Grow Profitability With Automated Price Negotiation

This article originally appeared in Modern Distribution Management. Republished with permission.

By: Eric Smith, Senior Analyst (MDM)

The old, manual methods of price negotiations can cost the average distributor upward of 5% in profit, according to a recent study by Zilliant, but a company could recoup those lost dollars— and even grow profitability —by implementing an automated, intelligent price negotiation system.

That was the message from Todd Pate, business solutions consultant, Zilliant, in the recent MDM Spotlight video, “Step Up Your Pricing Game with Automated Negotiation.” This latest installment of Spotlight, hosted by John Gunderson, VP sales, analytics and e-business, MDM, focused on why a distributor should consider modernizing its price negotiation tools and how they work.

A distributor should consider implementing automated price negotiation tools because the landscape has changed in terms of how customers look at pricing for the products they buy—whether it’s a B2C or B2B purchase.

“The world is different when it comes to what customers expect in pricing,” Pate said. “Increasingly, what we’re seeing, not just in distribution, but across a number of industries, is that the typical relationship is evolving, and expectations reset on more of a B2C type of experience, even in a B2B market. That’s understandable, given that all of our customers are consumers themselves and are using the internet to buy on a regular basis.”

What’s more, COVID-19has companies up and down the supply chain price-conscious, so negotiation has become even more pervasive in today’s environment.

“You’ve got customers that are getting squeezed on price at the top and you’ve got manufacturers that are giving you price increases at the bottom,” Gunderson said. “You, as a distributor, are going to have to work hard and efficiently to get paid for your value this year. And the more automated you can get versus manual, the more effective you’re going to be and the more profit you’re going to take to the bottom line.”

How Does Automated Price Negotiation Work?

Automated price negotiation removes the salesperson’s desire to close a deal by offering the floor price on a particular product when a customer balks at the list price. But this process isn’t optimal.

“Going through that process of negotiation can be cumbersome,” Pate said. “It’s often run by individuals that aren’t very well equipped, quite honestly, to negotiate well. They oftentimes will default to pleasing a customer and trying to give them a price as quickly as possible, so that they can process the order and move on to the next problem.”

Intelligent automated negotiation sets pre-defined rules on what prices can be auto–approved without human intervention—giving sales reps, partner resellers and customers the flexibility to negotiate within a range of prices that still maintain necessary margin levels and escalates quickly and efficiently when needed.

“Automated negotiation is a fairly new phenomenon,” Pate said. “It’s been enabled through the advent of big data and big data science capabilities that allow companies to take on this process that historically has been a very manual process.”

In this process, a distributor sets a price point for a particular product and a particular customer, who then can self–serve their product ordering. If they want a special price “because they’ve either seen a recent drop in commodities or they have been potentially shopping around and have a different price in hand from a competitor,” Pate said, they can request that price through the ordering portal.

“You can then set up an automated negotiation process to intelligently be able to agree on a price with a customer based on a series of algorithms and approve it automatically as long as that final price is within that window that’s already been pre–approved,” Pate said. “If customer request prices that are outside the bounds, you still have the ability to route that through a more traditional review process.”

In other words, it includes the best of both worlds — an automated system to handle most negotiations but also an opportunity to bring pricing exceptions to the management team’s attention.

“You can now actually negotiate a better price and capture that that 5% of profit opportunity that a lot of distributors leave on the table during negotiation,” Pate said. “Not only does it solve that math problem for you, but from a customer perspective, it creates a better experience.”