How to Drastically Improve Margins in Industrial Distribution with a Predictive Sales Software
Predictive Sales Analytics helps increase customer lifetime value in B2B distribution.
New customer behaviour and innovative technologies are having an impact on wholesale and distribution businesses worldwide. Manufacturers looking for more efficiency and customers demanding omnichannel experiences at the lowest price push companies to their limits.
The addition of these disruptive forces, partially enabled by new technologies, means substantial margin pressures.
Industrial Distribution plays a critical role as a sales channel, a supply-chain backbone, and a product competence centre. Companies cannot reliably perform these crucial roles on thin margins. However, as customers and manufacturers gain leverage through consolidation and direct businesses, meagre earnings for the intermediaries are a foregone conclusion.
Furthermore, to the challenges I described above, ours is a difficult time for the industry, whose profits have trailed those of the overall industrials sector for 15 years. There is a similar geographical picture, where Germany and Europe lag behind the US and Asia.
It is not a surprise that many wholesalers and distributors struggle to fight back in an increasingly digital world. Customers and retailers employ online wholesale marketplaces to purchase from manufacturers, entirely cutting out the distributor directly. Also, improvements in the B2B e-commerce experience renders customers more inclined to buy online. And this expansion in choice makes it harder to win their loyalty.
The changing world of Industrial Distribution is all about innovation.
There is a lot more innovation than most managers think in distribution. Although wholesalers have conventionally acted as the main channel of market access for manufacturers, keeping their products in stock, they have only been able to survive by innovating continuously.
Distributors deliver and secure sales volumes and help meet the diverse needs of a widely distributed and fragmented customer base.
They can only perform this with the latest technology.
Though competition is getting harder and margins are shrinking, wholesaling offers opportunities across many sectors. According to a recent study of the global management consultant McKinsey & Company, the fastest industrial distributors will establish deeper customer relationships and sustainable competitive advantages.
Those are the main reasons why a handful of industry leaders are growing market share and margin. McKinsey analysed 15 year’s performance of more than 130 industrial distributors, with a combined $ 500 billion in annual sales. The most demanding sectors, electronics, metals, and building products, have an ROIC (Return On Invested Capital) near zero.
Now let’s look at the bright spots. The distributors that will prosper in the coming years will selectively scale up, investing in technology to keep pace with competitors, manufacturers, and customers.
In summary, how can a successful industrial distributor drastically improve margins with predictive sales software? By enhancing its main value drivers using technology: price, retention, and cross-selling.
The top industrial distributors intelligently optimise pricing.
If you are in B2B distribution, you already know that small price increasements can have a remarkable effect on your profits. Ceteris Paribus, selectively pricing better, is the most effective profit driver in wholesales.
One cannot wake up one morning and increase prices across the board. Industrial distributors are usually tied with contract customers and manufacturers. The only way to improve pricing is to design and implement price differentiation strategies.
Usually, one of the most effective paths to executing a successful pricing strategy is to set prices right for each customer transaction. This methodology is particularly suitable for sporadic buyers. The problem with infrequent buyers is that you cannot quickly know what prices they are ready to accept. A Predictive Sales Software that can predict prices and fluctuation across thousands of customers and products is beneficial in this case.
A dynamic pricing tool provides sales reps with pricing recommendations tailored to each customer.
Pricing recommendations consider attributes such as product type, seasonality, customer segment and supplier – some of the main qualities that explain margin and pricing. Inside Sales reps easily compare pricing strategies and regularly implement the distributor pricing policy.
The most successful industrial distributors reduce customer fluctuation.
Reducing customer fluctuation can have a massive impact on profitability. We know by experience that even the most successful B2B distributors will usually work with a 15 to 20 % annual churn rate. In a typical low margins business, defining and reducing customer attrition can result in seven-figure improvements on earnings.
Your churn rate is not just a symptom of the industry’s underlying challenges; it can also be a possible indicator of customer dissatisfaction or better marketing from your competitors.
That is why it makes great sense to focus on the customers with the highest churn risk and prioritise customer retention selectively.
However, since customers have different propensity to switch suppliers and additional lifetime value, successful distributors know that prioritisation is essential. It only makes sense to invest in customer retention when both the risk and the customer’s value are high enough. Wholesalers serving thousands of medium and small accounts, only churn software using artificial intelligence can discover attrition risks and suggest the next best actions (NBA).
Take advantage of cross-selling opportunities.
What Bob Dylan sings: “He not busy being born is busy dying”, could be translated into the world of industrial distribution as you are either growing or dying. Revenue stagnation is a dangerous signal, especially in established markets.
If your share-of-wallet is not growing, your customers are standoffish between you and your competitors. Your company could soon become irrelevant. Discovering and taking advantage of cross-selling opportunities with current products in your portfolio and within your customer base is critical. It represents the cheapest and most effective way to stay relevant and secure the investment you have made in the customer.
Predictive Sales Software allows sales managers to spot several opportunities within their customer base to focus on selling value. For example, the case of a leading electrical wholesaler in Baden-Württemberg managed to exploit cross-selling with small accounts using artificial intelligence.
Smaller accounts are usually not relevant for quota-driven Key Account Managers or Inside Sales Reps under time pressure, and therefore often forgotten. The situation changes if a wholesaler provides inside sales representatives with a list of products with the highest cross-selling probabilities per account using Predictive Sales Software.
How to Drastically Improve Your Margins in Industrial Distribution with a Predictive Sales Software – Summary
The wholesalers at greater risk suffering from an approaching margin erosion are those in large segments with high margins, low value-added services, low customer purchasing power, and easy-to-ship products.
With Predictive Sales Software’s implementation, including algorithms for cross-selling, an industrial distributor can radically improve margins, reduce operational planning costs, and maximize customer lifetime value.
The inside and field sales teams can selectively and dynamically adjust prices across products and customers, reduce customer fluctuation and increase cross-selling.
Similarly, the classic field sales, currently serving thousands of possible customer-SKU transactions under challenging conditions and limited resources for advanced sales analytics, are no longer destined to work in a low-margin company.
Successful B2B distributors relentlessly improve sales-force effectiveness, pricing, cross-selling, and customer fluctuation.