Pricing can be tricky for any business, and it is certainly hard in the electrical industry. Are you charging too much? Could you be charging more? What should you charge for a rarely purchased item versus an everyday item?
These are the questions that entrepreneur Mark McGready initially wanted to help manufacturers answer when he founded Jigsaw Systems Inc. in 2008.
“I was working at a manufacturing company and we couldn’t find an adequate software solution for our SPA contracts,” said McGready, Jigsaw’s CEO. “Offerings from vendors either did not meet our needs, or the vendor wanted to transplant a solution from another industry that was inappropriate for the electrical industry. In the late 1990s and early 2000s, a lot of manufacturers tried to make their own in-house software solutions, but they weren’t software companies, so these efforts didn’t work out so well.”
Seeing the opportunity, McGready founded Jigsaw Systems to fill the niche. With a team of talented software developers, McGready brought big data solutions to the electrical industry.
Today, Jigsaw’s business is evenly split between distributors and manufacturers, and it specializes in pricing and process improvement through data analytics.
“Distributors and manufacturers alike have vast databases of transaction data, but most have trouble translating it into something,” said McGready. “We fill the gap and help clients understand what their data means from an inventory standpoint and a pricing standpoint. We’ll go through with them what they can do to increase profitability. We’ve never had a distributor that hasn’t added at least 2 percent to its gross profit margin overnight.”
Don’t leave money on the table
The challenge for most distributors is twofold: first, pricing and selling the tens of thousands of different products they have in their inventory, and secondly, pricing inconsistencies among in-house sales staff.
“A typical distributor may sell 30,000 different items during a year. That’s a large range of inventory that could include products from 300-400 manufacturers,” said McGready. “A good distributor may have pricing worked out for the top 500-1,000 items that make up half of their revenue. That’s only a fraction of their inventory though and at some point, you need an algorithm to help with pricing, so sales staff aren’t pricing on the fly.”
David Oldfather, vice president of business development at Jigsaw, adds that it is not uncommon for a customer to call different sales people at the same distributorship to see who will give them the best price.
When internal competition slashes into profit margins and pricing in the database isn’t engineered for optimal profitability, distributors leave money on the table every day.
Data-driven pricing adds 2% to bottom line
“Slow-moving products are often not priced aggressively enough,” said Oldfather. “It’s a huge convenience for the customer when you carry these products and you should make more money for them—even more for non-stock items that entail additional operating costs (e.g. ordering, handling and shipping).”
Part of Jigsaw’s price optimization service is to help distributors figure out their sales team’s habits. “It’s fairly common to see a wide range of margins among a sales team,” said Oldfather. “One person might sell at 15 percent and one might sell at 18—but it’s rarely more than that, because they are looking for the sale.
So, what we will do is make a scatter plot of their sales habits so they can see them graphically, which helps them understand their impact and begin to improve.”
Then, Jigsaw scientifically examines the distributor’s current pricing structure. “Anyone can raise prices, but if you do that across the board, customers will leave,” said McGready. “Instead, we are surgical about price increases—we might recommend a 5 percent increase on some products and no change on others.”
If price increases are one side of the coin, reining in overrides is the other. “We’ve seen companies with overrides as high as 60 to 70 percent,” said Oldfather. “The biggest obstacle is the salesforce. If they accept the pricing, their customers will too.”
To effectively earn buy-in for a new pricing system, each sales team should be given the opportunity to provide input and not feel as though the new pricing matrix is an imperial fiat. Jigsaw Systems capitalizes on this by visiting their distributor clients’ locations and coaching sales personnel on the philosophy of price sensitivity.
“The extra level of coaching makes a big difference,” said Oldfather. “We don’t sell a service, say here’s your magic number and ask them to execute it themselves. We help our clients roll it out and get their workforces engaged. This ensures the workforce isn’t going to overturn the good work we did in the first place.”
With this approach, Jigsaw Systems boasts a perfect success rate in boosting the bottom line for its distributor clients. “We normally tell our customers to expect a 2 to 5 percent improvement, without any drop in sales. Since many electrical distributors have a net profit of 2 to 3 percent, an extra two points on their bottom line can double their profits” said McGready.
For more information, visit jigsawsystemsinc.com.