

14. 14 Distributor pricing scatter plot

15. Strategic pricing matrix CONTRACTORS segment margins for a sample SKU VERY SMALLSMALLMEDIUMLARGE EXTRA LARGE VERY HIGH24%21%18%15%12% HIGH25%22%19%16%13% MEDIUM31%28%25%22%19% LOW33%29%26%23%20% 15

16. Pricing architecture Premiums & discounts from average margin (= 1.00) FOR CONTRACTORS CUSTOMER SEGMENT VERY SMALLSMALLMEDIUMLARGE EXTRA LARGE VERY HIGH +7%+3%0-7%-10% HIGH +9%+5%+3%-5%-7% MEDIUM +14%+9%+7%0-3% LOW +16%+11%+10%+3%0 16

17. 17 Strategic pricing cube CUSTOMER SIZE ITEM SENSITIVITY MRO SEGMENT OEM SEGMENT CONTRACTOR SEGMENT

18. 18 Source: McKinsey & Co.

19. 19

20. 20

21. 21

22. 22 80% distribution 20% fabrication 60% MRO 40% OEM 69% industrial 24% commercial 7% marine 55% metals 20% fabrications 15% safety 10% accessories Example: revenue mix

23. 5000 active customers 80% < $10,000 / year Customer base 10,000 SKUs 2000 vendors Product set 44 outside sales reps 23 inside sales reps 14 sales / branch managers People 23

24. Analytics – fix outliers Process improvements Greater consistency (80%) Analytics – low visible, less popular SKUs Premiums on less sensitive items (10%) Freight recovery, add-on charges New revenue opportunities (10%) 24

25. MRO end- users $20MM sales 4% upside (400 BP) Target $800,000 OEM manufacturers $30MM sales 3% upside (300 BP) Target $900,000 Contractors $10MM sales 2% upside (200 BP) Target $200,000 Resellers $5MM sales 1% upside (100 BP) Target $100,000 Total targeted increase $2.0MM 3% of $65MM sales Some prices are locked in to contracts; some increases cannot be achieved at all once; some customers and items are exempted for various reasons 25

26. Project considerations  About 2-3 months from start to implementation  Manager and sales training in person or via webinar  Implementation plan for each sales territory  About 80 hours of staff time needed 26

27. Deliverables - examples  Pricing recommendations data file  Pricing audit report  On-site or webinar training  Assistance with enterprise system  Rerun data within 12 months  Update analysis every 6 months thereafter 27

28. 28 STRATEGIC PRICING FOR DISTRIBUTORS Brent R. Grover Tools & Rules to Optimize Your Margin Multi-disciplinary approach to pricing

29. 29 Source: McKinsey & Co.

30. Price partitioning examples  Cell phone: universal connectivity fee, taxes  Rental car: airport fee, tourism fee, taxes  Airline: baggage, food, taxes  Car dealer: environmental fee, shop supplies  Tire dealer: mounting, balancing, disposal  Online e-tailer: freight, handling  Distributor: freight, handling, small order charge, energy surcharge 30

31. Partitioning distributor prices Has the customer decided to buy from you? Does the competition partition prices? Is the component charge a small part of the total? Do customer react negatively to partitioning prices? Do you control component cost, quality and delivery? Does the component satisfy a customer goal? 31

32. 32

33. 33 Tightest % limits Moderate % limits Looser % limitsLoosest/no % limits Strategic pricing & CTS Fewest / no core items Many core items Fewer core items Some core items Gentlest mGentle m Steeper mSteepest m

34. What’s next?  Consistent pricing – eliminate outliers  Tweak pricing  Freight cost recovery  Price partitioning  Cost to serve: P&L statement for each customer  Highest and best use of sales time = profitable growth 34

35. 35 “We wrote the books on distribution management.” ™ Evergreen Consulting, LLC 29525 Chagrin Boulevard, Suite 214 Cleveland, OH 44122 (216) 360-4600 ext.101 brent@evergreen-consulting.com www.evergreen-consulting.com Brent R. Grover